Rite Aid Corporation (NYSE:RAD) shareholders were handed the “ZONK!” behind door number one when Cerberus Capital offered to buy RAD via its ownership in Albertson’s grocery stores. This isn’t great for RAD stock.
I had long predicted that Cerberus Capital would make a run at the stores that remained in Rite Aid’s control, but I did not expect Albertson’s/Cerberus to come with an offer that could only be described as a joke.
The offer was for $1.83 in cash plus 1 share of Albertson’s for every ten shares of RAD stock, or just 1.079 shares of Albertson’s.
The most attractive thing here for Cerberus is that this would be a quasi-reverse merger in which Albertson’s assets would be shoved into RAD stock, allowing Cerberus to instantly have a public vehicle with which to exit its Albertson’s position.
Given that this values the stock at somewhere between $2 and $2.40 per share, it is obvious that this does not serve RAD shareholders. It serves Cerberus and it serves RAD management.
Bad Math on RAD Valuation
Rite Aid has most of its asset base in 2,591 stores. Now, we already can say that Walgreens Boots Alliance (NYSE:WBA) put up $4.375 billion for 1,932 stores, and therefore that puts the market value of each location at about $2.25 million. Multiply by the remaining stores and we get a value on those of $5.9 billion.
However, there are other assets – the PBM (“pharmacy benefit management”) business known as EnvisionRX. RAD paid $2 billion for it in 2015. PBMs have value and even if it lost, say, 10% of its value, you can put the stock value at $7.6 billion.
Subtract long term debt of $7.3 billion, and add $4.4 billion from the sale of those stores and we finish with an approximate value of $4.7 billion. We can then divide the billion shares outstanding, and come to a value of $4.70 per share. But let’s be conservative and take a full 20% off that number.
$3.86 per share would be lowest calculation I get on RAD stock value.
A Bad Deal for Stockholders
So aren’t RAD shareholder so very thrilled to be getting much less than that? That is exactly why RAD shareholders should vote down the merger deal.
See, management doesn’t care at this point. They just wanted to exit a business that is struggling, even though debt is coming down and cash flow is improving. They have no incentive to stick around and try to bring Rite Aid stock back to life. Take the $2 per share and get out now.
I would argue that there are other buyers out there. CVS Health Corporation (NYSE:CVS) bought Aetna Inc. (NYSE:AET) to combine operations into a healthcare operation that can more directly service consumers. Another health care insurer could do the same thing.
If Albertson’s, a grocery store, was willing to buy RAD, so might another chain of grocery stores for the very same reason.
The Bottom Line on RAD Stock
At this point, with RAD stock at $2 per share, there is very little downside for aggressive investors. If another firm comes in with a sweetened bid, Cerberus could bump up its bid as well, because it really wants to use this a way to exit its investment.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 23 years’ experience in the stock market, and has written more than 2,000 articles on investing. Lawrence Meyers can be reached at [email protected].