Daniel Cullinane CPA
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2500 Plaza 5 25th fl Jersey City NJ 07311 phone 732-516-1648 fax 732-516-9778
The class of busted mergers gets to formally add one more name to its list: Rite Aid Corp. (NYSE: RAD). This formerly pending merger has been known as dead for some time, but Walgreens Boots Alliance Inc. (NASDAQ: WBA) is now actually getting to acquire Rite Aid without a full formal buyout.
Approval of this transaction does not require a shareholder vote, but it is still subject to an antitrust review. Now value investors will have to decide if there is value or if this is now just a value trap.
The big question for Rite Aid shareholders ahead is what really will be left of the company. This busted merger feels lost somewhere between irony and paradox. At one point in 2015, assuming that regulatory blockage was not in the air, there was a case that Rite Aid should have fetched an even higher price than $9 per share. Those old valuations are now just a dream.
The company has cancelled its plan to sell stores to Fred’s and is now selling 2,186 of its stores to Walgreens. Rather than getting a $9 billion buyout, Rite Aid’s store sale and related assets sale to Walgreens will be for $5.175 billion.
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According to Rite Aid, the pharmacy chain will use the store sale proceeds to significantly reduce its debt and to strengthen its balance sheet. As of June 3, 2017, Rite Aid’s long-term debt, less current maturities, was $7.177 billion. The company’s total liabilities were $10.899 billion.
Rite Aid will also have a 10-year pharmaceutical purchase option through a Walgreens affiliate to purchase generic drugs at cost, a move that will give Rite Aid better purchasing power than it would have on its own.
In connection with the merger termination, Walgreens is paying Rite Aid a termination fee in the amount of $325 million in cash.
The 2,186 U.S. stores being sold are primarily located in the Northeast, Mid-Atlantic and Southeast regions. One of the three distribution centers included in the sale is in Philadelphia, and the other two are in Dayville, Connecticut and Spartanburg, South Carolina. Rite Aid did note that the federal tax gain on the sale of the assets will be largely offset by its net operating loss carryforwards.
While this merger is dead, damage is already being seen in Rite Aid as the pressure on the retail segment remains high. For the first quarter of 2017, Rite Aid’s revenues of $7.8 billion were down 4.9% from a year earlier. Rite Aid also had an operating loss of $52.4 million and a net loss of $75.3 million. Its adjusted EBITDA of $192.6 million was about 2.5% of revenues. Rite Aid outlined the lower figures as follows:
Retail Pharmacy Segment revenues were $6.4 billion and decreased 4.9 percent compared to the prior year period primarily as a result of a decrease in same store sales and reimbursement rates. Revenues in the company’s Pharmacy Services Segment were $1.5 billion and decreased 5.6 percent compared to the prior year period, due to an election to participate in fewer Medicare Part D regions, which caused a decrease in covered lives at Envision Insurance Company… Same store sales for the quarter decreased 3.9 percent over the prior year, consisting of a 5.0 percent decrease in pharmacy sales and a 1.5 percent decrease in front-end sales.
As of June 20, 2017, Rite Aid operated approximately 4,500 stores in 31 states. After the alternative to the merger, Rite Aid will have roughly half of that store count.
The big issue to consider now is that the new Rite Aid, even with less leverage on its balance sheet, will be about half of its current size. Its stock was down 26% at $2.91 on the news, and that is now less than half of the price prior to the Walgreens and Rite Aid merger announcement back in 2015. Rite Aid’s 52-week trading range is now $2.88 to $8.77.
What we are witnessing is a merger alternative that investors simply do not like. It’s hard to sell shrinkage on Wall Street, even if a company’s balance sheet will be less leveraged after it’s all said and done. There is value investing, and there is devalued investing. Guess which case fits Rite Aid now.
Beginning this weekend, the three major credit bureaus will implement policy changes that in many cases will result in an increase in consumers’ credit scores.
TransUnion, Equifax and Experian will require more documentation for public records such as civil judgments and tax liens on consumers’ credit reports. By requiring more information and more frequent updates, the credit bureaus expect all civil judgments and at least half of all tax liens will be removed from consumers’ credit reports by July 1.
Based on analysis from the personal finance website WalletHub, up to 9%, or 20 million people, will see their credit score rise. That might result in an increase of one’s credit score by about 10 points and some may see a rise of as much as 20 points. Those with credit scores between 351 and 500 are most likely to see their credit scores rise.
The credit-reporting changes were first announced earlier this year. In March, Eric J. Ellman, interim president and chief executive officer at Consumer Data Industry Association, said at the time:
[T]he enhanced standards for public records carefully balance the concerns of consumers and regulators about public record accuracy while at the same time ensuring that creditors can continue to rely on credit report data and credit scores derived from the data. announcement of the reporting changes.
A civil judgment on a person’s credit report means he or she has lost a lawsuit and the judge has ordered the person to pay the debt for which he or she was sued. This means the government is first in line for a person’s disposable income, leaving less left for credit card and loan payments.
A tax lien converts property such as a house or car into collateral for an unpaid tax obligation. The lien prevents a person from selling that property before paying the government what it’s owed.
