Advisory firm ISS recommends against Rite Aid sale to Albertsons

By Harry Brumpton

(Reuters) - Institutional Shareholder Services Inc (ISS), a shareholder advisory firm whose recommendations are followed by major mutual funds, said on Friday that Rite Aid Corp (N:RAD) investors should vote down its $24 billion merger with Albertsons Cos.

The ISS report is a blow to grocery chain Albertsons and its majority owner, private equity firm Cerberus Capital Management LP, which are hoping that acquiring Rite Aid, a drug retailer, will help win new business amid pressure from retail giants Amazon.com Inc (O:AMZN) and Walmart Inc (N:WMT).

"It does not appear that Rite Aid shareholders would receive a fair ownership interest in the combined company, a concern heightened by potential conflicts of interest during the negotiation process and apparently reflected in the company's underperformance since announcement," the ISS report said.

Rite Aid spokeswoman Ashley Flower said in a statement that the company strongly disagrees with ISS's recommendation. The deal "will significantly improve Rite Aid’s growth prospects, financial strength and ability to deliver compelling long-term value for shareholders," she said.

Representatives for Cerberus and Albertsons did not immediately respond to requests for comment. ISS peer Glass Lewis has also recommended that Rite Aid shareholders vote against the deal.

Rite Aid shareholders would get 30 percent of the combined company under the terms of the agreements with Albertsons. They are scheduled to vote on the deal on Aug. 9.

The company formed by combining Albertsons and Rite Aid will operate about 4,350 pharmacy counters and 320 clinics across 38 states and Washington, D.C., serving more than 40 million customers per week, the companies said at the time of the deal.

Most Albertsons Companies pharmacies would be rebranded as Rite Aid, and the company would continue to operate Rite Aid stand-alone pharmacies.

In early June, Highfields Capital Management, which is Rite Aid’s fourth-largest shareholder, owning 4.4 percent of Rite Aid’s outstanding shares, came out in opposition to the deal while a number of individual shareholders have also rallied against the deal's proposed form.