DEFM14A
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the

Securities Exchange Act of 1934

 

 

Filed by the Registrant                             Filed by a Party other than the Registrant  

Check the appropriate box:

 

  Preliminary Proxy Statement
  Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
  Definitive Proxy Statement
  Definitive Additional Materials
  Soliciting Material Pursuant to §240.14a-12

Rite Aid Corporation

(Name of Registrant as Specified In Its Charter)

 

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

  No fee required.
  Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
  1)  

Title of each class of securities to which transaction applies:

 

     

  2)  

Aggregate number of securities to which transaction applies:

 

     

  3)  

Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):

 

     

  4)  

Proposed maximum aggregate value of transaction:

 

     

  5)  

Total fee paid:

 

     

  Fee paid previously with preliminary materials.
  Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.
  1)  

Amount Previously Paid:

 

     

  2)  

Form, Schedule or Registration Statement No.:

 

     

  3)  

Filing Party:

 

     

  4)  

Date Filed:

 

     

 

 

 


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LOGO

MERGER PROPOSED—YOUR VOTE IS VERY IMPORTANT

 

 

June 25, 2018

Dear Stockholder:

I am pleased to invite you to attend a special meeting of stockholders of Rite Aid Corporation, a Delaware corporation, which we refer to as Rite Aid, to be held on August 9, 2018 at the office of Skadden, Arps, Slate, Meagher & Flom LLP, 4 Times Square, New York, NY 10036, at 8:30 a.m., Eastern time. As previously announced, Rite Aid has entered into an Agreement and Plan of Merger, dated as of February 18, 2018, which we refer to as the merger agreement, with Albertsons Companies, Inc., a Delaware corporation, which we refer to as ACI, Ranch Acquisition II LLC, a Delaware limited liability company and a wholly-owned direct subsidiary of ACI, which we refer to as Merger Sub II, and Ranch Acquisition Corp., a Delaware corporation and a wholly-owned direct subsidiary of Merger Sub II, which we refer to as Merger Sub I. Pursuant to the terms of the merger agreement, at closing, Merger Sub I will merge with and into Rite Aid, with Rite Aid surviving the merger as a wholly-owned direct subsidiary of Merger Sub II, which we refer to as the merger, and, immediately following the merger, Rite Aid will merge with and into Merger Sub II, with Merger Sub II surviving the subsequent merger as a wholly-owned direct subsidiary of ACI and a limited liability company, which we refer to as the subsequent merger and, together with the merger, the mergers. At the closing of the subsequent merger, Merger Sub II will be renamed “Rite Aid LLC.”

Upon the completion of the merger, each share of common stock, par value $1.00 per share, of Rite Aid, which is referred to as Rite Aid common stock, issued and outstanding immediately prior to the effective time of the merger, will be converted into the right to receive and become exchangeable for, at your election, either (i) 0.1000 of a fully paid and nonassessable share of common stock, par value $0.01 per share, of ACI, which we refer to as ACI common stock, plus $0.1832 in cash, without interest, or (ii) 0.1079 shares of ACI common stock. Based on the estimated number of shares of Rite Aid and ACI common stock that will be outstanding immediately prior to the closing of the merger, and depending upon the results of the cash elections, it is anticipated that, upon closing, existing ACI stockholders will own approximately 70.4% to 72.0% of the outstanding shares of ACI common stock, and former Rite Aid stockholders will own approximately 29.6% to 28.0% of the outstanding shares of ACI common stock, in each case on a fully diluted basis. Stockholders will not have appraisal rights under the Delaware General Corporation Law with respect to the merger because holders of shares of Rite Aid common stock are not required to receive consideration other than shares of ACI common stock (and cash in lieu of fractional shares, if any) in the merger, and shares of ACI common stock will be listed on the New York Stock Exchange immediately following the merger. The election to receive cash consideration is voluntary and dependent upon Rite Aid stockholders’ election (other than cash in lieu of fractional shares, if any).

At the special meeting of Rite Aid stockholders, Rite Aid stockholders will be asked to vote on (i) a proposal to approve the merger agreement and the transactions contemplated by the merger agreement, including the mergers, which we refer to as the merger proposal, (ii) a proposal to approve, by means of a non-binding, advisory vote, compensation that will or may become payable to Rite Aid’s named executive officers in connection with the merger, which we refer to as the compensation proposal, and (iii) a proposal to approve one or more adjournments of the special meeting to a later date or dates, if necessary or appropriate, to solicit additional proxies if there are insufficient votes to adopt the merger agreement at the time of the special meeting, which we refer to as the adjournment proposal.

Rite Aid’s board of directors, after considering the reasons more fully described in this proxy statement/prospectus, determined that the merger agreement and the transactions contemplated by the merger agreement, including the mergers, are advisable, fair to and in the best interests of Rite Aid and its stockholders, and adopted, approved and declared advisable the merger agreement and the transactions contemplated by the merger agreement. The Rite Aid board of directors unanimously


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recommends that you vote (i) “FOR” the proposal to approve the merger agreement and the transactions contemplated by the merger agreement, including the mergers, (ii) “FOR” the proposal to approve, by a non-binding, advisory vote, compensation that will or may become payable by Rite Aid to its named executive officers in connection with the merger and (iii) ”FOR” the proposal to approve one or more adjournments of the special meeting to a later date or dates, if necessary or appropriate, to solicit additional proxies if there are insufficient votes to adopt the merger agreement at the time of the special meeting.

In considering the recommendation of the Rite Aid board of directors, you should be aware that the directors and executive officers of Rite Aid will have interests in the merger that are different from, and in addition to, the interests of Rite Aid stockholders generally. See the section entitled “Interests of the Directors and Officers of Rite Aid in the Merger” beginning on page 296 of this proxy statement/prospectus.

The enclosed proxy statement/prospectus provides detailed information about the special meeting, the merger agreement and the mergers. A copy of the merger agreement is attached as Annex A to the proxy statement/prospectus. The proxy statement/prospectus also describes the actions and determinations of Rite Aid’s board of directors in connection with its evaluation of the merger agreement and the mergers. We encourage you to read the proxy statement/prospectus and its annexes, including the merger agreement, carefully and in their entirety. You may also obtain more information about Rite Aid from documents we file with the U.S. Securities and Exchange Commission, which we refer to as the SEC, from time to time.

Whether or not you plan to attend the special meeting in person, please complete, sign, date and return, as promptly as possible, the enclosed proxy card in the accompanying prepaid reply envelope or grant your proxy electronically over the Internet or by telephone. If you attend the special meeting and vote in person by ballot, your vote will revoke any proxy that you have previously submitted. If you hold your shares in “street name,” you should instruct your broker, bank or other nominee how to vote in accordance with the voting instruction form you will receive from your broker, bank or other nominee.

Your vote is very important, regardless of the number of shares that you own. We cannot complete the merger unless the merger proposal is approved by the affirmative vote of the holders of a majority of the outstanding shares of Rite Aid common stock. The failure of any stockholder of record to vote in person by ballot at the special meeting, to submit a signed proxy card or to grant a proxy electronically over the Internet or by telephone will have the same effect as a vote “AGAINST” the merger proposal. If you hold your shares in “street name,” the failure to instruct your broker, bank or other nominee on how to vote your shares will have the same effect as a vote “AGAINST” the merger proposal.

If you have any questions or need assistance voting your shares of Rite Aid common stock, please contact Morrow Sodali LLC, Rite Aid’s proxy solicitor, by calling (800) 662-5200 toll-free.

On behalf of Rite Aid’s board of directors, I thank you for your support and appreciate your consideration of this matter.

 

Sincerely,

LOGO

John T. Standley

Chief Executive Officer and Chairman
of the Board of Directors

Neither the U.S. Securities and Exchange Commission nor any state securities regulatory agency has approved or disapproved of the transactions described in this document, including the merger, or determined if the information contained in this document is accurate or adequate. Any representation to the contrary is a criminal offense.

The accompanying proxy statement/prospectus is dated June 25, 2018 and, together with the enclosed form of proxy card, is first being mailed to stockholders of Rite Aid on or about June 25, 2018.


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LOGO

Rite Aid Corporation

30 Hunter Lane

Camp Hill, Pennsylvania 17011

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS

YOUR VOTE IS VERY IMPORTANT. PLEASE VOTE YOUR SHARES PROMPTLY.

Notice is hereby given that a special meeting of stockholders of Rite Aid Corporation, a Delaware corporation, which we refer to as Rite Aid, will be held on August 9, 2018, at the office of Skadden, Arps, Slate, Meagher & Flom LLP, 4 Times Square, New York, NY 10036, at 8:30 a.m., Eastern time for the following purposes:

1. To consider and vote on the proposal to adopt the Agreement and Plan of Merger, dated as of February 18, 2018, which we refer to as the merger agreement, by and among Albertsons Companies, Inc., a Delaware corporation, which we refer to as ACI, Ranch Acquisition II LLC, a Delaware limited liability company and a wholly-owned direct subsidiary of ACI, which we refer to as Merger Sub II, Ranch Acquisition Corp., a Delaware corporation and a wholly-owned direct subsidiary of Merger Sub II, which we refer to as Merger Sub I, and Rite Aid, as it may be amended from time to time (a copy of the merger agreement is attached as Annex A to the proxy statement/prospectus accompanying this notice), and the transactions contemplated by the merger agreement, including the mergers, which we refer to as the merger proposal;

2. To consider and vote on the proposal to approve, by means of a non-binding, advisory vote, compensation that will or may become payable to Rite Aid’s named executive officers in connection with the merger contemplated by the merger agreement, which we refer to as the compensation proposal;

3. To consider and vote on the proposal to approve one or more adjournments of the special meeting to a later date or dates, if necessary or appropriate, to solicit additional proxies if there are insufficient votes to adopt the merger agreement at the time of the special meeting, which we refer to as the adjournment proposal; and

4. To transact any other business that may properly come before the special meeting or any adjournment or postponement of the special meeting.

The affirmative vote of the holders of a majority of the outstanding shares of Rite Aid common stock, par value $1.00 per share, which is referred to as Rite Aid common stock, entitled to vote thereon is required to approve the merger proposal. The affirmative vote of a majority of the shares of Rite Aid common stock represented at the special meeting, either in person or by proxy, and entitled to vote thereon is required to approve the compensation proposal. The affirmative vote of a majority of the shares of Rite Aid common stock represented at the special meeting, either in person or by proxy, and entitled to vote thereon is required to approve the adjournment proposal. The failure of any stockholder of record to vote in person by ballot at the special meeting, to submit a signed proxy card or to grant a proxy electronically over the Internet or by telephone will have the same effect as a vote “AGAINST” the merger proposal, but will not have any effect on the compensation proposal or the adjournment proposal. If you hold your shares in “street name,” the failure to instruct your broker, bank or other nominee on how to vote your shares will have the same effect as a vote “AGAINST” the merger proposal, but will not have any effect on the compensation proposal or the adjournment proposal. Abstentions will have the same effect as a vote “AGAINST” the merger proposal, the compensation proposal and the adjournment proposal.


