Rite Aid – Reinitiating Coverage: Part 2

EXECUTIVE SUMMARY

• We are reinitiating coverage on Rite Aid (RAD) and provide recommendations for the 2025 and 2026 Senior Secured Notes and the 2027 and 2028 Senior Unsecured Unguaranteed Notes.
• We conducted a sum of the parts valuation analysis, separately analyzing potential recovery values under non-firesale conditions for the retail pharmacy and PBM business segments. Under our Base Case scenario, we assumed a consolidated valuation of $4.5 bn at around FY2024, although with a wide dispersion of estimates across our valuation scenarios.
• Opioid liability remains a significant and material concern for Rite Aid and other large pharmacy chain operators (eg CVS and Walgreens). While RAD has gained some temporary relief from inclusion in jury trials under the Opioid MDL through early-2024, a number of precedent setting trials continue for peers in 2023.
• We estimate that RAD may be on the hook under a nationwide settlement (potentially negotiated under the construct of a bankruptcy filing) for amounts as high as $1 bn, although we model a range of lesser amounts in our ultimate recovery projections.
• The Company recently completed a $150 mn discounted bond tender priced at a 23% discount to par. To the extent the Company is able to generate positive FCF over the coming quarters, we believe additional discounted tenders are possible and are likely the best pathway for the Company to achieve the material deleveraging it is seeking to achieve.

RELATIVE VALUE

No immediate liquidity crisis (ex opioid liabilities) but significant operational improvements unlikely. With RAD currently generating ~$100 mn of annual free cash flow and sitting on ~$1.7 bn of liquidity (inclusive of revolver borrowing capacity), we 

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