Rite Aid Unveils Financial Plan
Rite Aid Corp. on Tuesday unveiled a massive financial restructuring plan that would provide $640 million in fresh working capital and delay debt payments for two years, as a new management team tries to guide the troubled drugstore chain back to prosperity.
The centerpiece of the initiative is a $1-billion two-year senior secured credit line that would generate the new working capital while adding Fleet Retail Finance Inc. and Heller Financial Inc. to Rite Aid’s list of principal lenders.
The plan also would give financial advisor and lead creditor J.P. Morgan a 13% equity stake, based on the current common stock outstanding, while extending maturities on an estimated $3.3 billion in bank debt, publicly traded notes and lease obligations until August 2002.
In addition, the company said it was no longer pursuing the sale of PCS Health Systems Inc., a pharmacy benefits manager that Rite Aid bought a year ago for $1.5 billion and had been trying to sell for months.
“Unfortunately, the company does not have the capital structure or the liquidity in place to capitalize on its assets and implement many of the strategic initiatives that we think are necessary,” Rite Aid Chairman Robert Miller said during a brief conference call with Wall Street analysts and reporters.
“Our new credit facility and the related transactions announced today, when completed, will provide us with the liquidity we need to support our turnaround plan.”
Wall Street appeared to greet the announcement with enthusiasm, sending Rite Aid stock up $1.63, or 28%, to close at $7.44 on the New York Stock Exchange.
But while analysts acknowledged that the financing deal provided much-needed time and money to revive the company’s operations, many remained cautious.
“This gives the company more time to turn around the story, and I wish them luck,” said A.G. Edwards analyst Jack Russo. “But they haven’t reported financials in a long time and nobody knows what’s going on there. So it’s just ludicrous to even make any guesses.”
The restructuring plan comes four months after Miller and his management team took control of Rite Aid in hopes of turning around the problem-plagued operations of a company whose common stock has fallen from more than $49 a share in 1998.
Beginning in the mid-1990s, Rite Aid pursued a strategy of rapid growth that quickly expanded its store network to 3,800 units in 30 states. But the company began to falter early last year, when a succession of earnings disappointments accompanied the departure of its chief executive, financial officers and its auditors.
Now faced with an investigation by the Securities and Exchange Commission and reports of a federal criminal probe, the No. 3 U.S. drugstore chain is working on an earnings restatement that is expected to wipe out half its pretax profit for the last three years.