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Only stockholders of record as of the close of business on June 22, 2018 are entitled to notice of the special meeting and to vote at the special meeting or at any adjournment or postponement thereof. A list of stockholders entitled to vote at the special meeting will be available in Rite Aid’s offices located at 30 Hunter Lane, Camp Hill, Pennsylvania 17011, during regular business hours for a period of at least ten (10) days before the special meeting and at the place of the special meeting during the meeting.

Stockholders will not have appraisal rights under the Delaware General Corporation Law with respect to the merger because holders of shares of Rite Aid common stock are not required to receive consideration other than shares of ACI common stock (and cash in lieu of fractional shares, if any) in the merger, and shares of ACI common stock will be listed on the New York Stock Exchange immediately following the merger. The election to receive cash consideration is voluntary and dependent upon Rite Aid stockholders’ election (other than cash in lieu of fractional shares, if any).

The Rite Aid board of directors unanimously recommends that you vote (i) “FOR” the proposal to approve the merger agreement and the transactions contemplated by the merger agreement, including the mergers, (ii) “FOR” the proposal to approve, by a non-binding, advisory vote, compensation that will or may become payable by Rite Aid to its named executive officers in connection with the merger and (iii) ”FOR” the proposal to approve one or more adjournments of the special meeting to a later date or dates, if necessary or appropriate, to solicit additional proxies if there are insufficient votes to adopt the merger agreement at the time of the special meeting.

 

By Order of the Board of Directors,

LOGO

James J. Comitale

Senior Vice President, General Counsel and Secretary

Dated: June 25, 2018


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YOUR VOTE IS IMPORTANT

WHETHER OR NOT YOU EXPECT TO ATTEND THE SPECIAL MEETING IN PERSON, WE ENCOURAGE YOU TO SUBMIT YOUR PROXY AS PROMPTLY AS POSSIBLE (1) BY TELEPHONE, (2) THROUGH THE INTERNET OR (3) BY MARKING, SIGNING AND DATING THE ENCLOSED PROXY CARD AND RETURNING IT IN THE POSTAGE-PAID ENVELOPE PROVIDED. You may revoke your proxy or change your vote at any time before the special meeting. If your shares are held in the name of a broker, bank or other nominee, please follow the instructions on the voting instruction card furnished to you by such broker, bank or other nominee, which is considered the stockholder of record, in order to vote. As a beneficial owner, you have the right to direct your broker, bank or other nominee on how to vote the shares in your account. Your broker, bank or other nominee cannot vote on any of the proposals, including the proposal to adopt the merger agreement, without your instructions.

If you fail to return your proxy card, to grant your proxy electronically over the Internet or by telephone, or to vote by ballot in person at the special meeting, your shares will not be counted for purposes of determining whether a quorum is present at the special meeting. If you are a stockholder of record, voting in person by ballot at the special meeting will revoke any proxy that you previously submitted. If you hold your shares through a broker, bank or other nominee, you must obtain from the record holder a valid legal proxy issued in your name in order to vote in person at the special meeting.

We encourage you to read the accompanying proxy statement/prospectus, including all documents incorporated by reference into the accompanying proxy statement/prospectus, and annexes to the accompanying proxy statement/prospectus, carefully and in their entirety. If you have any questions concerning the merger, the special meeting or the accompanying proxy statement/prospectus, or would like additional copies of the accompanying proxy statement/prospectus or need help voting your shares of common stock, please contact Rite Aid’s proxy solicitor:

Morrow Sodali LLC

470 West Avenue

Stamford, Connecticut 06902

Banks and Brokerage Firms Call: (203) 658-9400

Stockholders Call Toll-Free: (800) 662-5200

Email: rad.info@morrowsodali.com


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REFERENCES TO ADDITIONAL INFORMATION

This proxy statement/prospectus incorporates important business and financial information about Rite Aid from other documents that Rite Aid has filed with the SEC, and that are contained in or incorporated by reference into this proxy statement/prospectus. For a listing of documents incorporated by reference into this proxy statement/prospectus, please see the section entitled “Where You Can Find More Information” beginning on page 353 of this proxy statement/prospectus. This information is available for you to review at the SEC’s public reference room located at 100 F Street, N.E., Room 1580, Washington, D.C. 20549, and through the SEC’s website at www.sec.gov.

Any person may request copies of this proxy statement/prospectus and any of the documents incorporated by reference into this proxy statement/prospectus or other information concerning (i) Rite Aid, without charge, by written or telephonic request directed to Rite Aid, 30 Hunter Lane, Camp Hill, Pennsylvania 17011, Telephone: (717) 975-5809; or Morrow Sodali LLC, Rite Aid’s proxy solicitor, by calling toll-free at (800) 662-5200. Banks, brokerage firms and other nominees may call collect at (203)658-9400 or (ii) ACI, without charge, by written or telephonic request directed to ACI, 250 Parkcenter Blvd., Boise, Idaho 83706, Telephone: (208) 395-6200.

In order for you to receive timely delivery of the documents in advance of the special meeting of Rite Aid stockholders to be held on August 9, 2018, you must request the information no later than five (5) business days prior to the date of the special meeting (i.e., by August 2, 2018).

ABOUT THIS PROXY STATEMENT/PROSPECTUS

This document, which forms part of a registration statement on Form S-4 filed with the SEC by ACI (File No. 333-224169), constitutes a prospectus of ACI under Section 5 of the Securities Act with respect to the shares of common stock of Albertsons Companies, Inc. to be issued to Rite Aid stockholders pursuant to the merger agreement.

This document also constitutes a proxy statement of Rite Aid under Section 14(a) of the Exchange Act. It also constitutes a notice of meeting with respect to the special meeting, at which Rite Aid stockholders will be asked to consider and vote upon the merger proposal, the compensation proposal and the adjournment proposal.

ACI has supplied all information contained in this proxy statement/prospectus relating to ACI, and Rite Aid has supplied all information contained in or incorporated by reference into this proxy statement/prospectus relating to Rite Aid.

You should rely only on the information contained in or incorporated by reference into this proxy statement/prospectus. ACI and Rite Aid have not authorized anyone to provide you with information that is different from that contained in or incorporated by reference into this proxy statement/prospectus. This proxy statement/prospectus is dated June 25, 2018, and you should not assume that the information contained in this proxy statement/prospectus is accurate as of any date other than such date. Further, you should not assume that the information incorporated by reference into this proxy statement/prospectus is accurate as of any date other than the date of the incorporated document. Neither the mailing of this proxy statement/prospectus to Rite Aid stockholders nor the issuance by ACI of shares of ACI common stock pursuant to the merger agreement will create any implication to the contrary.

 

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EXPLANATORY NOTE

ACI, the registrant whose name appears on the cover of the registration statement of which this document forms a part, is a Delaware corporation. AB Acquisition LLC, which we refer to as AB Acquisition, is a Delaware limited liability company. ACI was formed for the purpose of reorganizing the organizational structure of AB Acquisition and its direct and indirect consolidated subsidiaries. Prior to December 3, 2017, ACI had no material assets or operations. On December 3, 2017, Albertsons Companies, LLC and its parent, AB Acquisition, completed a reorganization of their legal entity structure whereby the existing equityholders of AB Acquisition each contributed their equity interests in AB Acquisition to Albertsons Investor Holdings LLC, which we refer to as Albertsons Investor, and KIM ACI, LLC, which we refer to as KIM ACI. In exchange, equityholders received a proportionate share of units in Albertsons Investor and KIM ACI, respectively. Albertsons Investor and KIM ACI then contributed all of the equity interests they received to ACI in exchange for common stock issued by ACI. As a result, Albertsons Investor and KIM ACI became the parents of Albertsons Companies, Inc., owning all of its outstanding common stock with AB Acquisition and its subsidiary, Albertsons Companies, LLC, a Delaware limited liability company, becoming wholly-owned subsidiaries of ACI. On February 25, 2018, Albertsons Companies, LLC, a Delaware limited liability company, merged with and into ACI, with ACI as the surviving corporation (we refer to such transactions, collectively, as the ACI Reorganization Transactions). Prior to February 25, 2018, substantially all of the assets and operations of ACI were those of its subsidiary, Albertsons Companies, LLC. For more information about the ACI Reorganization Transactions, see the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations of ACI—The ACI Reorganization Transactions” beginning on page 212 of this proxy statement/prospectus.

Upon completion of the ACI Reorganization Transactions, Albertsons Investor and KIM ACI became the sole direct parent companies of ACI and owned 252,413,675 and 27,240,353 shares of common stock of ACI, respectively. In connection with, and immediately prior to the closing of, the merger, Albertsons Investor will distribute all of its shares of ACI common stock to its equity holders on a pro rata basis in accordance with the common units, management incentive units and investor incentive units held by such holders and KIM ACI will distribute shares of ACI common stock to its holders of management incentive units and investor incentive units on a pro rata basis in exchange for the common units, management incentive units and investor incentive units held by such holders (we refer to such distribution as the ACI Distribution). For more information about the ACI Distribution, see the section entitled “Certain Beneficial Owners of ACI Common Stock” beginning on page 348 of this proxy statement/prospectus.

IDENTICAL STORE SALES

As used in this proxy statement/prospectus to apply to ACI, the term “identical store sales” is defined as stores operating during the same period in both the current fiscal year and the prior fiscal year, comparing sales on a daily basis. Fuel sales are excluded from ACI identical store sales, and internet sales are included in identical store sales of the store from which the products are sourced for ACI. For ACI, the fiscal year ended February 24, 2018 is compared with the 52-week period ended February 25, 2017, the fiscal year ended February 25, 2017 is compared with the 52-week period ended February 27, 2016 and the fiscal year ended February 27, 2016 is compared with the 52-week period ended February 28, 2015. On an actual basis, acquired stores become identical on the one-year anniversary date of their acquisition. Stores that are open during remodeling are included in identical store sales. The stores divested in order to secure Federal Trade Commission, which we refer to as FTC, clearance of the Safeway acquisition by ACI are excluded from the identical store sales calculation beginning on December 19, 2014, the announcement date of the divestitures. Also included in this proxy statement/prospectus, where noted, are supplemental identical store sales measures for

 

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ACI, which includes acquired Safeway Inc., New Albertsons L.P. and United Supermarkets, LLC stores, irrespective of their acquisition dates.

As used in this proxy statement/prospectus to apply to Rite Aid Corporation, identical store sales include all stores that have been open at least one year. Stores in liquidation are considered closed, and relocation stores are not included in identical store sales until one year has lapsed.

MARKET, INDUSTRY AND OTHER DATA

This proxy statement/prospectus includes market and industry data and outlook, which are based on publicly available information, reports from government agencies, reports by market research firms and/or ACI’s own estimates based on ACI’s management’s knowledge of and experience in the markets and businesses in which ACI operates. ACI believes this information to be reasonable based on the information available to it as of the date of this proxy statement/prospectus. However, ACI has not independently verified market and industry data from third-party sources. Historical information regarding supermarket and grocery industry revenues, including online grocery revenues, was obtained from IBISWorld. Forecasts regarding Food-at-Home inflation were obtained from the U.S. Department of Agriculture, which we refer to as the USDA. Information with respect to ACI’s market share was obtained from Nielsen ACView All Outlets Combined (Food, Mass and Dollar but excluding Drug). This information may prove to be inaccurate because of the method by which ACI obtained some of the data for its estimates or because this information cannot always be verified with complete certainty due to limits on the availability and reliability of raw data, the voluntary nature of the data gathering process and other limitations and uncertainties inherent in a survey of market size. In addition, market conditions, customer preferences and the competitive landscape can and do change significantly. As a result, you should be aware that the market and industry data included in this proxy statement/prospectus and ACI’s estimates and beliefs based on such data may not be reliable. Neither ACI nor Rite Aid has verified the accuracy of such industry and market data.

