Rite Aid Corporation (NYSE: RAD) was founded by Alex Grass in 1962 in Scranton, Pennsylvania as a health and beauty store, originally called Thrift D Discount Center. The company changed its name to Rite Aid Corporation in 1968 ahead of its initial public offering (IPO) on the American Stock Exchange; the company moved to the New York Stock Exchange (NYSE) in 1970. Today, Rite Aid is the third-largest drugstore chain in the United States behind Walgreens and CVS Health, with annual sales in excess of $26 billion. The company's largest presence is in New York (620 stores), followed by California (583 stores) and Pennsylvania (540 stores). In October 2015, Walgreens offered $9.4 billion ($9 per share) to acquire Rite Aid's equity; the total transaction value including debt is $17.2 billion.

Acquisitions Fueled Growth

Within 10 years of opening its first store, Rite Aid had grown to 267 locations in 10 states. The company first achieved $1 billion in sales in 1983. In 1987, with the acquisition of Gray Drug (420 stores in 11 states), Rite Aid became the largest drugstore chain in the U.S., with over 2,000 stores. By 1996, Rite Aid doubled in size to 4,000 stores after several acquisitions including Read’s Drug Store, Lane Drug, Hook's Drug, Harco, K&B, Perry Drug Stores (224 stores), and Thrifty PayLess (1,000 stores). The Thrifty PayLess acquisition included the Bi-Mart membership discount store chain, which Rite Aid sold in 1998.

In 1999, Rite Aid formed a partnership with General Nutrition Companies that allowed GNC to open mini-stores within Rite Aid locations. In addition, Rite Aid partnered with Drugstore.com and offered Rite Aid customers the ability to place prescription orders online and get same day in-store pickup. Also in 1999, Rite Aid acquired pharmacy benefits manager PCS Health Systems. In 2007, Rite Aid added over 1,500 stores with its acquisition of Brooks Eckerd Pharmacy, and in 2015, it acquired pharmacy benefits manager Envision Pharmaceutical Services for $2 billion.

Accounting Scandal

In 1999, Rite Aid began restating earnings from prior years due to accounting irregularities. In 2003, six former Rite Aid senior executives were convicted of conspiracy regarding a wide-ranging accounting fraud and false filings with the U.S. Securities and Exchange Commission (SEC). These executives included former chief executive officer (CEO) Martin Grass, who was the son of company founder Alex Grass. The former executives admitted to drastically overstating net income from 1997 to 2000 through multiple schemes. Alex Grass was sentenced to eight years in prison, which at the time was one of the harshest punishments ever given in connection to an accounting-related crime. Rite Aid was forced to restate its earnings by $1.6 billion, which at the time was one of the largest restatements in U.S. history.

Potential Merger

Drug price inflation continues to hurt drugstore profitability, and the Affordable Care Act (ACA) has incentivized hospitals, health insurers and drugstores to cut costs. A popular way of doing this is reducing overhead through mergers and acquisitions (M&As). Rite Aid currently has 4,600 stores in the U.S., Walgreens has over 8,200 stores in 11 countries, and CVS Health has nearly 7,800 stores in the U.S. If the Walgreens / Rite Aid transaction is approved by shareholders and regulators, the combined entity will operate nearly 13,000 stores in 11 countries.

Financial Performance

Revenue increased from $4.5 billion in 1995 to $12.8 billion in 1999 (following several acquisitions) to $16.8 billion in 2005 to $26.3 billion in 2009 (following the Brooks Eckerd acquisition). However, since 2009, revenue has remained relatively flat around $26 billion. Given the company's history of top-line growth as a result of M&As, it is no surprise that Rite Aid is once again involved in merger talks, although this time it is the target. Revenue has grown nearly every year for the past 20 years and EBITDA has remained consistently positive. However, there have been periods of significant losses including 1999-2001 and 2008-2011. Since 2009, the company's stock price has increased from a low of 20 cents in February 2009 to $7.70 in November 2015, and the market capitalization has grown from $250 million to $8 billion.

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