MEMPHIS — Fred’s Inc.’s purchase of nearly 900 Rite Aid stores will accelerate the regional chain’s health care growth strategy, according to ichief executive officer Mike Bloom.
“This will be a transformative event for Fred’s Pharmacy,” Bloom says. “We believe that this transaction will also create tremendous opportunities for both our new and existing front-of-store and pharmacy team members. We look forward to realizing the considerable benefits this transaction will bring to our customers, patients, payors, supplier partners, team members and shareholders.”
The emergence of Fred’s as the buyer of stores slated for divestiture by Walgreens Boots Alliance and Rite Aid seemed unlikely, although rumors about it had swirled for weeks.
The discount store and pharmacy operator recently reported a $38 million loss for its third quarter as its revenue fell by more than 4%.
As a result, the retailer finished the third quarter with only $5.7 million in cash.
Consequently, not only the purchase of the Rite Aid stores but also transaction-related costs, expected capital investments and ongoing operations will be funded through debt. Fred’s said that it has secured financing from BofA Merrill Lynch and Regions Bank.
According to Fred’s, the stores designated for purchase are “generally representative” of Rite Aid’s current store performance in terms of both sales and earnings before interest, taxes, depreciation and amortization (EBITDA). Management expects the stores to be accretive to earnings and to generate substantial cash flow.
Fred’s intends to continue to employ store associates and field and regional team members involved with operations. Plans call for the stores to operate under the Rite Aid banner through a 24-month transition period.
“We greatly appreciate the dedication of our Rite Aid associates, who are taking great care of our customers and patients during this period,” says John Standley, chairman and CEO of Rite Aid. “We look forward to working closely with Fred’s to ensure a smooth, successful transition for our customers, patients and associates in the divested stores.”
The agreement would expland Fred’s store footprint from the southern to the eastern and western United States. The actual locations of the stores to be purchased will not be revealed until the WBA-Rite Aid deal is approved.
However, Jefferies LLC analyst Brian Tanquilut performed an analysis of competitive overlap between Walgreens and Rite Aid locations nationwide and, on that basis, suggests that Fred’s could establish a significant presence in California, Colorado, Florida, North Carolina and Washington, as well as bolstering its position in the Southeast.
Fred’s purchase of the Rite Aid stores is expected to be completed during the first half of 2017, but it will probably not occur until several months after WBA’s pending buyout of Rite Aid is wrapped up.