In addition, the market value reported in the appraisals of the ACI properties described herein are an estimate of value, as of the date stated in each appraisal. The appraisals were subject to the following assumption: the estimate of market value as is, is based on the assumption that the existing occupant/user remains in occupancy in the foreseeable future, commensurate with the typical tenure of a user of this type, and is paying market rent as of the effective date of appraisal. Changes since the appraisal date in external and market factors or in the property itself can significantly affect the conclusions. As an opinion, the reported values are not necessarily a measure of current market value and may not reflect the amount which would be received if the property were sold today. While ACI is not aware of any misstatements regarding any appraisals, market, industry or similar data presented herein, such data involves risks and uncertainties and is subject to change based on various factors, including those discussed under the sections entitled “Cautionary Statement Regarding Forward-Looking Statements” beginning on page 83 and “Risk Factors” beginning on page 50 of this proxy statement/prospectus.

NON-GAAP FINANCIAL MEASURES

As used in this proxy statement/prospectus, with respect to ACI, EBITDA is defined as generally accepted accounting principles, which we refer to as GAAP, earnings (net income (loss)) before interest, income taxes, depreciation and amortization. As used in this proxy statement/prospectus, with

 

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respect to ACI, Adjusted EBITDA is defined as GAAP earnings (net income (loss)) before interest, income taxes, depreciation, and amortization, further adjusted to eliminate the effects of items management does not consider in assessing ongoing performance. As used in this proxy statement/prospectus, with respect to ACI, Adjusted Net Income is defined as GAAP net income (loss) adjusted to eliminate the effects of items management does not consider in assessing ongoing performance. As used in this proxy statement/prospectus, with respect to ACI, Free Cash Flow is defined as Adjusted EBITDA less capital expenditures. See the section entitled “Summary—Summary Selected Historical Consolidated Financial Data of ACI” beginning on page 43 of this proxy statement/prospectus for further discussion and a reconciliation of Adjusted EBITDA and Adjusted Net Income.

As used in this proxy statement/prospectus, with respect to Rite Aid, EBITDA is defined as GAAP earnings (net income (loss)) before interest, income taxes, depreciation and amortization. As used in this proxy statement/prospectus, with respect to Rite Aid, Adjusted EBITDA is defined as net income (loss) excluding the impact of income taxes, interest expense, depreciation and amortization, LIFO adjustments, charges or credits for facility closing and impairment, inventory write-downs related to store closings, debt retirements, the merger termination fee paid to Rite Aid by Walgreens Boots Alliance, Inc., which we refer to as WBA, pursuant to the Amended and Restated Asset Purchase Agreement, dated as of September 18, 2017, by and among Rite Aid, WBA and Walgreen Co., which we refer to as the WBA asset purchase agreement, and other items (including stock-based compensation expense, merger and acquisition-related costs, severance and costs related to distribution center closures, gain or loss on sale of assets, and revenue deferrals related to our customer loyalty program). As used in this proxy statement/prospectus, with respect to Rite Aid, Free Cash Flow is defined as Adjusted EBITDA less cash paid for interest, rent on closed stores, capital expenditures, acquisition costs and the change in working capital.

EBITDA, Adjusted EBITDA, Adjusted Net Income and Free Cash Flow (collectively, which we refer to as the Non-GAAP Measures) are performance measures that provide supplemental information ACI’s and Rite Aid’s management believe is useful to analysts and investors to evaluate ongoing results of operations, when considered alongside other GAAP measures such as net income, operating income and gross profit. These Non-GAAP Measures exclude the financial impact of items ACI’s and Rite Aid’s management do not consider in assessing ACI’s and Rite Aid’s ongoing operating performance, and thereby facilitate review of ACI’s and Rite Aid’s operating performance on a period-to-period basis. Other companies may have different capital structures or different lease terms, and comparability to ACI’s and Rite Aid’s results of operations may be impacted by the effects of acquisition accounting on ACI’s and Rite Aid’s depreciation and amortization. As a result of the effects of these factors and factors specific to other companies, ACI and Rite Aid believe the Non-GAAP Measures, as applicable, provide helpful information to analysts and investors to facilitate a comparison of each company’s operating performance to that of other companies. In addition, Rite Aid’s incentive compensation is based in part on Adjusted EBITDA and Rite Aid bases certain of its forward-looking estimates and budgets on Adjusted EBITDA. ACI also uses Adjusted EBITDA, as further adjusted for additional items defined in ACI’s debt instruments, for board of director and bank compliance reporting. Neither ACI’s nor Rite Aid’s presentation of Non-GAAP Measures should be construed as an inference that the combined company’s future results will be unaffected by unusual or non-recurring items.

Non-GAAP Measures have limitations as analytical tools, and you should not consider them in isolation or as substitutes for analysis of ACI’s or Rite Aid’s operating results or cash flows as reported under GAAP. Some of these limitations are:

 

    Non-GAAP Measures do not reflect anticipated synergies;

 

    Non-GAAP Measures do not reflect certain one-time or non-recurring cash costs to achieve anticipated synergies;

 

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    Non-GAAP Measures do not reflect changes in, or cash requirements for, ACI’s and Rite Aid’s working capital needs;

 

    EBITDA and Adjusted EBITDA do not reflect the significant interest expense or the cash requirements necessary to service interest or principal payments on ACI’s and Rite Aid’s debt;

 

    Although depreciation and amortization are non-cash charges, the assets being depreciated or amortized may have to be replaced in the future, and EBITDA and Adjusted EBITDA and, with respect to acquired intangible assets, Adjusted Net Income, do not reflect any cash requirements for such replacements;

 

    Non-GAAP Measures are adjusted for certain non-recurring and non-cash income or expense items that are reflected in ACI’s and Rite Aid’s statements of operations;

 

    Non-GAAP Measures, other than Free Cash Flow, do not reflect ACI’s or Rite Aid’s capital expenditures or future requirements for capital expenditures or contractual commitments; and

 

    Other companies in ACI’s and Rite Aid’s industries may calculate these measures differently than ACI or Rite Aid does, limiting their usefulness as comparative measures.

Because of these limitations, Non-GAAP Measures should not be considered as measures of discretionary cash available to ACI or Rite Aid to invest in the growth of its business. ACI and Rite Aid compensate for these limitations by relying primarily on their GAAP results and using Non-GAAP Measures only for supplemental purposes. Please see ACI’s and Rite Aid’s consolidated financial statements contained in this proxy statement/prospectus.

Pro forma Adjusted EBITDA, as presented in this proxy statement/prospectus, is also a supplemental measure of performance that is not required by or presented in accordance with GAAP.

DEFINITIONS

Unless otherwise indicated or as the context otherwise requires, a reference in this proxy statement/prospectus to:

 

    “ACI” refers to Albertsons Companies, Inc., a Delaware corporation, or, prior to the ACI Reorganization Transactions, its predecessors, Albertsons Companies, LLC, a Delaware limited liability company, and AB Acquisition LLC, a Delaware limited liability company, in each case, together with their consolidated subsidiaries, and refers to the combined company following the completion of the merger;

 

    “ACI common stock” refers to the common stock, par value $0.01 per share, of ACI;

 

    “ACI Institutional Investors” refers to Klaff Realty, LP, Schottenstein Stores Corp., Lubert-Adler Partners, L.P., Colony NorthStar, Inc. and Kimco Realty Corporation, and each of their respective controlled affiliates and investment funds;

 

    “adjournment proposal” refers to the proposal to approve one or more adjournments of the special meeting to a later date or dates, if necessary or appropriate, to solicit additional proxies if there are insufficient votes to adopt the merger agreement at the time of the special meeting;

 

    “Cerberus” refers to Cerberus Capital Management, L.P., a Delaware limited partnership, and investment funds and accounts managed by it and its affiliates;

 

    “Code” refers to the Internal Revenue Code of 1986, as amended;

 

    “combined company” refers to ACI and its subsidiaries, including Rite Aid, collectively, following the completion of the merger;

 

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    “compensation proposal” refers to the proposal to approve, by means of a non-binding, advisory vote, compensation that will or may become payable to Rite Aid’s named executive officers in connection with the merger as contemplated by the merger agreement;

 

    “DGCL” refers to the General Corporation Law of the State of Delaware;

 

    “effective time of the merger” refers to the time the merger becomes effective;

 

    “Exchange Act” refers to the U.S. Securities Exchange Act of 1934, as amended;

 

    “GAAP” refers to accounting principles generally accepted in the United States of America;

 

    “merger” refers to the merger of Merger Sub I with and into Rite Aid, with Rite Aid surviving the merger as a wholly-owned subsidiary of ACI;

 

    “merger agreement” refers to the Agreement and Plan of Merger, dated as of February 18, 2018, by and among ACI, Merger Sub I, Merger Sub II and Rite Aid, a copy of which is attached as Annex A to this proxy statement/prospectus;

 

    “merger proposal” refers to the proposal to adopt the merger agreement and the transactions contemplated by the merger agreement, including the mergers;

 

    “mergers” refers, collectively, to the merger and the subsequent merger;

 

    “Merger Sub I” refers to Ranch Acquisition Corp., a Delaware corporation and a direct wholly-owned subsidiary of Merger Sub II;

 

    “Merger Sub II” refers to Ranch Acquisition II LLC, a Delaware limited liability company and a direct wholly-owned subsidiary of ACI;

 

    “new ACI bylaws” refers to the amended and restated bylaws for ACI in substantially the form attached as Annex D, which will become effective immediately prior to the effective time of the merger, and which will be applicable to the combined company following the completion of the merger;

 

    “new ACI certificate of incorporation” refers to the amended and restated certificate of incorporation for ACI in substantially the form attached as Annex C, which will become effective immediately prior to the effective time of the merger, and which will be applicable to the combined company following the completion of the merger;

 

    “NYSE” refers to the New York Stock Exchange;

 

    “proxy solicitor” refers to Morrow Sodali LLC, Rite Aid’s proxy solicitor;

 

    “Rite Aid” refers to Rite Aid Corporation, a Delaware corporation;

 

    “Rite Aid common stock” refers to the common stock, par value $1.00 per share, of Rite Aid;

 

    “SEC” refers to the Securities and Exchange Commission;

 

    “Securities Act” refers to the U.S. Securities Act of 1933, as amended;

 

    “special meeting” refers to the special meeting of Rite Aid stockholders to be held on August 9, 2018, or any adjournment thereof, at which Rite Aid stockholders will be asked to consider and vote upon the merger proposal, the compensation proposal and the adjournment proposal;

 

    “subsequent merger” refers to the merger of Rite Aid, as the surviving corporation in the merger, with and into Merger Sub II, with Merger Sub II surviving the subsequent merger as a direct wholly-owned subsidiary of ACI and a limited liability company;

 

    “surviving company” refers to Merger Sub II following the subsequent merger; and

 

    “we”, “our” and “us” refers to ACI or Rite Aid, as applicable, prior to completion of the merger and ACI following the completion of the merger.

