Walgreens Cuts Rite Aid Price As FTC Seeks More Divestments, Fred’s Deal May Be In Jeopardy
Walgreens Boots Alliance and Rite Aid have agreed to reduce the price for each share of Rite Aid common stock to be paid by Walgreens to a maximum of $7.00 per share and a minimum of $6.50 per share, or $7.37 billion to $6.84 billion, down from the $9 per share or $9.4 billion under their previous merger plan announced in 2015.
Additionally, the Deerfield, IL drug chain will be required to divest up to 1,200 Rite Aid stores and certain additional related assets to obtain regulatory approval. Both parties have also agreed to extend their merger process date to July 31 to allow additional time to obtain regulatory approval, a sixth month extension from their previous January 27 deadline.
With more than 300 stores added to the newly expanded divestiture list, several sources have questioned whether original Walgreens divestment partner Fred’s Inc., which agreed to purchase 865 overlapping units from Walgreens, might be out of the running.
According to our own financial sources and to semi-paraphrase the great Curtis Mayfield: “Freddy’s (Almost) Dead…That’s What I Said.” That’s reportedly because of the FTC’s concerns that the Memphis druggist might not be able support an acquisition of that size, especially when the agency got burned by allowing Haggen to buy 146 stores from Albertsons in 2015. And according to the New York Post, private equity firm Cerberus Capital, which controls both Albertsons and Supervalu, has emerged as a possible white knight to fill the void and acquire the Walgreens “overflow” should Fred’s fail in its bid. According to the Manhattan- based tabloid, which is owned by Rupert Murdoch’s News Corp. organization, Cerberus made its original bid to acquire the divested units through its Albertson unit at an auction in December. While the newspaper claims Cerberus lost out to Fred’s, it also claimed that their bid was actually higher than the $950 million that Fred’s paid for those rights. The story also notes that the nation’s largest drug chain accepted the Fred’s offer because Walgreens was concerned about potential FTC approval of a PE buyer. Cerberus denied that it ever contacted the FTC about the transaction or the bidding process.
If the merger falls through, Walgreens would be required to pay Rite Aid a termination fee of $325 million, which would double to $650 million “in certain circumstances,” according to a previous filing.
Ahold Delhaize Decentralization Plan Is Solid, But Can AUSA Improve Store-Level Execution?
I was encouraged to hear that phase two of Ahold Delhaize’s integration/synergy plan in the U.S. is to focus on a more decentralized approach, giving the banners (“brands” as AUSA COO Kevin Holt terms the divisions) more focus with more boots on the ground in Quincy, Carlisle (division, not corporate headquarters), Landover, Skokie (Peapod), Salisbury and Scarborough. The latter two divisions, Food Lion and Hannaford which are part of Delhaize America, already had established separate headquarters where local merchandising and procurement decisions were made.
If you’ve read my editorials over the years, you’ll know that I believe the industry’s seismic shift over the past 15 years to a more centralized merchandising approach has only been effective in saving backroom money. And despite almost every industry executive claiming that the individual divisions will still have significant input into local buying decisions, it never seems to work out as well as planned. That’s because at the end of the day, the category manager (or other decision maker) at corporate headquarters is the one signing that purchase order and essentially controls the deck.
In the past few years, we have seen some retailers shifting back to a more decentralized approach. Most notably, Albertsons has bought into this concept fully, re-establishing regional infrastructures at its 14 operating divisions. While we do not expect Ahold Delhaize to make the type of financial investment
or level of local commitment that Albertsons did in 2013, it’s clear that Holt is a big believer in a “brand-centric” system, which will almost certainly be an improvement over the current dysfunctional merchandising system that has existed in Carlisle for at least the past four years.
However, improvement is always relative and in the case of Ahold’s brands, the success of this new initiative will be measured by both tangibles and intangibles. Tangibly, can the AUSA “brands” improve the negative 0.2 percent ID sales results from its most recent quarter? While deflation and intense competition remain major impediments to all retailers, the peer group ID sales average (for publicly-traded grocery merchants) over the past year remains in the positive 2-2.5 percent range. Ahold USA hasn’t been at that benchmark in quite a while.
Of course, the biggest (and most important) intangible component that will affect the ultimate success (not just enhancement) of this new brand-centric model is how the AUSA banners will improve their image with their customers.
It too simplistic to say that the company’s stores look too vanilla, or more cap-ex needs to be deployed into accelerating remodelings or building new stores. Those facts are true, but the underlying core issue for Ahold USA, as it seeks better results, is its approach to its store level associates. Ever since the Ahold Delhaize merger was announced in June 2015, I’ve never seen this issue addressed specifically. Unless the newly united retailer commits more labor to its stores, vastly upgrades its training and improves associates’ morale at store level, decentralization or any other synergistic efficiency will fall short, because in any form of bricks and mortar retailing, the perception of the store associates is arguably the most important component in advancing consumer image.
