Albertsons/Rite Aid Merger Carries Risks, Benefits
While Albertsons and Rite Aid’s merger is designed to help the two massive retailers better compete against Walgreens and CVS—and possibly Amazon in the future—the deal comes with significant risks, analysts say.
Albertsons Companies said in February that its planned acquisition of Rite Aid would create a company with $83 billion in annual revenue. The combined company will operate in 4,892 locations, 4,345 pharmacy counters, and 320 clinics across 39 states, according to a new Moody’s report.
The merger provides numerous operational benefits to the two chains—including an expected spike in pharmacy sales—but also significant risks.
“The Albertsons-Rite Aid merger appears to be a response of ‘last resort’ for two companies who have been left behind in the evolution of the market, constantly anxious of Amazon’s next move,” John Santilli, president of Access Market Intelligence, tells Drug Topics. “The merger benefits will likely not be enough to be successful competing against the large chains: CVS, Walgreens, and potentially Amazon, in the pharmacy space.”
In addition, independent pharmacies in certain markets will “continue to feel the impact of the big becoming bigger” as a result of the merger, according to Santilli.
While the combined Albertsons-Rite Aid conglomerate could realize significant cost savings and sales benefits, the two companies must execute their integration seamlessly or face accelerating losses, thanks to competitive pressures and a high debt load, Moody’s analysts write in the report. The merger does not change Albertsons’ overall near-term credit profile, which will remain pressured. “The combined company will face significant challenges within the food and drug retail subsectors, which will continue to pressure margins and top-line growth,” the analysts write.
However, those analysts expect Rite Aid’s pharmacy business to increase in the future, due to an aging population and an expected increase in generic drug approvals. “We believe that drugstore retailing will benefit over time from broad trends, in particular an aging U.S. population. This will continue to drive increases in the use of prescription drugs and will drive revenue growth for drug retailers,” Moody’s analysts write. “The large generic drug approval backlog will also benefit the industry in the longer term, as generics typically have higher margins than branded drugs.”
Santilli adds that Albertsons’ grocery business should benefit from an increase in pharmacy customers and increased presence on the West Coast and other strong Rite Aid markets. Meanwhile, Rite Aid stands to benefit “from Albertsons’ resources in growing the front end of its stores.”
The combined retail operation also creates about $375 million in cost synergies and $3.6 billion in revenue synergies over four years, Moody’s says.
Meanwhile, Rite Aid’s PBM, EnvisionRx, a potential highlight of the merger, will remain a niche player in the market, Santilli predicts.