Who Else Would Acquire Rite Aid?

  • Rite Aid is an acquisition target because it is a very cheap but large company in a very prosperous sector.

 

  • One logical contender for Rite Aid is Wal-Mart because the drugstores could be easily integrated with Walmart Neighborhood Market and Walmart.com.
  • There are some good reasons for Kroger to buy Rite Aid, including adding Rite Aid to Kroger’s rewards card program.

 

  • Dollar General might make a play for Rite Aid now that it has failed in its bid for Family Dollar.
  • Rite Aid has some of the attributes of the kind of companies that Warren Buffett likes to acquire.

The prevailing theory in the stock blogosphere these days is that Walgreen Boots Alliance (NASDAQ: WBA) will soon make a move to acquire America’s third-largest drugstore operator, Rite Aid (NYSE: RAD).

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Rite Aid is a very tempting acquisition target these days because it is a large and growing but cheap company in a very lucrative industry. Between November 2013 and November 2014 Rite Aid’s TTM revenues grew by $900 million, rising from $25.38 billion in November 2013 to $26.28 billion in November 2014.

That gave Rite Aid an impressive quarterly year to year revenue growth rate of 5.26%, yet the company had a market capitalization of $8.62 billion and an enterprise value of $13.94 billion. In contrast, Walgreen had a market cap of $81.31 billion and an enterprise value of $82.45 billion. It also reported a quarterly year to year revenue growth rate of 6.68%, which would indicate that the entire drugstore sector is growing at an impressive rate.

That makes the 4,572 stores Rite Aid was operating in December 2014 a decidedly valuable commodity. It also makes Rite Aid an obvious acquisition target for Walgreen and the number two drug store operator, CVS Health (NYSE: CVS). Yet it also makes Rite Aid an acquisition target for a number of other large retailers.

Other Potential Buyers for Rite Aid

Some other logical potential suitors for Rite Aid include:

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  • Wal-Mart Stores Inc. (NYSE: WMT). Rite Aid’s locations would fit in nicely with Wal-Mart’s strategy of opening smaller neighborhood markets. Rite Aid stores would also be great pickup and return locations for merchandise ordered through Walmart.com. Wal-Mart offers free in store pickup for merchandise ordered on Walmart.com. Wal-Mart has been acquisition adverse for a long time, but that could change if the right company becomes available.

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  • Kroger (NYSE: KR). America’s largest grocer seems to be gearing up for another major acquisition. My fellow Seeking Alpha commentator Brian Nichols thinks Kroger is more likely to buy another grocer, but grocers do not come up for sale every day. Nichols’ thesis is that Kroger’s current strategy is to concentrate its expansion efforts on giant supercenters, yet Kroger has some smaller operations. It currently operates 725 convenience Some of Kroger’s current businesses, including 320 fine jewelry stores and the online retailer Vitacoast.com, would be a good fit with Rite Aid. Rite Aid could also get Kroger into some major markets it currently lacks, such as Chicago. Adding Rite Aid to Kroger’s reward card program could also drive a lot of new business to Kroger stores. Kroger is also a major player in the pharmacy sector; it filled 164 million prescriptions in 2013.

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  • Dollar General (NYSE: DG). The dollar store operator has been shopping for a major acquisition lately. Since it lost its bid to buy archrival Family Dollar (NYSE: FDO), Dollar General might try to buy Rite Aid. Purchasing Rite Aid would get Dollar General into the lucrative drugstore sector. There would be some good synergies because the two chains sell some of the same kinds of merchandise, such as dish soap and toiletries. Dollar General certainly has the cash to make a bid for Rite Aid; it was willing to pay $9.1 billion for Family Dollar.

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  • Berkshire Hathaway (NYSE: BRK.A). Yes it is a bit of a dark horse, but Rite Aid does meet some of Warren Buffett’s value criteria: it is a good company that has been going through a rough patch yet still has the potential to generate a lot of cash. It also has an easy-to-understand business model in a decidedly unglamorous industry—selling shaving cream and prescriptions. Rite Aid also meets another one of Uncle Warren’s classic criteria: it is a company that an idiot could run if necessary. Uncle Warren seems to be gearing up for an acquisition; he sold off all 41 million shares that his company held in Exxon-Mobile Corp (NYSE: XOM) for $3.7 billion. That is similar to Buffett’s sale of his Union Pacific stake before he bought Burlington Northern Santa Fe in 2009.

 

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I am sure there are other potential buyers for Rite Aid out there, but after Walgreen and CVS, the four big names above seem like the obvious acquirers. When all is said and done, it is hard to imagine Rite Aid not being acquired by somebody; it is simply too great a bargain to pass up.

Disclosure: Your blogger owns shares of Kroger (KR) and plans to keep them for a very long time.