Not surprisingly, we’ve been bombarded by calls and emails from associates and vendors wondering what other changes may be occurring at Ahold Delhaize in the U.S. for the rest of 2017.
Since Ahold Delhaize isn’t doling out more specifics at this time, here are some questions in our mailbag: With the recently announced brand-centric approach, will vendors need to make six separate appointments at AUSA, Delhaize and Peapod to present same suppliers’ offers? Or will it remain one
headquarter call? With the new local model to be implemented, how many merchandising jobs will be affected at corporate headquarters in Carlisle, either by relocations or terminations? With the new localized brand-centric plan, relative to their size, will there be a proportionate number of local merchandisers assigned to each banner? Will there be a change in job titles and responsibilities in the merchandising departments of both AUSA and Delhaize America, so that both companies are aligned as one? Is C&S being considered to supply the banners it already doesn’t service (Food Lion, Hannaford)? In order to gain nearly $400 million in U.S. synergy savings, how many associates will lose their jobs at Ahold USA and Delhaize America?
Stay tuned, it may take a while, but most of those answers should ultimately be revealed.
Albertsons Reportedly Withdraws Pursuit To Purchase Price Chopper
Three months ago, all bets were on Albertsons to acquire Golub Corp. (Price Chopper) the 84-year-old regional grocery chain based in Schenectady, NY. Now it appears that deal is off as several financial sources have told us that the Boise, ID-based chain has withdrawn its interest to buy Price Chopper, primarily because it wants to concentrate on launching its effort to go public, which was first announced in July 2015.
Price Chopper, which shook up its senior management team a year ago and has acknowledged that it would explore opportunities to enhance its capital position to improve its store operations and convert more units to its upscale Market 32 format, took an even more forward leap when it hired New York investment bank Sagent Advisors to issue a prospectus relating to those opportunities.
During the past six months, multiple financial sources told us that interest in the approximately 135-stores chain was far from robust with Albertsons emerging as perhaps the only bidder to acquire the whole company (reportedly minus real estate) for about $1 billion. However, after speculation began to increase last fall that Albertsons was the leading contender to acquire Price Chopper, Reuters announced in late December that a deal was close between the two parties. Through our Wall Street sources, we also confirmed that a deal was close.
However, we were told that, just before 2016 ended, Albertsons elected not to pursue the Price Chopper purchase, opting instead to prioritize its effort to take the company public, something it first announced 18 months ago. One of our financial sources summarized the situation from his perspective: “The Price Chopper situation poses a moderate level of risk to any interested buyer. They are losing market share in most areas, the performance of its Market 32 conversions has been below our sales projections and any buyer would have to sink substantial capital into improving stores and infrastructure. As for Albertsons, launching its IPO has always been a priority since it acquired Safeway two years ago. Even though the retail food sector remains somewhat depressed, the overall market is very healthy now. Why not strike while the iron is hot?”
When Albertsons filed its initial S-1 SEC form, it said it would attempt to raise capital to repay debt and create enough cap-ex to improve operations and perhaps fund other acquisition opportunities (Albertsons said it would like to reach $100 billion in retail sales by 2020). The second largest pure-play supermarket operator in the country (annual sales of approximately $58 billion) is primarily owned by private equity firm Cerberus Capital Management which has been trying to decrease its equity in its two largest retail/wholesale food investments – Albertsons and Supervalu.
It was believed that Albertsons might launch as early as Q4 in 2015, but a poorly received Wal-Mart Investor Day in October 2015 helped depress the entire grocery sector. The Boise-based retailer, however, posted an amended S-1 filing in November 2015 stating that it would resume its attempts to seek a public offering, while also noting the “volatility” of the current financial markets. During the next 14 months, even though the sector has improved a bit, deflation, overstoring and the increased threat of online sales continue to challenge most food retailers.
Now the window to “go public” seems to be more open with Wall Street rallying behind the announcement of Donald Trump’s presidency, as the Dow Jones Industrial Average broke the 2,000 barrier points on January 25 and stood at 20,090 on February 9.