 

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TABLE OF CONTENTS

 

     Page  

QUESTIONS AND ANSWERS ABOUT THE MERGER AND THE SPECIAL MEETING

     1  

SUMMARY

     14  

Parties to the Merger

     14  

The Merger and the Merger Agreement

     16  

Merger Consideration

     16  

Ownership of the Combined Company

     17  

Governance of ACI Following the Merger

     17  

Recommendation of the Rite Aid Board of Directors; Rite Aid’s Reasons for the Merger

     19  

Opinion of Rite Aid’s Financial Advisor

     19  

Information About the Special Meeting

     20  

Treatment of Equity and Equity-Based Awards

     21  

Interests of the Directors and Officers of Rite Aid in the Merger

     23  

Regulatory Approvals

     24  

No Appraisal Rights

     25  

Listing of ACI Common Stock on the NYSE

     25  

Conditions to Completion of the Mergers

     25  

No Solicitation or Negotiation of Acquisition Proposals

     26  

Alternative Proposals

     27  

No Change in Recommendation or Alternative Acquisition

     27  

Termination of the Merger Agreement

     28  

Termination Fees and Expenses

     30  

Other Related Agreements

     31  

Accounting Treatment

     32  

Material U.S. Federal Income Tax Consequences

     33  

Federal Securities Law Consequences

     33  

Debt Matters

     33  

Amendment and Restatement of ACI Certificate of Incorporation and Bylaws

     35  

Comparison of Rights of ACI Stockholders and Rite Aid Stockholders

     35  

Litigation Related to the Merger

     36  

Risk Factors

     36  

Information on the Combined Company

     37  

Summary Selected Historical Consolidated Financial Data of ACI

     43  

Summary Selected Historical Consolidated Financial Data of Rite Aid

     46  

Selected Unaudited Pro Forma Condensed Combined Consolidated Financial Data

     48  

RISK FACTORS

     50  

Risks Relating to the Merger

     50  

Risks Relating to the Combined Company Following the Merger

     56  

Risks Relating to Ownership of ACI Common Stock

     60  

Risks Relating to ACI’s Business and Industry

     62  

Risks Relating to ACI’s Safeway, A&P and Haggen Acquisitions and Integration

     77  

Risks Relating to ACI’s Indebtedness

     78  

Risks Relating to Rite Aid’s Business

     82  

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

     83  

INFORMATION ABOUT THE SPECIAL MEETING

     86  

PARTIES TO THE MERGER

     92  

THE MERGER

     94  

The Merger

     94  

Merger Consideration

     94  

Ownership of the Combined Company

     95  

 

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     Page  

Debt Matters

     95  

Background of the Merger

     99  

Recommendation of the Rite Aid Board of Directors; Rite Aid’s Reasons for the Mergers

     122  

Opinion of Rite Aid’s Financial Advisor

     129  

Financial Forecast

     138  

ACI’s Reasons for the Merger

     141  

Approval of the New ACI Certificate of Incorporation and Issuance of ACI Common Stock

     144  

Governance of ACI Following the Merger

     144  

Amendment and Restatement of ACI Certificate of Incorporation and Bylaws

     145  

Closing and Effective Time of the Merger

     145  

Regulatory Approvals

     146  

Federal Securities Law Consequences

     147  

Accounting Treatment

     147  

Dividend Policy Following the Merger

     147  

Listing of ACI Common Stock on the NYSE

     147  

Delisting and Deregistration of Rite Aid Common Stock

     148  

Litigation Related to the Merger

     148  

THE MERGER AGREEMENT

     149  

OTHER RELATED AGREEMENTS

     183  

SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF RITE AID

     187  

SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF ACI

     188  

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

     190  

COMPARATIVE HISTORICAL AND UNAUDITED PRO FORMA PER SHARE DATA

     210  

MARKET PRICES OF RITE AID COMMON STOCK AND DIVIDEND INFORMATION

     211  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF ACI

     212  

BUSINESS OF ACI

     240  

MANAGEMENT AND OTHER INFORMATION OF THE COMBINED COMPANY

     261  

EXECUTIVE COMPENSATION OF ACI

     269  

RELATED PERSON TRANSACTIONS

     292  

INTERESTS OF THE DIRECTORS AND OFFICERS OF RITE AID IN THE MERGER

     296  

DESCRIPTION OF INDEBTEDNESS

     306  

MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES

     320  

DESCRIPTION OF ACI CAPITAL STOCK

     325  

SHARES ELIGIBLE FOR FUTURE SALE

     329  

COMPARISON OF RIGHTS OF ACI STOCKHOLDERS AND RITE AID STOCKHOLDERS

     332  

NO APPRAISAL RIGHTS

     345  

CERTAIN BENEFICIAL OWNERS OF RITE AID COMMON STOCK

     346  

CERTAIN BENEFICIAL OWNERS OF ACI COMMON STOCK

     348  

HOUSEHOLDING OF PROXY MATERIALS

     350  

LEGAL MATTERS

     351  

EXPERTS

     351  

STOCKHOLDER PROPOSALS

     352  

WHERE YOU CAN FIND MORE INFORMATION

     353  

INDEX TO FINANCIAL STATEMENTS

     F-1  

 

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Annex A   

Agreement and Plan of Merger, dated as of February  18, 2018, by and among ACI, Merger Sub I, Merger Sub II and Rite Aid

  
Annex B   

Opinion of Citigroup Global Markets Inc.

  
Annex C   

Form of Amended and Restated Certificate of Incorporation of ACI

  
Annex D   

Form of Amended and Restated Bylaws of ACI

  
Annex E   

Form of Registration Rights Agreement

  
Annex F   

Form of Standstill Agreements

  
Annex G   

Form of Lock-Up Agreements

  
Annex H   

Form of No Action Agreement

  

 

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QUESTIONS AND ANSWERS ABOUT THE MERGER AND THE SPECIAL MEETING

The following questions and answers are intended to address some commonly asked questions regarding the mergers, the merger agreement and the special meeting. These questions and answers may not address all questions that may be important to you as a Rite Aid stockholder. We encourage you to read carefully the more detailed information contained elsewhere in this proxy statement/prospectus, the annexes to this proxy statement/prospectus, including the merger agreement, and the documents we incorporate by reference in this proxy statement/prospectus. You may obtain the documents and information incorporated by reference in this proxy statement/prospectus without charge by following the instructions in the section entitled “Where You Can Find More Information” beginning on page 353 of this proxy statement/prospectus. The merger agreement is attached as Annex A to this proxy statement/prospectus.

 

Q: What is this document?

 

A: Rite Aid has agreed to combine with ACI under the terms of the merger agreement that are described in this proxy statement/prospectus. This document is a proxy statement because it will be used by the Rite Aid board of directors to solicit proxies for the special meeting of the Rite Aid stockholders at which the Rite Aid stockholders will be asked to vote on the proposal to adopt the merger agreement, among other matters. This document is also a prospectus because it will be used by ACI to offer ACI common stock to Rite Aid stockholders in exchange for their Rite Aid common stock upon completion of the proposed merger. This document contains important information about the merger agreement and the details of the mergers, the business, results of operations and financial condition of Rite Aid and ACI, the combined capital stock, certain risk factors related to the mergers, Rite Aid and ACI, and other matters that are important to Rite Aid stockholders. Rite Aid urges all Rite Aid stockholders to read this proxy statement/prospectus, including all documents incorporated by reference into this proxy statement/prospectus, and annexes to this proxy statement/prospectus, carefully and in their entirety. In particular, Rite Aid urges you to read carefully “Risk Factors” beginning on page 50 of this proxy statement/prospectus.

 

Q: Why am I receiving these materials?

 

A: The Rite Aid board of directors is furnishing this proxy statement/prospectus and form of proxy card to the holders of Rite Aid common stock in connection with the solicitation of proxies to be voted at a special meeting of stockholders or at any adjournments or postponements of the special meeting.

 

Q: When and where is the special meeting?

 

A: The special meeting will take place on August 9, 2018, at the office of Skadden, Arps, Slate, Meagher & Flom LLP, 4 Times Square, New York, NY 10036, at 8:30 a.m., Eastern time.

 

Q: Who is entitled to vote at the special meeting?

 

A: Only Rite Aid stockholders of record as of the close of business on June 22, 2018 are entitled to notice of the special meeting and to vote at the special meeting or at any adjournments or postponements thereof. Each holder of Rite Aid common stock is entitled to cast one vote on each matter properly brought before the special meeting for each share of Rite Aid common stock that such holder owned as of the record date.

 

Q: May I attend the special meeting and vote in person?

 

A:

Yes. All stockholders as of the record date may attend the special meeting and vote in person. Seating will be limited. Stockholders will need to present proof of ownership of Rite Aid common

 

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  stock, such as a recent bank or brokerage account statement, and a form of personal identification to be admitted to the special meeting. No cameras, recording equipment, electronic devices, large bags, briefcases or packages will be permitted in the special meeting. Even if you plan to attend the special meeting in person, Rite Aid encourages you to complete, sign, date and return the enclosed proxy card or to vote electronically over the Internet or via telephone to ensure that your shares will be represented at the special meeting. If you attend the special meeting and vote in person, your vote by ballot will revoke any proxy previously submitted. If you hold your shares in “street name,” because you are not the stockholder of record, you may not vote your shares in person at the special meeting unless you request and obtain a valid legal proxy from your broker, bank or other nominee.

 

Q: What am I being asked to vote on at the special meeting?

 

A: You are being asked to consider and vote on the following proposals:

 

    To adopt the merger agreement and the transactions contemplated by the merger agreement, including the mergers, which we refer to as the merger proposal;

 

    To approve, by means of a non-binding, advisory vote, compensation that will or may become payable to Rite Aid’s named executive officers in connection with the merger as contemplated by the merger agreement, which we refer to as the compensation proposal; and

 

    To approve one or more adjournments of the special meeting to a later date or dates, if necessary or appropriate, to solicit additional proxies if there are insufficient votes to adopt the merger agreement at the time of the special meeting, which we refer to as the adjournment proposal.

 

Q: What is the proposed merger and what effects will it have on Rite Aid?

 

A: The proposed transaction is a series of two mergers whereby Rite Aid will become a subsidiary of ACI pursuant to the merger agreement. If the merger proposal is approved by the requisite number of holders of Rite Aid common stock and the other closing conditions under the merger agreement have been satisfied or waived, Merger Sub I will merge with and into Rite Aid, with Rite Aid surviving the merger as a wholly-owned direct subsidiary of Merger Sub II, and, immediately following the merger, Rite Aid will merge with and into Merger Sub II, with Merger Sub II surviving the subsequent merger as a wholly-owned direct subsidiary of ACI and a limited liability company. As a result of the mergers, Rite Aid will become a wholly-owned direct subsidiary of ACI. Rite Aid expects to de-list its common stock from the NYSE and de-register its common stock under the Exchange Act as soon as reasonably practicable following the effective time of the merger. Thereafter, Rite Aid would no longer be a publicly traded company. If the merger is completed, you will not own any shares of the capital stock of Rite Aid, Merger Sub I or Merger Sub II, and instead will only be entitled to receive the stock election consideration and/or cash election consideration, as applicable, which we refer to as the merger consideration.

