24/7 Wall St.

The class of busted mergers gets to formally add one more name to its list: Rite Aid Corp. (NYSE: RAD). This formerly pending merger has been known as dead for some time, but Walgreens Boots Alliance Inc. (NASDAQ: WBA) is now actually getting to acquire Rite Aid without a full formal buyout.

Approval of this transaction does not require a shareholder vote, but it is still subject to an antitrust review. Now value investors will have to decide if there is value or if this is now just a value trap.

The big question for Rite Aid shareholders ahead is what really will be left of the company. This busted merger feels lost somewhere between irony and paradox. At one point in 2015, assuming that regulatory blockage was not in the air, there was a case that Rite Aid should have fetched an even higher price than $9 per share. Those old valuations are now just a dream.

The company has cancelled its plan to sell stores to Fred’s and is now selling 2,186 of its stores to Walgreens. Rather than getting a $9 billion buyout, Rite Aid’s store sale and related assets sale to Walgreens will be for $5.175 billion.

According to Rite Aid, the pharmacy chain will use the store sale proceeds to significantly reduce its debt and to strengthen its balance sheet. As of June 3, 2017, Rite Aid’s long-term debt, less current maturities, was $7.177 billion. The company’s total liabilities were $10.899 billion.

Rite Aid will also have a 10-year pharmaceutical purchase option through a Walgreens affiliate to purchase generic drugs at cost, a move that will give Rite Aid better purchasing power than it would have on its own.

In connection with the merger termination, Walgreens is paying Rite Aid a termination fee in the amount of $325 million in cash.

The 2,186 U.S. stores being sold are primarily located in the Northeast, Mid-Atlantic and Southeast regions. One of the three distribution centers included in the sale is in Philadelphia, and the other two are in Dayville, Connecticut and Spartanburg, South Carolina. Rite Aid did note that the federal tax gain on the sale of the assets will be largely offset by its net operating loss carryforwards.

While this merger is dead, damage is already being seen in Rite Aid as the pressure on the retail segment remains high. For the first quarter of 2017, Rite Aid’s revenues of $7.8 billion were down 4.9% from a year earlier. Rite Aid also had an operating loss of $52.4 million and a net loss of $75.3 million. Its adjusted EBITDA of $192.6 million was about 2.5% of revenues. Rite Aid outlined the lower figures as follows:

Retail Pharmacy Segment revenues were $6.4 billion and decreased 4.9 percent compared to the prior year period primarily as a result of a decrease in same store sales and reimbursement rates. Revenues in the company’s Pharmacy Services Segment were $1.5 billion and decreased 5.6 percent compared to the prior year period, due to an election to participate in fewer Medicare Part D regions, which caused a decrease in covered lives at Envision Insurance Company… Same store sales for the quarter decreased 3.9 percent over the prior year, consisting of a 5.0 percent decrease in pharmacy sales and a 1.5 percent decrease in front-end sales.

As of June 20, 2017, Rite Aid operated approximately 4,500 stores in 31 states. After the alternative to the merger, Rite Aid will have roughly half of that store count.

The big issue to consider now is that the new Rite Aid, even with less leverage on its balance sheet, will be about half of its current size. Its stock was down 26% at $2.91 on the news, and that is now less than half of the price prior to the Walgreens and Rite Aid merger announcement back in 2015. Rite Aid’s 52-week trading range is now $2.88 to $8.77.

What we are witnessing is a merger alternative that investors simply do not like. It’s hard to sell shrinkage on Wall Street, even if a company’s balance sheet will be less leveraged after it’s all said and done. There is value investing, and there is devalued investing. Guess which case fits Rite Aid now.