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Influential investor advisory firms Glass Lewis and Institutional Shareholder Services are urging investors to oppose the proposed tie-up of Rite Aid and Albertsons Companies, a blow to the retailers' efforts to secure investor approval just weeks before it goes to a shareholder vote.
The $24 billion deal, announced in February, has faced push-back from a number of retail investors as well as top ten shareholder Highfields Capital Management. Critics have argued the deal provides Albertsons' private equity owner, Cerberus Capital Management, a vehicle to take the company public without rewarding Rite Aid shareholders in turn.
At issue for both ISS and Glass Lewis is the price that Albertsons offered Rite Aid for the deal. The deal gives Rite Aid shareholders a roughly 29 percent stake in the combined company, which will begin trading on the New York Stock Exchange after the deal closes. Because Albertsons is a private company, however, the value of that stake is up for debate and contingent upon how Albertsons is valued. And that can vary.
Meantime, its value relative to Rite Aid is complicated by the volatility facing the entire retail industry, amid uncertainties like Amazon's plans in health care.
Based on Glass Lewis's calculations, the deal is for Rite Aid is essentially a merger of equals, with little takeover premium paid to Rite Aid investors. Based on ISS's math, Albertsons is getting Rite Aid at a discount.
Both, though, supported the strategic rational of the deal. The retailers have argued that, together, they get scale, which is increasingly important to compete with behemoths like Walmart and Amazon. The combination of a pharmacy business and retailer also echoes similar trends taking place across the industry, as reimbursement rates decline and generic drug-makers consolidate.
Ashley Flower, a spokesperson for Rite Aid told CNBC the company "strongly [disagrees] with ISS' recommendation." She added the company continues to support the proposed deal and believes it will "significantly improve Rite Aid's growth prospects, financial strength and ability to deliver compelling long-term value for shareholders."
A spokeswoman for Albertsons on Thursday told CNBC regarding Glass Lewis's recommendation the firm "reached the wrong conclusion." She added that it "failed to appropriately consider the momentum behind Albertsons Cos recent results or the cost synergies and revenues opportunities resulting from the merger." She did not respond to requests for comment on Friday regarding ISS's conclusion.
Albertsons was formed by Cerberus and a consortium of investors in 2006. The investment firm later merged Albertsons with the grocer Safeway in 2015. But plans to take Albertsons public were sidelined by market volatility and, later, Amazon's acquisition of Whole Foods that upended the grocery market.
The grocer has also stumbled in comparison to its peers like Kroger, which has had positive same-store sales the past two fiscal years, ISS notes. Albertsons, by contrast, showed same-store sale growth in the most recent two quarters, preceded by negative same store sales in the past two fiscal years, ISS says.
The grocer is also highly leveraged, with $12 billion in long-term debt and capitalized leases.
Rite Aid has had its own challenges. Regulators thwarted its attempts to sell to Walgreens Boots Alliance, forcing them to whittle down a sale of Rite Aid's entire 4,600 store footprint to just 1,932 locations. Its competitors, which now include Walgreens and a proposed CVS Health-Aetna tie-up, dwarf it in size.
But ISS said on Friday it is unsure the deal as structured, and the $375 million in cost-savings the retailers say it will generate, will sufficiently absolve them of their woes.
"Strategically, the proposed merger appears to be a step in the right direction, as it provides [Rite Aid] with increased scale and diversification. However, the transaction would introduce a new set of risks associated with the grocery business, and the combined company's leverage could limit investment in two evolving business environments," ISS wrote.
ISS also said that potential conflicts of interest in the negotiating process "heightened" its concerns about the deal's benefit for Rite Aid shareholders.