Civil judgments and tax liens will be listed in the public records section of a person’s credit report.
GOLDMAN SACHS LOWERS PRICE TARGET FOR OIL
In a note to investors released Wednesday, analysts at Goldman Sachs lowered their average third-quarter price forecast for a barrel of West Texas Intermediate (WTI) crude oil from $55 to $47.50, citing an unexpectedly large increase in production from OPEC members Libya and Nigeria, both of which are exempt from the cartel’s production cuts, and continued growth in U.S. shale production.
Production cuts of 1.6 million barrels a day were agreed to last December among OPEC members and 11 partners, including Russia, and extended last month to run through the end of the first quarter of next year. But third-quarter production increases are now expected to offset the cuts and do little to lower the global inventory glut.
According to a report at CNBC, Goldman’s analysts said:
This creates risks that the normalization in inventories will not be achieved by the time the OPEC cut ends next March. We expect this will leave prices trading near $45 (a barrel) until there is evidence of a decline in the U.S. horizontal oil rig count, sustained stock draws or additional OPEC production cuts.
None of the analysts’ three conditions shows any sign of appearing. U.S. rig counts have continued to rise, although the pace of the increase has slowed. Because it takes about six months between the time a rig is added and when production begins, production through the end of the third quarter should continue to increase. In addition, there are nearly 6,000 drilled but uncompleted wells that could be put into production even more quickly, and break-even costs for drilling have fallen below $50 a barrel in nearly all major U.S. shale plays.
Drawdowns of global stockpiles have not been as rapid as Goldman’s analysts (or most others for that matter) expected. Partly that’s due to exports from Libya, Nigeria and the United States. Even the Chinese government’s lifting of a ban on imports from the country’s so-called teapot refiners has not reduced inventory levels much, and the Chinese continue to buy at the current low prices to build their strategic reserve.
Finally, further production cuts by OPEC and its partners are not on the table for discussion. Russia has as much as said that it will not cut production further, and unless Saudi Arabia can persuade Libya, Nigeria, Iran and Iraq to curtail production further, prospects remain dim for further cuts.
Goldman’s analyst called the current crude oil market “cyclically bullish within a structurally bearish framework.” In other words, crude prices will remain lower for longer despite occasional spikes. The analysts did note that inventories are falling, demand for crude remains high, OPEC could change its mind about further cuts, and U.S. producers could have second thoughts if costs rise. So far, however, the structural bears are beating up the cyclical bulls.
WTI crude oil for August delivery traded up about 1.3% late Friday morning, at $45.34 in a 52-week range of $42.06 to $58.30. Brent crude for September delivery traded up 1.3% as well at $48.17 a barre
CREDIT SCORES TO RISE
NEW SUPER COMPUTER
The U.S. Department of Energy’s Oak Ridge National Laboratory launched “Summit”, the world’s most powerful supercomputer. The launch offers the chance for several companies to show their technical muscle. First among these is IBM (NYSE: IBM). Like many IBM product releases, the publicity does next to nothing to improves IBM’s dismal financials or help long suffering shareholders.
“Summit” has a dizzying array of extraordinary features. The Oak Ridge National Laboratory’s management wrote:
With a peak performance of 200,000 trillion calculations per second—or 200 petaflops, Summit will be eight times more powerful than ORNL’s previous top-ranked system, Titan. For certain scientific applications, Summit will also be capable of more than three billion billion mixed precision calculations per second, or 3.3 exaops. Summit will provide unprecedented computing power for research in energy, advanced materials and artificial intelligence (AI), among other domains, enabling scientific discoveries that were previously impractical or impossible.
Among the IBM components in the machine, according to the company, are POWER9 chips. The “architecture” which includes these chips has been made available to IBM customers. It remains to be seen if this will meaningfully enhance IBM’s revenue. Since it is so specialized, probably not. However, the project does get to show off IBM’s presence in the artificial intelligence sector.
IBM’s artificial intelligence businesses mostly run under a brand called “Watson.” The promotion of “Watson” to the general public has made it as famous as IBM probably is in some circles. The hugely expensive promotion has probably not helped adoption of IBM products. It has, however, been a large waste of money.
IBM’s shares are down 5% this year to $146, against an advance of the S&P of 3% over the same period. In the last five years, IBM shares are down 27% while the S&P has risen 71%. Whatever IBM’s new products have been, its financial position continues to tumble.
In its most recent quarter, IBM’s management announced revenue of $19.1 billion, up from $18.1 billion in the same quarter the year before. EPS, however, fell from $1.86 to $1.82. As part of the presentation, Ginni Rometty, IBM chairman and CEO, said:
“In the first quarter we maintained momentum in our business, with reported revenue growth in total and across our major segments. These results reinforce that our clients value our innovative technologies, our industry expertise and our commitment and actions for the responsible stewardship of their privacy and data. This is also reflected in our leadership positions in enterprise cloud, AI and security.”
There is little evidence of “leadership” in any of those three sectors.
Press releases, no matter how impressive their contents, won’t get IBM back on track
JUNE NEWSLETTER 6
Copyright © Daniel Cullinane CPA.
WHAT IS LEFT OF RITE AID