 

Q: Will the ACI common stock be listed on a stock exchange?

 

A: ACI has been approved to list the ACI common stock with the NYSE under the symbol “ACI,” and the combined company is expected to be publicly traded on the NYSE under this symbol following the completion of the mergers. While trading in ACI common stock on the NYSE is expected to begin on the first business day following the date of completion of the mergers, there can be no assurance that a viable and active trading market will develop. For more information, please see the section entitled “The Merger—Listing of ACI Common Stock on the NYSE” beginning on page 147 of this proxy statement/prospectus.

 

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Q: What will I receive if the merger is completed?

 

A: At the effective time of the merger, each share of Rite Aid common stock issued and outstanding immediately prior to the effective time of the merger (other than shares of Rite Aid common stock owned, directly or indirectly, by ACI, Merger Sub I or Rite Aid (including shares of Rite Aid common stock held as treasury stock by Rite Aid), and in each case not held on behalf of third parties, immediately prior to the effective time of the merger) will be converted into the right to receive and become exchangeable for 0.1000, which we refer to as the base exchange ratio, of a fully paid and nonassessable share of ACI common stock, without interest, which we refer to as the base consideration, plus, at the election of the holder of Rite Aid common stock, either:

 

    for each share of Rite Aid common stock with respect to which an election to receive cash has been effectively made and not revoked or redeemed, and for each share of Rite Aid common stock with respect to which a Rite Aid stockholder has not made an election to receive cash or stock, an amount in cash equal to $0.1832 per share, without interest, which we refer to as the additional cash consideration (and which, together with the base consideration, we refer to as the cash election consideration); provided, that to the extent the aggregate additional cash consideration to be paid to any holder of shares of Rite Aid common stock for all such holder’s shares of Rite Aid common stock held in a single account would result in such stockholder being entitled to a fraction of a cent in cash with respect to the shares of Rite Aid common stock held in such account, such aggregate amount will be rounded down to the nearest whole cent; or

 

    for each share of Rite Aid common stock with respect to which an election to receive additional ACI common stock has been effectively made and not revoked, 0.0079, which we refer to as the additional stock election exchange ratio (and which, together with the base exchange ratio, we refer to as the stock election exchange ratio), of a fully paid and nonassessable share of ACI common stock, without interest, which we refer to as the additional stock consideration (and which, together with the base consideration, we refer to as the stock election consideration).

For the avoidance of doubt, the cash election consideration consists of both the base consideration, which consists of ACI common stock, and the additional cash consideration, which consists of cash. No fractional shares of ACI common stock will be issued in the merger, and in lieu thereof, holders of Rite Aid common stock who would otherwise have been entitled to a fraction of a share of ACI common stock will be paid upon surrender of shares of Rite Aid common stock (and after taking into account and aggregating the total number of shares of ACI common stock to be issued in exchange for the shares of Rite Aid common stock represented by all certificates, or book-entry shares, as applicable, surrendered by such holder and the shares of ACI common stock received by such holder as a result of both the base exchange ratio and the additional stock election exchange ratio) cash in an amount, without interest and rounded to the nearest cent, representing such holder’s proportionate interest in the net proceeds from the sale by the exchange agent, on behalf of all such holders, of all fractional shares of ACI common stock which would otherwise be issued.

 

Q: What will be the ownership structure of the combined company after the consummation of the merger?

 

A: Based on the estimated number of shares of Rite Aid and ACI common stock that will be outstanding immediately prior to the closing of the merger, and depending upon the result of the cash election, it is anticipated that, upon closing, existing ACI stockholders will own approximately 70.4% to 72.0% of the outstanding shares of ACI common stock, and former Rite Aid stockholders will own approximately 29.6% to 28.0% of the outstanding shares of ACI common stock, in each case on a fully diluted basis.

 

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Q: How do I calculate the value of the merger consideration?

 

A: Because ACI will issue shares of ACI common stock in exchange for each share of Rite Aid common stock, the value of the merger consideration that Rite Aid stockholders receive will depend on the per share value of ACI common stock at the effective time of the merger. Prior to the effective time, there has not been and will not be an established public trading for ACI common stock. The price of the ACI common stock at the effective time will reflect the combination of ACI and Rite Aid, and will be unknown until the commencement of trading following the effective time of the merger. The base exchange ratio and the additional stock election exchange ratio are fixed and thus will not fluctuate up or down based on the market price of a share of Rite Aid common stock prior to the merger.

 

Q: When is the election deadline?

 

A: The election deadline is 5:00 p.m. New York City time on a date mutually agreed by Rite Aid and ACI but which in no event will be less than one day prior to the anticipated closing date. Rite Aid and ACI will issue a joint press release announcing the anticipated date of the election deadline not more than fifteen business days before, and at least five business days prior to, the anticipated date of the election deadline. If Rite Aid and ACI jointly agree to postpone the election deadline to a later date, ACI and Rite Aid will promptly announce any such delay and, when determined, the rescheduled election deadline. The election deadline has not been established as of the date of this proxy statement/prospectus.

 

Q: How do Rite Aid stockholders make an election?

 

A: Not less than thirty days prior to the election deadline, ACI will instruct Broadridge Financial Solutions, Inc. (or if Broadridge Financial Solutions, Inc. is unwilling or unable to serve as exchange agent, a bank or trust company mutually agreed upon by Rite Aid and ACI, in either case, referred to as the exchange agent) to send to each record holder, as of five business days prior to such date, of Rite Aid common stock an election form. Each election form will permit the stockholder (or the beneficial owner through customary documentation and instructions) to specify (i) the number of shares of such stockholder’s Rite Aid common stock with respect to which such holder elects to receive the stock election consideration, (ii) the number of shares of such holder’s Rite Aid common stock with respect to which such holder elects to receive the cash election consideration or (iii) that such holder makes no election with respect to such holder’s Rite Aid common stock, and, in such case of each of (i) and (ii), the particular shares for which the holder desires to make such election. Any shares of Rite Aid common stock with respect to which the exchange agent does not receive a properly completed election form prior to the election deadline will be deemed to be shares with respect to which no election has been made. The election form will indicate in a clear and unambiguous manner that a stockholder’s failure to make a proper election prior to the election deadline will result in such stockholder receiving cash election consideration for such shares for which no proper election has been made. Any election will have been properly made only if the exchange agent will have received a properly completed election form by the election deadline. If your shares of Rite Aid common stock are held in a brokerage or other custodial account, you should receive instructions from the entity which holds your shares advising you of the procedures for making your election. If you do not receive these instructions, you should contact the entity that holds your shares.

Subject to the terms of the merger agreement and of the election form, the exchange agent will have reasonable discretion to determine whether any election has been properly or timely made and to disregard immaterial defects in the election form, and any good faith decisions of the exchange agent regarding such matters will be binding and conclusive. None of ACI, Merger Sub I, Merger Sub II, Rite Aid or the exchange agent will be under any obligation to notify any person of any defect in an election form. The election form will provide stockholders with a toll-free number to contact the exchange agent with any questions concerning making an election.

 

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Q: What type of merger consideration will stockholders receive if they do not make an election?

 

A: A stockholder’s failure to make a proper election prior to the election deadline will result in such stockholder receiving cash election consideration for such shares for which no proper election has been made.

 

Q: Can I make one election for some of my shares and another for the rest?

 

A: Yes. Each election form will permit the holder (or the beneficial owner through customary documentation and instructions) to specify (i) the number of shares of such stockholder’s Rite Aid common stock with respect to which such holder elects to receive the stock election consideration, (ii) the number of shares of such holder’s Rite Aid common stock with respect to which such holder elects to receive the cash election consideration or (iii) that such holder makes no election with respect to such holder’s Rite Aid common stock, and, in such case of each of (i) and (ii), the particular shares for which the holder desires to make such election.

 

Q: Can I change or revoke my election after submitting an initial election?

 

A: Yes. Any election form may be revoked or changed by the person submitting the form, by written notice received by the exchange agent prior to the election deadline. In the event an election form is revoked prior to the election deadline and no subsequent election is properly made prior to the election deadline, the shares of Rite Aid common stock represented by such election form will be deemed to be shares with respect to which no election has been made. A stockholder’s failure to make a proper election prior to the election deadline will result in such stockholder receiving cash election consideration for such shares for which no proper election has been made.

 

Q: What do I need to do now?

 

A: Rite Aid encourages you to read this proxy statement/prospectus, the annexes to this proxy statement/prospectus, including the merger agreement, and the documents we refer to in this proxy statement/prospectus carefully and consider how the mergers affect you. Then complete, sign, date and return, as promptly as possible, the enclosed proxy card in the accompanying reply envelope or grant your proxy electronically over the Internet or by telephone, so that your shares can be voted at the special meeting. If you hold your shares in “street name,” please refer to the voting instruction forms provided by your broker, bank or other nominee to vote your shares.

 

Q: Should I send in my stock certificates now?

 

A: No. After the merger is completed, under the terms of the merger agreement, you will receive shortly thereafter a letter of transmittal instructing you to send your stock certificates to the exchange agent in order to receive the merger consideration for each share of your common stock represented by the stock certificates. You should use the letter of transmittal to exchange your stock certificates for the stock election consideration and/or the cash election consideration, as applicable, to which you are entitled upon completion of the merger. After receiving the proper documentation from you, following the effective time, the exchange agent will deliver to you the ACI common stock in either certificated or book-entry form and any cash consideration to which you are entitled, if any. Please do not send in your stock certificates now.

 

Q: What happens if I sell or otherwise transfer my shares of Rite Aid common stock after the record date but before the special meeting?

 

A:

The record date for the special meeting is earlier than the date of the special meeting and the date the merger is expected to be completed. If you sell or transfer your shares of your common stock after the record date but before the special meeting, unless special arrangements (such as

 

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  the provision of a proxy) are made between you and the person to whom you sell or otherwise transfer your shares and each of you notifies Rite Aid in writing of such special arrangements, you will transfer the right to receive the merger consideration, if the merger is completed, to the person to whom you sell or transfer your shares of Rite Aid common stock, but you will retain your right to vote these shares at the special meeting. Even if you sell or otherwise transfer your shares of common stock after the record date, Rite Aid encourages you to complete, date, sign and return the enclosed proxy card or vote via the Internet or telephone.

 

Q: How does Rite Aid’s board of directors recommend that I vote?

 

A: The Rite Aid board of directors, after considering the various factors described in the section entitled “The Merger—Recommendation of the Rite Aid Board of Directors; Rite Aid’s Reasons for the Merger” beginning on page 122 of this proxy statement/prospectus, unanimously determined that the merger agreement and the transactions contemplated by the merger agreement, including the mergers, are advisable, fair to and in the best interests of Rite Aid and its stockholders, and adopted, approved and declared advisable the merger agreement and the transactions contemplated by the merger agreement.

