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Albertsons and Rite Aid announced late yesterday that they have called off their $24 billion merger, largely because a number of Rite Aid shareholders, including a couple of influential advisory firms, felt that the drug store chain was being undervalued in the proposed deal.

Albertsons released a statement that said, in part:

“Albertsons Companies believes that the strategic rationale of the Rite Aid combination was compelling, including the $375 million of cost synergies and $3.6 billion of identified revenue opportunities. We disagree with the conclusion of certain Rite Aid stockholders and third-party advisory firms that although they acknowledged the strategic logic of the combination, did not believe that Albertsons Companies was offering sufficient merger consideration to Rite Aid stockholders. Consistent with Albertsons Companies’ disciplined approach to mergers and acquisitions, and after careful consideration of all information available to our Board of Directors through today, we were unwilling to change the terms of the merger.We remain excited about the improving momentum, financial strength, and industry leadership of Albertsons Companies. Our team has remained laser focused on execution to drive our financial and operating performance, while ensuring we continue to meet and exceed the needs of our customers.”

In its report, the Wall Street Journal writes that “some of Rite Aid’s biggest shareholders had planned to vote against the pharmacy’s planned merger with privately held grocer Albertsons, unconvinced by the companies’ argument that a deal was necessary to fend off competition from Amazon.com Inc. and others … The retailers each said their mutual decision to call it quits was made despite their belief in the deal’s rationale. Albertsons said it disagreed with investors and proxy-advisory firms that felt it had undervalued its offer for Rite Aid, which has a market-capitalization of under $2 billion. Albertsons board declined to change the terms of the merger, the retailer said.”

Neither company will owe the other any money under the terms of the cancelled deal.

The Journal notes that “private-equity firm Cerberus Capital Management LP had been the main owner of Albertsons for over a decade and had tried to take Albertsons public in 2015. Combining with Rite Aid would have allowed Albertsons to go public and given Rite Aid shareholders about 30% of the company.”

And, the New York Times notes that “it was hardly the transformative deal that rivals have pursued — such as CVS’s proposed merger with Aetna, the health insurer, or Walmart’s efforts to deepen its ties with Humana.”
KC's View:
I know there were a lot of investor questions having to do with whether Albertsons was paying enough, and whether the deal creates enough value in the end. I have tons of respect for Jim Donald, Albertsons’ COO … if anyone could’ve made this work, it is him. But it always struck me as a deal about a) size, and b) giving Cerberus a way to cash out.

For me, the more important question wasn’t about investor value, but whether physical size, as defined in the traditional sense, remains a critical differentiator. Not to make everything about Amazon, but it seems to me that its expansion of an ecosystem is less about size and more about relevance and resonance. That’s what its acquisition of PillPack is all about - identifying a pain point and figuring out a solution, or, in this case, acquiring one that, when grafted onto its existing business model, has the potential of representing a significant leap forward.

I’m not sure that acquiring a whole bunch of drug stores represents the same sort of leap.

That said, Albertsons is making new and significant investments in technology and looking for innovation-minded partners, so I’m hopeful, for Albertsons’ sake, that it has some new tricks up its sleeve. Old tricks probably won't be enough.