‘Round The Trade
For years, Amazon.com posted incredible quarterly sales but disappointing earnings as the company remained stalwart in its resolve to build its innovation and revenue platforms at the expense of profits. In the past two years, earnings are rapidly catching up to still eye-catching sales growth. In its recently released fourth quarter ended December 31, 2016, profit increased 55 percent to $749 million while sales jumped 21 percent to $43.7 billion (which, not surprisingly, was disappointing to Wall Street). It also appears that Godzilla (Amazon) is about to launch a new credit card – Amazon Prime Rewards Visa Signature – that will rival or exceed the benefits of Costco’s rewards card. The new card offers Amazon “Prime” members 5 percent back on all amazon.com purchases as well as 2 percent back at restaurants, gas stations and drugstores, and 1 percent back on every other purchase. In order to get the full reward value from the card, holders must join Prime for $99 a year. Non-Prime members who get the card still receive 3 percent back at amazon.com, 2 percent back at restaurants, gas stations, and drugstores, and 1 percent back on every other purchase. “We are adding even more value to Prime by offering rewards on Amazon and everywhere else you shop,” said Max Bardon, an Amazon VP. The new card also offers other benefits, including no foreign transaction fees, travel protection, and 24/7 concierge service. While the card could be a modest game changer, I’m hoping that an Amazon drone drops off a package on my front porch or maybe Godzilla will build me one of those new Amazon tunnels. With a tunnel leading up to my house, then I’d really know why my cable reception isn’t so good. And just before presstime, Godzilla announced that will build a 1.2 million square foot fulfillment center in North East, MD (Cecil County). The new DC, Amazon’s third in the state, will employ about 700 and carry larger items such as televisions and patio furniture. With any of Amazon’s recent moves and ensuing results, including financial performance, is there any sane reason to be disappointed in virtually anything that Amazon attempts? Sure, they’ve had a few duds in recent memory (Amazon Elements diapers, Fire Phone), but who has a better track record for innovation over the past decade? Nobody’s even a close second. And 2016 was arguably the best year in its 22-year history. But alas, somebody’s got to hold down second-place in the ecommerce standings. And that company would be Wal-Mart. Late last month, the Behemoth said it would offer its U.S. customers free two-day shipping on a minimum order of $35 in an attempt to compete with Amazon’s popular “Prime” shipping program. The new free shipping program will replace the world’s largest retail merchant’s “Shipping Pass,” another two-day shipping program that had an annual membership fee of $49. Amazon’s “Prime” program charges customers $99 a year for two-day shipping that also comes with additional perks such as a streaming video service. On the brick and mortar side of the business, you’ll soon be able to purchase your new automobile at Wally World. The big retailer is planning to partner with several dealership groups including AutoNation, the nation’s largest new vehicle retailer, to sell the cars in 25 Wal-Mart units across the Southwest. According to Automotive News, staffers will be on hand to help buyers through the process, which is centered at a CarSaver kiosk within the store. The story notes that the utilization of the CarSaver technology would allow interested buyers to connect with a dealership within 15 miles of that Wal-Mart and is aimed at reducing the stress and pressure of the typical car shopping experience while saving customers potentially $3,000 on a car’s average sticker price. Additionally, Wal-Mart is again experimenting with a new c-store format that it debuted earlier this month at the entrance of an existing SuperCenter in Rogers, AR. The 2,500 square foot unit features a hot bar, walk-in beer cooler, soft-serve ice cream machine, pre-made sandwiches and salads and a limited number of staple grocery items…also entering the convenience store business for the first time is Dollar General, which currently operates more than 12,500 stores in 43 states. The Goodlettsville, TN-based discounter opened its first DGX c-store in Nashville, TN last month. The 3,400 square foot unit, based 15 miles from its corporate headquarters features groceries, pet supplies, snacks and some HBC items to go with “grab and go” sodas, sandwiches, and coffee. Another store will open shortly in Raleigh, NC…one company that is partially exiting from its decentralized approach and moving to a corporate procurement system is Austin, TX-based Whole Foods. And in the past month, WFM took another step toward becoming less local when it announced it has closed three food prep facilities on the East Coast. Units in Landover, MD, Everett, MA and Atlanta, GA have ceased operations as the organics chain will now utilize outside suppliers. And just before presstime, the organics-driven chain posted disappointing first quarter sales and earnings with comp store revenue for the period ended January 15. Comps dipped 2.4 percent, marking the sixth consecutive quarter that the “good for you foods” merchant had declining same store sales. Net income for the 16-week period fell to $95 million from $157 million a year ago. Additionally, co-founder and CEO John Mackey said that it will no longer seek to reach 1,200 stores in