The Rite Aid board of directors unanimously recommends that you vote (i) “FOR” the proposal to approve the merger agreement and the transactions contemplated by the merger agreement, including the mergers, (ii) “FOR” the proposal to approve, by a non-binding, advisory vote, compensation that will or may become payable by Rite Aid to its named executive officers in connection with the merger and (iii) “FOR” the proposal to approve one or more adjournments of the special meeting to a later date or dates, if necessary or appropriate, to solicit additional proxies if there are insufficient votes to adopt the merger agreement at the time of the special meeting.

 

Q: What risks should I consider in deciding whether to vote in favor of the merger?

 

A: You should carefully review the section entitled “Risk Factors” beginning on page 50 of this proxy statement/prospectus, which presents risks and uncertainties related to the merger, the combined company and the business and operations of each of ACI and Rite Aid.

 

Q: What happens if the merger is not completed?

 

A: If the merger agreement is not adopted by the Rite Aid stockholders or if the merger is not completed for any other reason, Rite Aid stockholders will not receive any payment for their shares of common stock. Instead, Rite Aid will remain an independent public company, your common stock in Rite Aid will continue to be listed and traded on the NYSE and registered under the Exchange Act and Rite Aid will continue to file periodic reports with the SEC.

Under specified circumstances, Rite Aid will be required to pay ACI a termination fee upon the termination of the merger agreement or will be entitled to receive a termination fee from ACI, as described in the sections entitled “The Merger Agreement—Termination of the Merger Agreement—Termination Fees” beginning on page 180 of this proxy statement/prospectus.

 

Q: Do any of Rite Aid’s directors or officers have interests in the merger that may differ from those of Rite Aid stockholders generally?

 

A:

You should be aware that Rite Aid’s directors and executive officers may have interests in the merger that may be different from, or in addition to, the interests of Rite Aid stockholders generally. The Rite Aid board of directors was aware of and considered these interests to the extent such interests existed at the time, among other matters, in evaluating and overseeing the negotiation of the merger agreement, in approving the merger agreement and the mergers and in recommending that the merger agreement be adopted by the stockholders of Rite Aid. For a

 

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  description of the interests of Rite Aid’s directors and executive officers in the merger, see the section entitled “Interests of the Directors and Officers of Rite Aid in the Merger” beginning on page 296 of this proxy statement/prospectus.

 

Q: What vote is required to adopt the merger agreement?

 

A: The affirmative vote of the holders of a majority of the outstanding shares of Rite Aid common stock is required to approve the merger proposal.

The failure of any stockholder of record to vote in person by ballot at the special meeting, to submit a signed proxy card or to grant a proxy electronically over the Internet or by telephone will have the same effect as a vote “AGAINST” the merger proposal. If you hold your shares in “street name,” the failure to instruct your broker, bank or other nominee on how to vote your shares will have the same effect as a vote “AGAINST” the merger proposal. An abstention will also have the same effect as a vote “AGAINST” the merger proposal.

As of June 22, 2018, the record date for determining who is entitled to vote at the special meeting, there were approximately 1,067,312,183 shares of Rite Aid common stock issued and outstanding. Each holder of Rite Aid common stock is entitled to one vote per share of stock owned by such holder as of the record date.

 

Q: What vote is required to approve the proposal to approve, by a non-binding, advisory vote, compensation that will or may become payable by Rite Aid to its named executive officers in connection with the merger and the proposal to approve one or more adjournments of the special meeting to a later date or dates, if necessary or appropriate, to solicit additional proxies?

 

A: Assuming a quorum is present, approval of the compensation proposal requires the affirmative vote of a majority of the shares of Rite Aid common stock represented at the special meeting, either in person or by proxy, and entitled to vote thereon. Approval of the adjournment proposal, whether or not a quorum is present, requires the affirmative vote of a majority of the shares of Rite Aid common stock represented at the special meeting, either in person or by proxy, and entitled to vote thereon.

The failure of any stockholder of record to vote in person by ballot at the special meeting, to submit a signed proxy card or to grant a proxy electronically over the Internet or by telephone will not have any effect on the compensation proposal or the adjournment proposal. If you hold your shares in “street name,” the failure to instruct your broker, bank or other nominee on how to vote your shares will not have any effect on the compensation proposal or the adjournment proposal. Abstentions will have the same effect as a vote “AGAINST” the compensation proposal and the adjournment proposal.

 

Q: What happens if the non-binding advisory proposal to approve compensation that will or may become payable by Rite Aid to its named executive officers in connection with the merger is not approved?

 

A: Approval, on a non-binding, advisory basis, of compensation that will or may become payable by Rite Aid to its named executive officers in connection with the merger is not a condition to completion of the merger. The vote is an advisory vote and is not binding. Accordingly, regardless of the outcome of the advisory vote, if the merger is completed, Rite Aid may still pay such compensation to its named executive officers in accordance with the terms and conditions applicable to such compensation.

 

Q: What constitutes a quorum?

 

A:

As of the record date, there were 1,067,312,183 shares of Rite Aid common stock outstanding and entitled to be voted at the special meeting. The presence, either in person or represented by proxy, of the holders of a majority of the outstanding shares of Rite Aid common stock entitled to

 

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  vote at the special meeting will constitute a quorum at the special meeting. As a result, in order to have a quorum at the special meeting, at least 533,656,092 shares of Rite Aid common stock must be represented by stockholders present in person or by proxy at the special meeting. Abstentions (which are described below) will count for the purpose of determining the presence of a quorum for the transaction of business at the special meeting. Broker non-votes are shares held by a broker, bank or other nominee that are present in person or represented by proxy at the special meeting, but with respect to which the broker, bank or other nominee is not instructed by the beneficial owner of such shares on how to vote on a particular proposal and the broker does not have discretionary voting power on such proposal. Because brokers, banks and other nominee holders of record do not have discretionary voting authority with respect to any of the three proposals, if a beneficial owner of shares of Rite Aid common stock held in “street name” does not give voting instructions to the broker, bank or other nominee with respect to any of the proposals, then those shares will not be present in person or represented by proxy at the special meeting. If there are any broker non-votes, then such broker non-votes will count for the purpose of determining the presence of a quorum for the transaction of business at the special meeting.

 

Q: What is the difference between holding shares as a stockholder of record and as a beneficial owner?

 

A: If your shares are registered directly in your name with Rite Aid’s transfer agent, Broadridge Financial Solutions, Inc., you are considered, with respect to those shares, to be the “stockholder of record.” In this case, this proxy statement/prospectus and your proxy card have been sent directly to you by Rite Aid.

If your shares are held through a broker, bank or other nominee, you are considered the “beneficial owner” of the shares of Rite Aid common stock held in “street name.” In that case, this proxy statement/prospectus has been forwarded to you by your broker, bank or other nominee who is considered, with respect to those shares, to be the stockholder of record. As the beneficial owner, you have the right to direct your broker, bank or other nominee on how to vote your shares by following their instructions for voting. You are also invited to attend the special meeting. However, because you are not the stockholder of record, you may not vote your shares in person at the special meeting unless you request and obtain a valid legal proxy from your broker, bank or other nominee.

 

Q: How may I vote?

 

A: If you are a stockholder of record, there are four ways to vote:

 

    By attending the special meeting and voting in person by ballot;

 

    By visiting the Internet at the address on your proxy card;

 

    By calling toll-free (within the U.S. or Canada) at the phone number on your proxy card; or

 

    By completing, dating, signing and returning the enclosed proxy card in the accompanying prepaid reply envelope.

A control number, located on your proxy card, is designed to verify your identity and allow you to vote your shares of common stock, and to confirm that your voting instructions have been properly recorded when voting electronically over the Internet or by telephone. Please be aware that, although there is no charge for voting your shares, if you vote electronically over the Internet or by telephone, you may incur costs such as telephone and Internet access charges for which you will be responsible.

Even if you plan to attend the special meeting in person, you are strongly encouraged to vote your shares of common stock by proxy. If you are a stockholder of record or if you obtain a valid legal

 

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proxy to vote shares which you beneficially own, you may still vote your shares of common stock in person at the special meeting even if you have previously voted by proxy. If you are present at the special meeting and vote in person, your previous vote by proxy will not be counted.

If your shares are held in “street name” through a broker, bank or other nominee, you may vote through your broker, bank or other nominee by completing and returning the voting form provided by your broker, bank or other nominee, or electronically over the Internet or by telephone through your broker, bank or other nominee if such a service is provided. To vote via the Internet or via telephone through your broker, bank or other nominee, you should follow the instructions on the voting form provided by your broker, bank or other nominee.

 

Q: If my broker holds my shares in “street name,” will my broker vote my shares for me?

 

A: Not without your direction. Your broker, bank or other nominee will only be permitted to vote your shares on any proposal only if you instruct your broker, bank or other nominee on how to vote. Broker non-votes are shares held by a broker, bank or other nominee that are present in person or represented by proxy at the special meeting, but with respect to which the broker, bank or other nominee is not instructed by the beneficial owner of such shares on how to vote on a particular proposal and the broker does not have discretionary voting power on such proposal. Because brokers, banks and other nominee holders of record do not have discretionary voting authority with respect to any of the three proposals, if a beneficial owner of shares of Rite Aid common stock held in “street name” does not give voting instructions to the broker, bank or other nominee with respect to any of the proposals, then those shares will not be present in person or represented by proxy at the special meeting. If there are any broker non-votes, then such broker non-votes will be counted as a vote “AGAINST” the merger proposal, but will have no effect on the compensation proposal or the adjournment proposal. Therefore, it is important that you instruct your broker, bank or other nominee on how you wish to vote your shares.

 

Q: May I change my vote after I have mailed my signed proxy card or otherwise submitted my vote by proxy?

 

A: Yes. If you are a stockholder of record, you may change your vote or revoke your proxy at any time before it is voted at the special meeting by:

 

    Submitting a new proxy electronically over the Internet or by telephone after the date of the earlier submitted proxy;

 

    Delivering a written notice of revocation to Rite Aid’s Secretary;

 

    Signing another proxy card with a later date and returning it to Rite Aid prior to the special meeting; or

 

    Attending the special meeting and voting in person.

If you hold your shares of common stock in “street name,” you should contact your broker, bank or other nominee for instructions regarding how to change your vote; or contact Rite Aid’s proxy solicitor, Morrow Sodali LLC at (800) 662-5200. You may also vote in person at the special meeting if you obtain a valid legal proxy from your broker, bank or other nominee.

 

Q: What is a proxy?

 

A: A proxy is your legal designation of another person, referred to as a “proxy,” to vote your shares of Rite Aid common stock. The written document describing the matters to be considered and voted on at the special meeting is called a “proxy statement.” The document used to designate a proxy to vote your shares of Rite Aid common stock is called a “proxy card.” The Rite Aid board of directors has designated John T. Standley, Darren W. Karst and James J. Comitale, and each of them with full power of substitution, as proxies for the special meeting.

 

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Q: If a stockholder gives a proxy, how are the shares voted?

