Friday, December 18, 2009

Rite Aid Grim Reaper Approaches

Rite Aid (RAD) released quarterly results and still cannot demonstrate how their debt will be repaid. I started my financial life by being a lender. The lenders need to be very worried. An interesting development has occurred. Their receivables have doubled to some $1 Billion. They claim their receivables securitization has pushed maturities out beyond 2010 so there will be breathing room. But when the deck was shuffled they end up with approximately $500 million more on the balance sheet. Which of course explains why long term debt is up by about the same amount.

Lenders at this stage are in a quandary. They have to keep lending to keep the corpse alive. They face legal challenges. If it can be proven that they acted recklessly they will be held liable and take a large haircut in their loan position.

If some 67% of sales are pharmaceutical this could be easily carved out and resold to another entity. But if Rite Aid goes bust do you want them filling your prescriptions. It’s all about trust and bankrupts are not trusted. Just look at General Motors. Therefore they need to bust a move now.

They are the third largest pharmacy chain in the US. Health care is an emotional topic in the US. If big pharma thinks it will not be paid it will stop shipping. A normal commercial decision.

What about the confidential medical records that the pharmacists have on probably millions of customers? There is also the Coutu connection from Canada. Politicians from the right will point out that Canada’s supposed lead in health care was of no value here.

The company has a nominal market value of some $1 Billion plus some $6.2 Billion in long term debt and a lot of leases in a lot of shopping malls across America. Hey I know. Let Wal-Mart (WMT) buy it. They have a $200 Billion market cap and could easily swallow this one and develop a huge hold on pharmacy sales. They could also look good by riding to the rescue of beleaguered individuals and keep their prescriptions going.