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Analyst: Rite Aid Could Be Next Takeover Target

February 19, 2010

By George Anderson

UBS Securities' analyst Neil Currie thinks that once Walgreens has had the opportunity to complete its purchase of Duane Reade, it might turn its attention to taking over some or all of Rite Aid's 4,800 stores. Of course, CVS and Walmart might have something similar in mind and perhaps more than one of these parties could buy up part of the drugstore chain.

Rite Aid is valuable to others in the pharmacy business, according to Mr. Currie, because it "is the last remaining major drugstore asset in the U.S., with meaningful exposure to dense urban markets."

Any of the three chains would benefit from a deal with Rite Aid, Mr. Currie wrote.

"We believe potential suitors for stores within the Rite Aid portfolio could include CVS, especially in the Pacific Northwest and Mountain regions; Walgreens in certain urban markets; and Walmart, given our view that Walmart has significant potential to grow in urban markets, is looking more closely at the economics of a smaller food/drug footprint and appears to have wider healthcare ambitions."

Discussion Questions: How likely do you think all or parts of Rite Aid will be sold? What chain(s) would benefit most from acquiring part or all of Rite Aid?

FINANCIALS:     [NYSE:RAD]

Discussion Questions:

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Instant Poll:

How likely do you think it is that Rite Aid will be a takeover target in the near future?

Comments:

On the heels of the Walgreen/Duane Reade announcement, this is fascinating. CVS, Walmart and Walgreen would benefit from Rite Aid's footprint and though I would normally cut Walmart out of any U.S. acquisition conversations, their current focus on urban markets, especially in light of the Duane Reade deal, might have them making bolder moves. I would think that Walgreen evaluated Rite Aid prior to deciding on Duane Reade so my bet would be on CVS or on segmented sell-offs. Certainly not unprecedented in the drug channel.

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Carol Spieckerman, President, newmarketbuilders

If Rite Aid is going to remain a player, they need to become a true convenience store. The Pharmacy is the low margin traffic draw; the front is where they make money. That area is under merchandised and promoted.

Sandy Miller, President, Miller Zell

It would be difficult for either CVS or Walgreens to buy all or of Rite Aid. The FTC would likely jump all over such a proposed deal. Some sort of split would have to be brokered, with CVS and Walgreens each picking up Rite Aid sites that result in the least reduction of competition. For both the drug industry and consumers, such a scenario is preferable to letting Rite Aid whither to the point that neither CVS nor Walgreen would want the remains.

Walmart has not shown great interest in growing via acquisition. That said, it does want urban real estate for smaller format stores and Walgreen showed with its Duane Reade takeover that a traditional organic-growth retail can purchase great urban real estate via acquisition. Walmart may figure in the mix, too.

David Schulz, Contributing Editor, HomeWorld Business

Rite Aid would have to be divided, if Walgreens and CVS pursue it, because of anti-trust issues.

Or someone like Sears Holdings or a very large supermarket operator like Kroger or Safeway might be interested in parts of it.

I fear that Rite Aid can not be a stand-alone operation for much longer.

'weo'

Ummm...."highly likely" would have to be my vote, since some of the West Coast RAD stores have already been purchased by one of the contenders named in the article and more are rumored by end of first quarter this year.

Other analysts opine that RAD will have to sell real estate over the next two years. That Walgreens and CVS will be buyers seems inevitable. The specter of Walmart in the bidding is something I suspect they would not care to see. Should get interesting.

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Ben Ball, Senior Vice President, Dechert-Hampe

With all due respect to the analyst, I do not see a wholesale purchase of Rite Aid by Walgreens. What I do see happening is someone coming in and providing Rite Aid with the necessary capital to jump start their business, both on store refurbishment (badly needed) and marketing.

Rite Aid's new prototype stores stand right up there with both Walgreens and CVS, and their product selection is more complete. They tend to have a more sophisticated Private Label strategy, yet customers are simply not reacting to the great changes and strides they have made. They need to market more effectively, and drive more traffic into their stores, and all of this takes money.

Where is Bill Ackman when you need him?

Joel Warady, Chief Marketing Officer, Enjoy Life Foods

I don't think it's in Walgreens' DNA to take on an acquisition of this size. CVS has always been bolder on that front, but its current challenge in trying to get Caremark in shape likely rules it out as a suitor. Besides, a Rite Aid acquisition would just kill earnings for a long while.

It's amazing how one analyst's speculative comment can get everyone's juices flowing!

'brucebuck'

Many Rite Aid stores would probably be square pegs and not necessarily the right fit for Walgreens and/or CVS. However, it would not be surprising to me if the chain were taken over, at least in parts, perhaps even by multiple buyers. Who knows?

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David Biernbaum, Senior Marketing and Business Development Consultant, David Biernbaum Associates LLC

Wal-Mart is not an acquisition player for Rite Aid. The store footprint and format are all wrong and the costs to make these Wal-Mart "friendly" would far outweigh the benefits.

For Rite Aid to be split up, it would first have to declare bankruptcy or go through a formal sale by a third party (usually a bank) that has a vested interest in how their stores and assets are divided up. Because of their size, any Rite Aid asset re-allocation would involve the FTC which would also require some sort of government oversight for all involved parties. All of this is still a bit premature until the last breath is taken from Rite Aid and they formally go up for sale.

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Kai Clarke, CEO, American Retail Consultants

I'm a strong believer in the two-per-channel theory--that each channel will end up with only two major players. Rite Aid, being third in their channel, would therefore seem unlikely to survive in its present form.

The question to me would be whether it is absorbed by one of the other two (seems unlikely for antitrust reasons), breaks itself into regions, or morphs into some other form (e.g., the c-store suggestion above).

'bobhouk'

Clearly the number three chain in the national drugstore mix, but still relevant to many neighborhoods. I believe there will be an ongoing cleansing process within this enterprise and I agree that if not acquired, it will morph into something different--I'm thinking urban markets/centers.

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Dave Wendland, Vice President, Hamacher Resource Group

I haven't seen a mention of private equity firm making an investment to revamp stores at Rite Aid and improve their merchandising. Although they are not prominent in my home market, the experience I have had with Rite Aid is similar to Walgreens in their "older" stores--a bit tired and in need of modernization.

Investment in improving the core product might make sense before management at Rite Aid pulls the trigger.

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Bill Hanifin, Managing Director, Hanifin Loyalty LLC

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