It’s the month of Halloween and it appears Rite Aid may finally hand out a hallowed prize after a tumultuous year of failed marriages and operational challenges in a changing retail marketplace. Just when many shareholders thought it was time to throw in the towel, Rite Aid faces its crowning moment at this month’s annual shareholder meeting on October 30.
Rite Aid's board of directors is entertaining a shareholder proposal called the “Lisa Weiss Proposal” to spin off the pharmacy benefits management (PBM) division, EnvisionRx, in a tax-free stock distribution deal to existing shareholders. Twenty percent of the spun-off company will be kept to meet the tax-free status mandated by regulators. Weiss is a major shareholder of Rite Aid stock.
The board is open to considering and adopting the plan. The proposal is summarized in the proxy material (“Other Matters”) and is being considered on the shareholder meeting agenda. “After all, Rite Aid paid $2 billion for EnvisionRx in 2014 and currently the total market capitalization of Rite Aid altogether is just over $1 billion,” said Weiss.
Shareholders view the sum of the parts as being greater than the whole. If there were ever a time in which this rings true, it's now.
Weiss views the spinoff of EnvisionRx as a tech play with a “bricks and mortar” kicker. Weiss suggests that shareholders and beleaguered management can finally solve their differences and benefit enormously by uncoupling the 2,500 remaining stores from EnvisionRx, which it acquired in 2015 for $2 billion, and share in the spoils of owning two separate publicly traded companies on the New York Stock Exchange.
In addition, it lessens the risk of a stand-alone attempt to resurrect Rite Aid.
Spinning off EnvisionRx from Rite Aid would allow both companies to experience pure-play efficiencies. The PBM sector is hot as evidenced by the Cigna purchase of Express Scripps. EnvisionRx could leave Rite Aid in the dust sooner rather than later, but it’s a testament to Rite Aid management for having the fortitude to deliver and execute the spin-off proposal. It's not an insurmountable task and Rite Aid will retain 20% of the EnvisionRx “upside” potential.
But it begs the question: Why didn't EnvisionRx go it alone with a massive private equity investment or an initial public offering in the first place? After all, EnvisionRx is a multibillion dollar company and could be set free to capitalize on today’s technology and pharmaceutical sector metrics, which could be worth billions.
Rite Aid is certainly at a crossroads. Several failed merger attempts with Walgreens and Albertsons over the last 18 months does not look favorably upon Rite Aid leadership, despite their defensive rationale. It appears the default position of management is to go it alone, which defies the viewpoint of a vast majority of shareholders, Wall Street analysts and professionals and proxy advisory firms.
The go-it-alone strategy for Rite Aid sounds like a last ditch effort in the face of many prior alternative shareholder value propositions, including a retry with Walgreens or the several potential suitors that showed interest in a buyout scheme prior to the Albertsons merger attempt.
It’s one of those bad-luck-meets-bad decision-making scenarios that doesn’t generally occur in the public markets (though General Electric comes to mind). The best way to remove suspicion of the current executive team and board is by contracting a 100% independent forensic accounting firm to conduct an end-to-end audit of Rite Aid's finances and executive decision making.
So, we reach the pinnacle of true shareholder angst and what has been managerial obstinacy in the public marketplace. Let’s see if management will tune in and embrace the owners and professionals this time. If not, remember the words of Dr. W. Edward Deming: "It is not necessary to change. Survival is not mandatory."
Deming realized from his work globally providing executives and government officials with consulting services that companies that adopt constancy of purpose for quality, productivity, and service, and go about it with intelligence and perseverance, have a chance to survive. Skilled and competent leadership is of paramount importance.
I am on the record as stating that without better leadership and a coherent, capabilities-driven strategy aligned with the right external market position, Rite Aid will not survive.
I have identified multiple strategies that Rite Aid can and should utilize. Independent consultants and executives who have reviewed my strategies agree that Rite Aid would transform and grow if they adopted such strategies.
As I write this article, Rite Aid stock is trading at $1.05 a share, a record low. To think that Rite Aid's stock has reached bottom is foolish. To think Rite Aid will recover without massive changes to the executive team and board members is also foolish.
