Fitch Ratings has placed its ratings on Rite Aid Corp.
(Rite Aid) on Rating Watch Negative as follows:
-- Issuer Default Rating (IDR) 'B-';
-- Bank credit facility 'BB-'/'RR1';
-- Senior secured notes 'BB-'/'RR1';
-- Senior unsecured notes 'CCC+'/'RR5'.
Fitch's rating action follows the announcement that Rite Aid has agreed to acquire 1,858 drug stores from The Jean Coutu Group (Jean Coutu) for approximately $3.4 billion. Rite Aid's consideration for the transaction includes $1.45 billion in cash, 250 million of newly-issued Rite Aid common shares, and the assumption of Jean Coutu's $850 million 8.5% senior subordinated notes. Fitch expects that the cash portion of the transaction price will be primarily financed with new debt. The transaction is subject to approval by Rite Aid shareholders as well as regulatory approvals. It is expected to close as early as the fourth quarter of fiscal 2007.
Rite Aid will acquire Jean Coutu's drug stores currently operating under the Brooks and Eckerd banners in 14 states, primarily in the Northeast and mid-Atlantic regions of the US. Rite Aid will also acquire six distribution centers. This transaction will significantly increase Rite Aid's current drug operations, to approximately 5,000 stores, thus closing the gap with its largest competitors. Rite Aid will remain the third largest drug operator in the US, and will have pro forma revenues of approximately $28.0 billion, up from $17.4 billion for the latest 12 months (LTM) ended June 3, 2006.
In addition, following the completion of the acquisition, Rite Aid is expected to have approximately $5.5 billion of total debt. As a result, credit metrics are anticipated to remain weak as the company's ability to delever will be constrained going forward. For the LTM period ended June 3, 2006 Rite Aid's adjusted leverage was 6.8 times (x) and EBITDAR coverage of interest and rents was 1.3x.
In resolving the Rating Watch Negative status, Fitch will consider Rite Aid's ability to successfully integrate the acquired stores, manage higher debt balances with limited financial flexibility, and improve the current condition of its consolidated stores base through increased capital investments. Fitch expects that the company will face significant challenges in integrating its new stores while also positioning its store base to better compete with other market players. Also considered will be Rite Aid's larger store base, and its ability to better leverage its distribution and purchasing network.
Fitch's Recovery Ratings (RR), introduced in 2005, are a relative indicator of creditor recovery on a given obligation in the event of a default. A broad overview of Fitch's RR methodology as it relates to specific sectors, including a Case Study webcast, can be found at www.fitchratings.com/recovery.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
-- Issuer Default Rating (IDR) 'B-';
-- Bank credit facility 'BB-'/'RR1';
-- Senior secured notes 'BB-'/'RR1';
-- Senior unsecured notes 'CCC+'/'RR5'.
Fitch's rating action follows the announcement that Rite Aid has agreed to acquire 1,858 drug stores from The Jean Coutu Group (Jean Coutu) for approximately $3.4 billion. Rite Aid's consideration for the transaction includes $1.45 billion in cash, 250 million of newly-issued Rite Aid common shares, and the assumption of Jean Coutu's $850 million 8.5% senior subordinated notes. Fitch expects that the cash portion of the transaction price will be primarily financed with new debt. The transaction is subject to approval by Rite Aid shareholders as well as regulatory approvals. It is expected to close as early as the fourth quarter of fiscal 2007.
Rite Aid will acquire Jean Coutu's drug stores currently operating under the Brooks and Eckerd banners in 14 states, primarily in the Northeast and mid-Atlantic regions of the US. Rite Aid will also acquire six distribution centers. This transaction will significantly increase Rite Aid's current drug operations, to approximately 5,000 stores, thus closing the gap with its largest competitors. Rite Aid will remain the third largest drug operator in the US, and will have pro forma revenues of approximately $28.0 billion, up from $17.4 billion for the latest 12 months (LTM) ended June 3, 2006.
In addition, following the completion of the acquisition, Rite Aid is expected to have approximately $5.5 billion of total debt. As a result, credit metrics are anticipated to remain weak as the company's ability to delever will be constrained going forward. For the LTM period ended June 3, 2006 Rite Aid's adjusted leverage was 6.8 times (x) and EBITDAR coverage of interest and rents was 1.3x.
In resolving the Rating Watch Negative status, Fitch will consider Rite Aid's ability to successfully integrate the acquired stores, manage higher debt balances with limited financial flexibility, and improve the current condition of its consolidated stores base through increased capital investments. Fitch expects that the company will face significant challenges in integrating its new stores while also positioning its store base to better compete with other market players. Also considered will be Rite Aid's larger store base, and its ability to better leverage its distribution and purchasing network.
Fitch's Recovery Ratings (RR), introduced in 2005, are a relative indicator of creditor recovery on a given obligation in the event of a default. A broad overview of Fitch's RR methodology as it relates to specific sectors, including a Case Study webcast, can be found at www.fitchratings.com/recovery.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.