Rite Aid, Walgreens scrap merger; Rite Aid to sell stores to Walgreens, pay down debt

By Paul Deckelman

New York, June 29 – Rite Aid Corp. and prospective merger partner Walgreens Boots Alliance, Inc. officially called it quits on Thursday, 20 months after the two big drugstore chain operators first announced plans to combine, done in by uncertainty over whether that $17.4 billion plan could gain federal regulatory approval.

They have instead gone to Plan B – Camp Hill, Pa.-based Rite Aid, the third-largest drugstore chain operator in the United States behind larger rivals Walgreens and CVS Health, will sell almost half of its more than 4,600 stores to Walgreens for $5.175 billion in cash and then use most of that money to reduce its more than $7 billion debt load.

Rite Aid’s chairman and chief executive officer, John T. Standley. told analysts on a Thursday conference call regarding the termination of the merger agreement, its replacement by the asset-sale deal and the release of the company’s fiscal 2018 first-quarter results that Rite Aid would shortly receive from Walgreens the previously agreed-upon $325 million breakup fee for the termination of the merger plan.

“We expect to receive that fee in the next few days and will use this money to pay down a portion of our existing borrowings on our revolving credit facility,” Standley said.

As of the end of the fiscal first quarter, Rite Aid had $2.317 billion of outstanding senior secured revolver borrowings due in January 2020, down somewhat from the $2.405 billion of revolver debt on the books at the end of its 2017 fiscal year on March 4.

Use of store sale proceeds

Rite Aid’s senior executive vice president, chief financial officer and chief administrative officer, Darren Karst, told the analysts that Rite Aid would then receive the proceeds from its sale of 2,186 stores, related distribution assets and inventory “once the transaction closes,” which is expected to take place sometime within the next six months.

“We will receive the proceeds from the asset sale over a period of several months, as WBA [Walgreens Boots Alliance] takes possession of the stores in orderly waves.”

He said that Rite Aid would pay off approximately $350 million to $400 million of net liabilities on the balance sheet, consisting mostly of trade payables and accrued liabilities related to the divested assets, pay some $75 million to $100 million of restructuring costs and transaction fees, net of tax, and make income tax payments of between $100 million and $125 million.

Karst said that the store-sale proceeds, net of the above amounts, would likely total between $4.5 billion and $4.7 billion, “significant net proceeds to allow us to de-lever the balance sheet.”

He said the company expects its leverage ratio of net debt as a multiple of trailing 12-month adjusted EBITDA to fall to “roughly half of the level that it is today, which will give us an opportunity to improve free cash flow through reduced interest expense, and provides us with the ability to make strategic investments in our business.”

At June 3, the leverage ratio stood at 6.8 times.

During the question-and-answer portion of the conference call following the formal presentations by Standley and Karst, the executives indicated that pro forma leverage following the store-sale transaction, payment of the proceeds and the use of that money for debt paydown would be somewhere in the 3 times to 4 times area, although Karst was careful to point out that this was not a target level that the company was specifically attempting to meet.

Priorities for debt paydown

In answer to an analyst’s question of whether the new capital structure following the debt paydown would consist more of bonds or of bank debt, Karst replied: “I don’t think we have concluded where we want to be on that yet.”

He told another analyst who asked whether there would be a “waterfall” of which debt would be paid down first that while management had “not entirely mapped that out, it will generally go from senior to more subordinated – there is a waterfall that will be required, so that is our initial thinking.”

At the end of the 2018 fiscal first quarter, total debt stood at $7.24 billion, down from $7.33 billion at the end of fiscal 2017. About $22 million was considered to be the current portion of long-term debt.

Rite Aid’s biggest obligation was the aforementioned $2.317 billion of revolver borrowings. Other secured debt in the capital structure included $466 million of tranche 1 second-lien term loan debt due in August 2020 and $497 million of tranche 2 second-lien term loan debt due in June 2021.

The company had three issues of unsecured guaranteed bond debt – $897 million of 9¼% senior notes due March 2020, $804 million of 6¾% senior notes due June 2021 and $1.775 billion of 6 1/8% senior secured notes due April 2023.

There were also two issues of unsecured and unguaranteed bond debt outstanding – $293 million of 7.7% notes due in February 2027 and $127 million of 6 7/8% fixed-rate senior notes due in December 2028.

© 2015 Prospect News.
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