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Proxy Firm Against Rite Aid Acquisition

Proxy Governance announced Tuesday that it advised Rite Aid shareholders to vote against the company's pending acquisition of 1,858 drug stores from The Jean Coutu Group because the deal is too expensive and greatly increases the chain's leverage.

However, Rite Aid said a day earlier that two other proxy firms, Glass Lewis & Co. and Institutional Shareholder Services, advised shareholders to vote for the deal which was valued at around $3.4 billion when it was announced last August.

Last summer, Rite Aid announced it was buying 337 Brooks stores and 1,521 Eckerd stores from the Canadian company for a total for $1.45 billion in cash and 250 million shares of company stock while also assuming $850 million of Jean Coutu Group's debt. The shareholder vote is slated for Jan. 18.

In a release, Proxy Governance said, "There is near consensus among analysts that Rite Aid is paying a premium price for the Eckerd and Brooks assets, especially in view of the historical performance of those assets."

It also said there was a chance the Federal Trade Commission might require Rite Aid to divest some of the stores, which would reduce the scale advantages of the transaction and also indirectly increase the per-store cost of the deal.

Rite Aid spokeswoman Karen Rugen wouldn't directly address the Proxy Governance report, only saying that the other two firms understood the benefits of the transaction. Glass Lewis didn't return calls for comment. In a report issued in November, Institutional Shareholder Services recommended that shareholders vote in favor of the deal despite concerns, including how the transaction would add to Rite Aid's leverage. The report said the transaction would bolster Rite Aid's growth, provide economies of scale and bolster earnings.

Rite Aid's Web site tells shareholders that they should vote for the deal for several reasons including the prospect of increased earnings, sales growth and cost savings.