 

A: Regardless of the method you choose to vote, the individuals named on the enclosed proxy card, or your proxies, will vote your shares in the way that you indicate. When completing the Internet or telephone process or the proxy card, you may specify whether your shares should be voted “FOR” or “AGAINST” some or none of the specific items of business to come before the special meeting, or you may abstain from voting on all.

If you properly sign and return your proxy card but do not mark the boxes showing how your shares should be voted on a matter, the shares represented by your properly signed proxy will be voted as recommended by the Rite Aid board of directors with respect to each proposal.

 

Q: What should I do if I receive more than one set of voting materials?

 

A: You may receive more than one set of voting materials, including multiple copies of this proxy statement/prospectus and multiple proxy cards or voting instruction cards. For example, if you hold your shares in more than one brokerage account, you will receive a separate voting instruction card for each brokerage account in which you hold shares. If you are a stockholder of record and your shares are registered in more than one name, you will receive more than one proxy card. Please complete, date, sign and return (or vote via the Internet or telephone with respect to) each proxy card and voting instruction card that you receive.

 

Q: Who will count the votes?

 

A: All votes will be counted by the independent inspector of election appointed for the special meeting.

 

Q: Where can I find the voting results of the special meeting?

 

A: Rite Aid intends to announce preliminary voting results at the special meeting and publish final results in a Current Report on Form 8-K that will be filed with the SEC within four (4) business days following the special meeting. All reports that Rite Aid files with the SEC are publicly available when filed. See the section entitled “Where You Can Find More Information” beginning on page 353 of this proxy statement/prospectus.

 

Q: Will I be subject to U.S. federal income tax upon the exchange of Rite Aid common stock for cash pursuant to the merger?

 

A: The mergers, taken together, are expected to qualify as a “reorganization” within the meaning of Section 368(a) of the Code. Assuming the mergers so qualify, (i) Rite Aid stockholders that receive solely ACI common stock in the merger generally will not recognize gain or loss upon the exchange of shares of Rite Aid common stock for shares of ACI common stock pursuant to the merger, and (ii) Rite Aid stockholders that receive a combination of ACI common stock and cash in the merger generally will recognize gain (but not loss) equal to the lesser of the amount of cash received and the excess of the “amount realized” in the transaction (i.e., the fair market value of the ACI common stock received plus the amount of cash received) over their tax basis in their Rite Aid common stock. The U.S. federal income tax consequences described above may not apply to all holders of Rite Aid common stock. Because particular circumstances may differ, Rite Aid recommends that you consult your tax advisor to determine the U.S. federal income tax consequences relating to the mergers in light of your own particular circumstances and any consequences arising under the laws of any state, local or foreign taxing jurisdiction. A more complete description of the U.S. federal income tax consequences of the mergers is provided under “Material U.S. Federal Income Tax Consequences” beginning on page 320 of this proxy statement/prospectus.

 

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Q: What will the holders of outstanding Rite Aid equity awards receive in the merger?

 

A: At the effective time of the merger:

 

    Each Rite Aid stock option will be assumed by ACI and converted into an ACI stock option, on the same terms and conditions as were applicable immediately prior to the completion of the merger, to acquire a number of shares of ACI common stock equal to the product of (x) the number of shares of Rite Aid common stock subject to such Rite Aid stock option immediately prior to the effective time and (y) the base exchange ratio, with any fractional shares rounded down to the next lower whole number of shares after aggregating each individual holder’s Rite Aid stock options with the same exercise price. The exercise price of each such ACI stock option will be equitably adjusted to be equal to the quotient of (x) the excess of (i) the exercise price per share of Rite Aid common stock subject to such option over (ii) the additional cash consideration and (y) the base exchange ratio (which results will be rounded up to the nearest whole cent).

 

    Each Rite Aid time- and performance-vesting restricted stock unit held by any grantee other than a current or former non-employee director, consultant, employee or other service provider of Rite Aid who will not continue in employment or service with ACI (each such grantee, we refer to as a former service provider), which we refer to as a Rollover RSU, will be assumed by ACI and converted into an ACI time-vesting restricted stock unit, which we refer to as an ACI RSU, on the same terms and conditions as were applicable immediately prior to the completion of the merger, relating to a number of shares of ACI common stock equal to the product of (x) the number of Rollover RSUs held by the holder thereof immediately prior to the effective time, assuming achievement of any applicable performance metrics at the target level of achievement, and (y) the stock election exchange ratio, with any fractional shares rounded to the nearest whole number of shares.

 

    Each Rite Aid restricted stock award held by any grantee other than a former service provider, which we refer to as a Rollover RSA, will be assumed by ACI and converted into an ACI restricted stock award, which we refer to as an ACI RSA, on the same terms and conditions as were applicable immediately prior to the completion of the merger, relating to the number of shares of ACI common stock equal to the product of (x) the number of shares of Rite Aid common stock subject to such Rollover RSA immediately prior to the effective time and (y) the base exchange ratio, with any fractional shares rounded to the nearest whole number of shares, plus a number of shares of ACI common stock or an amount in cash equal to the product of (i) the number of shares of Rite Aid common stock subject to such Rollover RSA immediately prior to the effective time and (ii) the additional stock consideration or the additional cash consideration, as elected by the holder and settled or paid to the holder shortly following the completion of the merger.

 

    Each Rite Aid restricted stock award held by a former service provider, which we refer to as a Former Service Provider RSA, will vest and the holder will be entitled to receive a number of shares of ACI common stock equal to the product of (x) the number of shares of Rite Aid common stock subject to such Former Service Provider RSA immediately prior to the effective time, assuming achievement of any applicable performance metrics at the target level of achievement and (y) the base exchange ratio, with any fractional shares rounded to the nearest whole number of shares, plus a number of shares of ACI common stock or an amount in cash equal to the product of (i) the number of shares of Rite Aid common stock subject to such Former Service Provider RSA immediately prior to the effective time, assuming achievement of any applicable performance metrics at the target level of achievement and (ii) the additional stock consideration or the additional cash consideration, as elected by the holder.

 

   

Each Rite Aid time- and performance-vesting restricted stock unit held by a former service provider, which we refer to as a Former Service Provider RSU, will vest and the holder will be entitled to receive a number of shares of ACI common stock equal to the product of (x) the

 

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number of shares of Rite Aid common stock subject to such Former Service Provider RSU immediately prior to the effective time, assuming achievement of any applicable performance metrics at the target level of performance and (y) the base exchange ratio, with any fractional shares rounded to the nearest whole number of shares, plus a number of shares of ACI common stock or an amount in cash equal to the product of (i) the number of shares of Rite Aid common stock subject to such Former Service Provider RSU immediately prior to the effective time, assuming achievement of any applicable performance metrics at the target level of achievement and (ii) the additional stock consideration or the additional cash consideration, as elected by the holder. To the extent that any Former Service Provider RSU by its terms provides for settlement in cash, the holder instead will be entitled to receive the cash value of the number of whole shares of ACI common stock equal to the product of (x) the number of shares of Rite Aid common stock subject to such Former Service Provider RSU immediately prior to the effective time, assuming achievement of any applicable performance metrics at the target level of achievement and (y) the base exchange ratio, with any fractional shares rounded to the nearest whole number of shares, plus an amount in cash equal to the product of (i) the number of shares of Rite Aid common stock subject to such Former Service Provider RSU immediately prior to the effective time, assuming achievement of any applicable performance metrics at the target level of achievement and (ii) the additional cash consideration.

 

Q: When do you expect the merger to be completed?

 

A: While there is no assurance that the merger will close, the parties are working toward completing the merger early in the second half of calendar year 2018. However, the exact timing of completion of the merger cannot be predicted because the completion of the merger is subject to conditions, including, among other things, adoption of the merger agreement by the Rite Aid stockholders and the receipt of regulatory approvals.

 

Q: Who will serve on the combined company’s board of directors following the merger?

 

A: Upon the closing of the merger, the board of directors of the combined company will be comprised of nine (9) members. As of the date of this proxy statement/prospectus, Rite Aid and ACI have identified all nine (9) members of the combined company’s board of directors:

 

    ACI has identified its four (4) designees: Robert G. Miller, who was selected to be Chairman, Lenard B. Tessler, who was selected to be Lead Director, Allen M. Gibson and B. Kevin Turner;

 

    Rite Aid has identified its four (4) designees: John T. Standley, David R. Jessick, Michael N. Regan and Marcy Syms; and

 

    ACI and Rite Aid have identified Sharon L. Allen as the joint designee.

ACI first proposed that Allen M. Gibson or another identified person be jointly designated to the ninth director seat. Rite Aid requested that a different independent candidate be considered who, among other criteria and unlike the first two proposed persons, did not have any affiliation with or investment in Cerberus. ACI then proposed Sharon L. Allen to be jointly designated to the ninth director seat. Ms. Allen was asked to join the board of a predecessor company to ACI as an independent director when ACI was considering its proposed initial public offering in 2015, and has been on the board since June 2015. Ms. Allen had been the former Executive Chairman of Deloitte LLP from 2003 until her retirement in 2011, and currently is a director and Chair of the Audit Committee of each of Bank of America Corporation and First Solar Inc. Ms. Allen also served as the past Chairman of the National Board of the YMCA from 2012 to 2014 and she appeared on the Forbes list of “The 100 Most Powerful Women in the World” for four consecutive years from 2006 to 2009 and Directorships’ “100 Most Influential People in Corporate Governance” for four consecutive years from 2007 to 2010. Other than her service on the ACI board and its predecessor, Ms. Allen has no relationships with ACI, its current shareholders including Cerberus or Rite Aid, or their respective officers and directors. After carefully reviewing

 

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her qualifications, including through an interview of Ms. Allen conducted by Rite Aid’s lead independent director and all members of its nominating and governance committee, the Rite Aid board of directors unanimously approved the designation of Ms. Allen to the ACI board upon consummation of the merger.

For more information, please see the section entitled “The Merger—Governance of ACI Following the Merger” beginning on page 144 of this proxy statement/prospectus.

 

Q: Where will the headquarters of the combined company be located and who will serve in senior leadership roles following the merger?

 

A: Immediately following the merger, the combined company will have co-corporate headquarters in Boise, Idaho and in the Harrisburg, Pennsylvania metropolitan area. Mr. John T. Standley, the current Chief Executive Officer of Rite Aid, is expected to be the Chief Executive Officer of the combined company following the merger. Mr. Robert G. Miller, the current Chief Executive Officer of ACI, is expected to be the Chairman of the combined company following the merger. In addition to Messrs. Standley and Miller, the leadership team is expected to include ACI’s recently appointed President and Chief Operating Officer, Jim Donald, who previously served as Chief Executive Officer of Starbucks Corporation and as a senior executive at several food and drug retailers, including Wal Mart Stores, Inc., Albertson’s, Inc. and Safeway Inc. and Rite Aid’s current President and Chief Operating Officer, Kermit Crawford, who has significant experience in the drug retail and healthcare industries, including serving as a senior executive at WBA. The rest of the combined company’s executive team will be identified in due course as Rite Aid and ACI continue working towards closing of the transactions contemplated by the merger agreement.

