Why Is the Street So Unimpressed With Albertsons' Bid to Buy Rite Aid?

In this segment from the MarketFoolery podcast, host Chris Hill and Motley Fool Asset Management's Bill Barker consider the recent history and near-term outlook of Rite Aid (NYSE: RAD), which sold off a fair number of stores after it was unable to merge with Walgreens Boots Alliance (NASDAQ: WBA). Now, it's going to end up in the portfolio of Albertsons, where perhaps it can provide a little jolt for the company's inevitable return to the public markets -- Cerberus Capital Management, after all, isn't planning on holding it forever.

A full transcript follows the video.

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This video was recorded on Feb. 20, 2018.

Chris Hill: Albertsons, the grocery chain, is buying Rite Aid, the drugstore. One reaction that appears to be happening on Wall Street is essentially the investing equivalent of yawning, because it's not like shares of Rite Aid are shooting to the moon on this. And Rite Aid has always struck me as one of those businesses without any real compelling thesis for investors, in part because they haven't made the moves that CVS (NYSE: CVS) has made over the last four years, in terms of being more focused on health, not just in the way that CVS got rid of selling tobacco, but their move into being more of a healthcare company. When you saw the news, Albertsons buying Rite Aid, what was your first reaction?

Bill Barker: I think we talked about Rite Aid recently in regard to their attempt to sell themselves to Walgreens. They were partially successful. They sold some of their stores, but not all, not as many as they wanted. What was left was, there has to be someone else that's going to acquire this company. They obviously don't want to go it alone any longer, and they're handicapped against CVS and Walgreens in terms of their scope. But, somebody can probably do a better job with what remains.

And I think Rite Aid tried to sell 4,600 locations to Walgreens in 2015. Ultimately they sold less than half of that, about 1,900. So, what they had left was available to the highest bidder, and Albertsons has been moving around. This is a company that wanted to go public a couple of years ago and failed. They were lined up to do it, but then Kroger had some bad news and then Walmart got into the grocery store space in a better way, and then Amazon acquired Whole Foods, so there never seemed to be a good enough time to reintroduce that IPO. And you still have Albertsons hanging around, owned by Cerberus Capital Management, still trying to figure out what the combination is that's going to interest the market. I think that's the liquidation event that their private equity owners want.

Hill: Is that the best name of any private equity firm?

Barker: Cerberus Capital Management?

Hill: Yeah.

Barker: I don't know. I've never ranked them.

Hill: I just think, when you think about private equity and what private equity companies are capable of, sometimes for good, sometimes not for good, the fact that these folks decided, "We're going to name our private equity firm after the mythological three-headed dog who guards the gates of hell," I feel like they were onto something there.

Barker: Yeah, the three-headed hellhound. I don't know. Does that convey skill at private equity? Or just something to fear?

Hill: Definitely the latter. I don't know their track record well enough to know if they can claim the former. But certainly, they're shooting for the former.

Barker: Well, I think it's a strong one. I don't know that it's worked out especially well for Albertsons so far. It's a mixed record, apparently.

Hill: Well, when you decide to hook up with the company that named their firm after the three-headed hellhound, you kind of get what you signed up for, I think. You kind of knew that going in, or you should have.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Bill Barker has no position in any of the stocks mentioned. Chris Hill owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon. The Motley Fool is short shares of Kroger. The Motley Fool recommends CVS Health. The Motley Fool has a disclosure policy.