The Chapter 11 filing of the drugstore chain Rite Aid came as little surprise.
The publicly held company had a large debt burden, $1.5 billion of which was coming due in 2025; a projected fiscal 2024 net loss “expected to be almost $700 million; and needed “meaningful investment to generate growth and improve profitability,” according to an S&P Global downgrade notice on August 23.
It also faced potentially substantial opioid-related settlement claims from lawsuits accusing it of contributing to an oversupply of the addictive prescription drug.
"Rite Aid’s bankruptcy filing follows years of challenged operating performance, a weakening competitive position, particularly against larger peers, elevated financial leverage, and limited cash flow, which has limited Rite Aid’s ability to invest in its business and stabilize market share,” said David Silverman, senior director, retail, at Fitch Ratings, in an email.
Having already lined up debtor-in-possession financing totaling $3.45 billion, Rite Aid may survive bankruptcy. But in the years since the business had started to suffer, why hadn’t any suitors come along to rescue the U.S.’s third-largest national drugstore chain? They had.
In October 2015, Walgreens Boots Alliance agreed to buy Rite-Aid for about $17 billion, including debt, to boost Walgreens’ U.S. footprint. But in January 2017, the deal was scaled back, as Walgreens projected it would need to sell as many as 1,200 Rite-Aid stores for the merger to meet regulatory approval. Six months later, the companies dropped the megamerger altogether, facing the possibility that the FTC would kill the deal. Walgreens wound up buying 2,186 Rite Aid stores for $5.18 billion, cutting Rite Aid’s store count in half. It also paid Rite-Aid a $325 million termination fee.
The proposed February 2018 combination of Rite Aid and grocery store operator Albertsons might have been Rite Aid’s best chance. The combined company would have had 4,350 pharmacy counters and 320 clinics across 38 states, $83 billion in revenue, and a more diversified revenue base. At the time, Cerberus Capital Management owned Albertsons. The $2.4 billion deal was called off the following August when it looked like shareholders wouldn’t approve the agreement. Proxy advisory firms had recommended Rite Aid stockholders vote against the transaction.
Spear Point Capital Management
The weakest of the proposed deals. Rite Aid’s board of directors rejected an unsolicited $3.6 billion takeover offer from activist investor firm Spear Point Capital Management in April 2022. Rite Aid called the deal “not credible.”
The board said Spear Point had provided no evidence of the needed financing, and the agreement contained a change in control provision that would have violated the terms of nearly all of Rite Aid’s debt instruments. In addition, “Spear Point has no track record of acquiring public companies the size and complexity of Rite Aid,” according to a press release.
"A smaller footprint could leave an already structurally challenged Rite Aid further weakened in terms of competing for inclusion in pharmaceutical networks and negotiating with vendors and partners."
The Rite Aid story is not over yet. The company’s bankruptcy plan includes turning some creditors into equity holders, reducing debt and cash interest expense, said Fitch’s Silverman. “Lower cash interest could allow Rite Aid to increase its investment in strategic initiatives,” he said.
Bankruptcy will also let Rite Aid accelerate the closure of underperforming stores. However, “a smaller footprint could leave an already structurally challenged Rite Aid further weakened in terms of competing for inclusion in pharmaceutical networks and negotiating with vendors and partners,” Silverman said.
Rite Aid’s bankruptcy filing lists $8.6 billion in total debts and $7.6 billion in assets.