What's going on?
US grocer Albertsons announced on Wednesday that it’s buying pharmacy chain Rite Aid, creating a giant with $83 billion in annual sales that could be a contender in the struggle for food and drug supremacy in the States.
What does this mean?
Albertsons, the country’s second-largest grocer, is a private company that owns the Safeway brand and 19 other supermarket chains, many of which feature in-store pharmacies. The company was previously on the verge of “going public” – but an IPO was shelved in 2015 after bad results from competitor Walmart. Since then, a variety of factors, including Amazon’s acquisition of Whole Foods, have depressed grocers’ stock prices (and therefore Albertsons’ potential public valuation).
Rite Aid, meanwhile, has had its own share of rotten luck. In 2015, it tried to sell itself to rival Walgreens, but a full merger was blocked by US competition authorities. In the end, the two companies announced a partial sale that left Rite Aid with around 2,600 stores on its hands – until now.
Why should I care?
For markets: The deal isn’t yet a clear win for shareholders of either company.
Albertsons’ private equity owner no longer has to risk an IPO in a turbulent market – but it isn’t yet cashing out its investment. Meanwhile, Rite Aid’s shareholders are being given stock in the new company, which ties the outcome of their investment to its success – and its stock price. The hope for both sets of shareholders is that the enlarged scale of the combined company will enable it to better compete in an ultra-competitive industry.
The bigger picture: Walmart is setting a (mixed) example.
The merger is just the latest example of traditional grocers seeking growth in broader offerings and greater scale. Walmart is another competitor looking to e-commerce and pharmacies for answers: on Tuesday, however, it announced disappointing growth online, with sales there still only accounting for a tiny 4% of the retailer’s $500 billion annual revenue – and that helped Walmart stock to its worst day in more than two years.