the next decade (it currently operates approximately 460 units) and instead said the company will “double down” on its most loyal customers, continue to lower prices and take other steps to improve profitability and efficiency. WFM also announced that nine stores will close before the end of its 2nd quarter (none in the Northeast). Currently the retailer has 93 new stores in development. Just before we went to press, more tough news for the retailer, which prides itself on healthy offerings: the first Whole Foods to open in the District, a unit on the 2300 block of Wisconsin Avenue, was ordered to be shut down by the D.C. Department of Health for violating food code regulations and presenting a health hazard to the public. Specifically for “failing to minimize and reduce the presence of insects, rodents and other pests on the premises. ” The Glover Park store opened in 1996…another publicly-traded company that’s struggled with sales and earnings improvements is Supervalu, which had another tough earnings period in its third quarter ended December 5. The Eden Prairie, MN wholesaler/retailer posted an $11 million loss from continuing operations while suffering another huge identical stores sales decrease (5.7 percent) at its corporate retail stores which also saw a 3.8 percent decline in customer count and a 1.9 percent dip in average basket size. Supervalu’s wholesale business was somewhat healthier with a sales increase of 0.2 percent, to $1.91 billion, although administrative expense adversely impacted profits. Wholesale operating earnings were $52 million, or 2.7 percent of net sales versus adjusted operating earnings of $60 million, or 3.2 percent of net sales in the year-ago period. Things should get better in that department next quarter as SVU assumes primary grocery supply responsibility for all 178 The Fresh Market stores and an additional 50 America’s Food Basket units in the Northeast. CEO Mark Gross commented on the company’s wholesale and retail status, while also addressing the recent Save-A-Lot (S-A-L) transaction: “The successful sale of Save-A-Lot early in the fourth quarter provides Supervalu with additional flexibility to operate and grow our business. Additionally, our wholesale team has done a tremendous job delivering for our customers. It is a significant accomplishment that we increased wholesale sales compared to last year given the sales lost at the end of fiscal 2016. Unfortunately, in our retail segment we have not been able to overcome persistent deflation, competitive impacts, and o
ther factors. It takes time to change customers’ shopping habits, but our team is dedicated to improving our results.” Gross’ assessment is accurate and he knows that rebuilding Supervalu as solely a wholesaler is going to take time. However, the shakeout process is difficult to watch. Everybody knows that the company’s retail stores need to be sold and/or closed. But are there viable buyers to attract? To make matters worse, as SVU continues to invest less capital in its more than 200 corporate units, the rougher they look, which further devalues those banners and stores in markets that continue to be overstored and are ultra-competitive. SVU also announced that it hired Anne Dament as senior VP- merchandising and marketing for its retail stores. She previously held senior management posts at Safeway, Pet Smart and most recently Target. A native Minnesotan, at least she won’t have to move very far in her new job, but her challenges will be enormous. With heavy speculation that Supervalu is looking to sell its 200-plus store retail unit, Dament must find ways to re-energize a disparate store base that has been essentially cap-ex starved for more than a decade. Making Shoppers, Farm Fresh, Cub, Shop ‘n Save and Hornbacher’s relevant again will be a supreme challenge. There was one additional pearl in reading the agate type in SVU’s recently filed 10-Q report. The company revealed that it paid only $17 million for the 22 former Food Lion stores it acquired last year. That more or less confirms that Ahold Delhaize sold its 85-store divestiture package for less than $1 million per unit, an indication of how anxious the big Dutch retailer was to dump those locations in order to complete the merger. The downside for those Supervalu acquired units in Maryland, Pennsylvania and West Virginia (trading as Shop ‘N Save) is that they are performing worse than any of the other former Food Lion, Martin’s, Stop & Shop and Hannaford stores that other retailers purchased…Bain Capital Private Equity Co. (60 percent) and Chinese supermarket chain Yonghui Superstores (40 percent) have acquired Stamford, CT-based Daymon Worldwide, the private label development and retail merchandising services company, for $413 million… just before presstime, Kellogg’s made a major move in its distribution model. The Battle Creek, MI-based manufacturer said it will dismantle its DSD model for its snack business and switch to a warehouse model, the path where 75 percent of its business is already sold. Approximately 1,100 associates will be affected and 39 distribution centers will close by the end of the company’s fourth quarter this year. While I could almost never envision a scenario where companies like Coke, Pepsi, Frito-Lay and Bimbo switch to a warehouse model, don’t be shocked if you see smaller or medium-sized firms, or even large CPG manufacturers with specialized DSD products, opt for the less costly (and less service-oriented) factory to warehouse model in the near future.
