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The Amazon Effect

20 February 2018 by lberuti

The take-over of Whole Foods by Amazon is still reverberating in the industry. Retailers have been under growing pressure from online competitors, and the corner drugstore has been no exception. Grocer ABS (New Albertson’s) announced today that they will buy what remains of RAD ( Rite Aid Corporation ) in a deal that will continue to reshape the US retail and health care industries, after RAD failed to sell itself to Walgreens. The resulting entity will have about 4,900 stores – including 4,350 pharmacy locations - in 38 states, and the pharmacies will be rebranded under the Rite Aid name. The planned combination is projected to have $14Bln in debt, and its debt to EBITDA leverage is expected to stand at 4.1x, higher than ABS’s 4x, but lower than RAD’s 4.5x. Most of the bonds issued by RAD are callable and investors expect them to be redeemed during the process of the merger. A lot of these bonds are currently held in portfolio where the credit element has been stripped by the purchase of Credit Default Swaps. The anticipation of these positions unwinds is probably one of the drivers of the collapse of RAD’s 5-year CDS which closed 239bps tighter at 501bps.