Local Notes
It looks like May 18 will be ribbon-cutting day for Lidl’s debut in the U.S. with 10 stores reportedly to open on that day. Sources have told us that Lidl will cluster 10 store openings every few weeks thereafter and hope to have approximately 100 stores open by the end of 2017. Corporately, the German discounter’s parent firm (Schwarz Group) has named a new chief executive, Jesper Hojer. The Danish-born Hojer, who has worked for Lidl for more than a decade, replaces Sven Seidel who became Lidl’s CEO in March 2014. And Lidl’s chief discount rival in Europe (and soon-to-be in the U.S.), Aldi, said it will spend $1.6 billion to remodel its 1,300 U.S. stores. Aldi’s new redesigned model, which now exists in about 300 units, features wider aisles, raised ceilings, sleeker refrigerated doors and windows and more natural. The new store design adds about 20 percent more floor space (to about 20,000 square feet) and an expanded perishables presence….Nestle USA is moving its corporate headquarters from its longtime base in Glendale to a 35-story 580,000 square foot building in the Rosslyn section of Arlington, VA. Nestle is expected to occupy 40 percent of the edifice (206,000 square feet) and is expected to begin its corporate move this summer and continue through the end of 2018. Nestle USA’s sales in 2015 were $9.7 billion…Publix is slowly moving forward in its store-by-store takeover of 10 Martin’s (Ahold USA) units in the Richmond market. In the past month, the Lakeland, FL-based merchant has filed for permits for four more units where Publix will begin extensive upgrades ($3 to $6 million per unit). Thus far, Publix has taken permit action on seven of the 10 supermarkets that Publix agreed to acquire last year. It’s possible that the first of those stores could open in late summer, although the retailer has not yet provided any concrete opening day information…Kroger has bought a controlling interest in the legendary Murray’s Cheese flagship location on Bleecker Street in Manhattan’s West Village. Kroger and Murray’s have enjoyed a partnership since 2008 and today there are 350 cheese shops inside Kroger stores. It seems like a great deal for both parties providing financial security for Murray’s owner Rob Kaufelt (whose dad Stanley Kaufelt, founder of Mayfair Super Markets, was an iconic figure in the supermarket industry) and permanent control of an influential brand for Kroger…Relay Foods, the Charlottesville, VA-based online grocery delivery and pick-up firm focusing on healthy and local sourced food products, has retired its name and will begin utilizing a “delivery only” model utilized by Door to Door Organics, the company it merged with last summer. Whether the Door to Door name will be used permanently has not been decided, but the company has exited the Lynchburg, VA and North Carolina markets. Door to Door’s primary Mid-Atlantic depot is located in Montgomeryville, PA…one more thing before we move to the obit section: after reading the Ahold Delhaize press release about the company’s shift to a more “brand-centric” model, was I the only one who had trouble deciphering this amalgamation of wordsmithing ambiguity? That’s what happens when too many lawyers are allowed to meddle in the process… last year seemed to be a record year for celebrity deaths and based on the first month of 2017, the trend seems to be accelerating. I’m very sad to report the passing of Mary Tyler Moore, the groundbreaking comedienne and actress who died last month at the age of 80. Besides iconic roles as Laura Petrie in “The Dick Van Dyke Show” (1961-66) and Mary Richards on “The Mary Tyler Moore Show” (1970-77), Tyler Moore also received a Best Actress Academy Award nomination for her role in 1980s “Ordinary People.” She was also a spokesperson for juvenile diabetes, a cause close to my heart, having been diagnosed with Type 1 version of the disease when she was 33. Mannix is dead too. Actor Mike Connors, who played hard-boiled private eye Joe Mannix on the self-titled TV series (1967-74), passed away at the age of 91. Connors, born Krekor Ohanian, began his film career in 1952’s “Sudden Fear.” Actor John Hurt, nominated for two Oscars, is also no longer with us. The gravelly-voiced British actor, who received Academy Award recognition for his roles in “Midnight Express” (1978) and “The Elephant Man” (1980), had a wide-ranging acting career which included more than 200 film and TV roles. He usually played characters with issues, and according to website IMDB, Hurt’s characters died 47 times on screen. Della Street has also died. Barbara Hale, who played the devoted secretary to Raymond Burr’s Perry Mason on the long-running TV series (1957-66), died last month at the age of 94. In 1959, Hale won an Emmy Award for the show; she also made nearly 60 television and film appearances in a career that spanned 52 years. And just before presstime, we learned of the passing of the world’s greatest authority on everything (or nothing). Professor Irwin Corey, whose mock-intellectual dialogue and fractured logic entertained audiences for more than 70 years, passed away at the age of 102. With his disheveled appearance, featuring tennis shoes and rumpled tuxedo, “The Professor” analyzed a recent election year outcome by noting: “I’m sorry, the returns are fragmentary, but the indication is that there will be a turnout that won’t come up to expectations of those who, through their analyses have proved the percentages will only relate to the outcome.” We’ll miss the professor – he was truly one of a kind…