 

Q: How will my rights as a stockholder of ACI following the merger differ from my current rights as a Rite Aid stockholder?

 

A: Immediately prior to the closing of the merger, ACI’s certificate of incorporation and bylaws will be amended to be in substantially the forms attached as Annex C and Annex D, respectively, of this proxy statement/prospectus. As a result, the rights of Rite Aid stockholders who become stockholders of ACI in the merger will continue to be governed by the laws of the State of Delaware, the new ACI certificate of incorporation and the new ACI bylaws. For more information, see the sections entitled “Comparison of Rights of ACI Stockholders and Rite Aid Stockholders” beginning on page 332 of this proxy statement/prospectus and “The Merger—Amendment and Restatement of ACI Certificate of Incorporation and Bylaws” beginning on page 145 of this proxy statement/prospectus.

 

Q: Am I entitled to appraisal rights under the DGCL?

 

A: No, Rite Aid stockholders will not have appraisal rights under the DGCL with respect to the merger because holders of shares of Rite Aid common stock are not required to receive consideration other than shares of ACI common stock (and cash in lieu of fractional shares, if any) in the merger and shares of ACI common stock will be listed on the NYSE immediately following the merger. The election to receive cash consideration is voluntary and dependent upon a stockholder’s election (other than cash in lieu of fractional shares, if any).

 

Q: Who can help answer my questions?

 

A: If you have any questions concerning the merger, the special meeting or this proxy statement/prospectus, or would like additional copies of this proxy statement/prospectus or need help voting your shares of Rite Aid common stock, please contact Rite Aid’s proxy solicitor:

Morrow Sodali LLC

470 West Avenue

Stamford, Connecticut 06902

Banks and Brokerage Firms Call: (203) 658-9400

Stockholders Call Toll-Free: (800) 662-5200

Email: rad.info@morrowsodali.com

 

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SUMMARY

The following summary highlights selected information in this proxy statement/prospectus and may not contain all the information that may be important to you as a Rite Aid stockholder. Accordingly, we encourage you to read carefully this entire proxy statement/prospectus, its annexes and the documents referred to herein. Each item in this summary includes a page reference directing you to a more complete description of that topic. You may obtain the information incorporated by reference into this proxy statement/prospectus without charge by following the instructions under the section entitled “Where You Can Find More Information” beginning on page 353 of this proxy statement/prospectus.

Parties to the Merger (Page 92)

Rite Aid Corporation

30 Hunter Lane

Camp Hill, Pennsylvania 17011

(717) 761-2633

Rite Aid Corporation, a Delaware corporation, which we refer to as Rite Aid, was incorporated in 1968 and, after giving effect to the sale of certain stores to Walgreens Boots Alliance, Inc., which we refer to as WBA, is one of the largest retail drugstore chains in the United States based on both revenues and number of stores. As of May 7, 2018, Rite Aid operated 2,533 stores in 19 states across the country. Rite Aid is a pharmacy retail healthcare company that provides its customers and communities with a high level of care and service through various programs it offers through its two reportable business segments, its Retail Pharmacy segment and its Pharmacy Services segment. Rite Aid accomplishes its goal of delivering comprehensive care to its customers through its retail drugstores, RediClinic walk-in retail health clinics and transparent and traditional EnvisionRxOptions and MedTrak pharmacy benefit managers, which we refer to as PBMs. Rite Aid also offers fully integrated mail-order and specialty pharmacy services through EnvisionPharmacies. Additionally through Envision Insurance Company, EnvisionRxOptions also serves one of the fastest-growing demographics in healthcare: seniors enrolled in Medicare Part D. When combined with Rite Aid’s retail platform, this comprehensive suite of services allows Rite Aid to provide value and choice to customers, patients and payors and allows it to succeed in today’s evolving healthcare marketplace. Rite Aid is headquartered in Camp Hill, Pennsylvania.

Rite Aid common stock is listed on the NYSE under the symbol “RAD.”

Albertsons Companies, Inc.

250 Parkcenter Blvd.

Boise, Idaho 83706

(208) 395-6200

Albertsons Companies, Inc., a Delaware corporation, which we refer to as ACI, was formed in 2015 in connection with the planned reorganizational transactions of AB Acquisition. For more information on the ACI Reorganization Transactions, see the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations of ACI—The ACI Reorganization Transactions” beginning on page 212 of this proxy statement/prospectus.

ACI is one of the largest food and drug retailers in the United States, with both a strong local presence and national scale. As of February 24, 2018, ACI operated 2,318 stores across 35 states and



 

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the District of Columbia under 20 well-known banners including Albertsons, Safeway, Vons, Jewel-Osco, Shaw’s, Acme, Tom Thumb, Randalls, United Supermarkets, Pavilions, Star Market, Haggen and Carrs, as well as meal kit company Plated (as defined herein) based in New York City. ACI operated 1,777 pharmacies, 1,275 in-store branded coffee shops and 397 adjacent fuel centers. Over the past five years, ACI has completed a series of acquisitions, beginning in March 2013 with its acquisition of New Albertson’s, Inc., which we refer to as NAI (now known as New Albertsons L.P., which we refer to as NALP) from SUPERVALU INC., which we refer to as SuperValu, which included the Albertsons stores that ACI did not already own and stores operating under the Acme, Jewel-Osco, Shaw’s and Star Market banners. In December 2013, ACI acquired United Supermarkets, LLC, which we refer to as United, a regional grocery chain in North and West Texas. In January 2015, ACI acquired Safeway Inc., which we refer to as Safeway, which at the time of the acquisition was the second-largest publicly traded food retailer in the United States, in a transaction that significantly increased ACI’s scale and geographic reach. For the fiscal year ended February 24, 2018, ACI achieved annual run-rate synergies related to the acquisition of Safeway of approximately $750 million. ACI also completed the acquisition of 73 stores from The Great Atlantic & Pacific Tea Company, Inc., which we refer to as A&P, for ACI’s Acme banner and 35 stores from Haggen Holdings, LLC, which we refer to as Haggen, during the fiscal year ended February 27, 2016, and ACI acquired an additional 29 stores from Haggen during the fiscal year ended February 25, 2017, 15 of which operate under the Haggen banner.

Ranch Acquisition Corp.

c/o Albertsons Companies, Inc.

250 Parkcenter Blvd.

Boise, Idaho 83706

(208) 395-6200

Ranch Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of Merger Sub II (as defined herein), was formed solely for the purpose of facilitating the merger and the other transactions contemplated by the merger agreement. We refer to Ranch Acquisition Corp. as Merger Sub I. Merger Sub I has not carried on any activities or operations to date, except for those activities incidental to its formation and undertaken in connection with the transactions contemplated by the merger agreement. Pursuant to the merger agreement, at the closing of the merger, Merger Sub I will be merged with and into Rite Aid, with Rite Aid surviving the merger as a wholly-owned subsidiary of ACI.

Ranch Acquisition II LLC

c/o Albertsons Companies, Inc.

250 Parkcenter Blvd.

Boise, Idaho 83706

(208) 395-6200

Ranch Acquisition II LLC, a Delaware limited liability company and a wholly-owned subsidiary of ACI, was formed solely for the purpose of facilitating the merger and the other transactions contemplated by the merger agreement. We refer to Ranch Acquisition II LLC as Merger Sub II. Merger Sub II has not carried on any activities or operations to date, except for those activities incidental to its formation and undertaken in connection with the transactions contemplated by the merger agreement. Pursuant to the merger agreement, immediately after the merger, Rite Aid, as the corporation surviving the merger, will be merged with and into Merger Sub II, with Merger Sub II surviving the subsequent merger as a wholly-owned subsidiary of ACI and a limited liability company.



 

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The Merger and the Merger Agreement (Page 94 and Page 149)

The terms and conditions of the merger are contained in the merger agreement, a copy of which is attached as Annex A to this proxy statement/prospectus. We encourage you to read the merger agreement carefully and in its entirety, as it is the legal document that governs the merger.

The proposed transaction is a series of two mergers whereby Rite Aid will become a subsidiary of ACI pursuant to the merger agreement. If the merger proposal is approved by the requisite number of holders of Rite Aid common stock and the other closing conditions under the merger agreement have been satisfied or waived, Merger Sub I will merge with and into Rite Aid, with Rite Aid surviving the merger as a wholly-owned direct subsidiary of Merger Sub II, and, immediately following the merger, Rite Aid will merge with and into Merger Sub II, with Merger Sub II surviving the subsequent merger as a wholly-owned direct subsidiary of ACI and a limited liability company. As a result of the mergers, Rite Aid will become a wholly-owned direct subsidiary of ACI.

Following the merger, ACI common stock will be listed on the NYSE under the ticker symbol “ACI,” Rite Aid common stock will be delisted from the NYSE, deregistered under the Exchange Act and will cease to be publicly traded.

Merger Consideration (Page 94)

At the effective time of the merger, each share of Rite Aid common stock issued and outstanding immediately prior to the effective time of the merger (other than shares of Rite Aid common stock owned, directly or indirectly, by ACI, Merger Sub I or Rite Aid (including shares of Rite Aid common stock held as treasury stock by Rite Aid), and in each case not held on behalf of third parties, immediately prior to the effective time of the merger) will be converted into the right to receive and become exchangeable for 0.1000, which we refer to as the base exchange ratio, of a fully paid and nonassessable share of ACI common stock, without interest, which we refer to as the base consideration, plus, at the election of the holder of Rite Aid common stock, either:

 

    for each share of Rite Aid common stock with respect to which an election to receive cash has been effectively made and not revoked or redeemed, and for each share of Rite Aid common stock with respect to which a Rite Aid stockholder has not made an election to receive cash or stock, an amount in cash equal to $0.1832 per share, without interest, which we refer to as the additional cash consideration (and which, together with the base consideration, we refer to as the cash election consideration); provided, that to the extent the aggregate additional cash consideration to be paid to any holder of shares of Rite Aid common stock for all such holder’s shares of Rite Aid common stock held in a single account would result in such stockholder being entitled to a fraction of a cent in cash with respect to the shares of Rite Aid common stock held in such account, such aggregate amount will be rounded down to the nearest whole cent; or

 

    for each share of Rite Aid common stock with respect to which an election to receive additional ACI common stock has been effectively made and not revoked, 0.0079, which we refer to as the additional stock election exchange ratio (and which, together with the base exchange ratio, we refer to as the stock election exchange ratio), of a fully paid and nonassessable share of ACI common stock, without interest, which we refer to as the additional stock consideration (and which, together with the base consideration, we refer to as the stock election consideration).

For the avoidance of doubt, the cash election consideration consists of both the base consideration, which consists of ACI common stock, and the additional cash consideration, which



 

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consists of cash. No fractional shares of ACI common stock will be issued in the merger, and in lieu thereof, holders of Rite Aid common stock who would otherwise have been entitled to a fraction of a share of ACI common stock will be paid upon surrender of shares of Rite Aid common stock (and after taking into account and aggregating the total number of shares of ACI common stock to be issued in exchange for the shares of Rite Aid common stock represented by all certificates, or book-entry shares, as applicable, surrendered by such holder and the shares of ACI common stock received by such holder as a result of both the base exchange ratio and the additional stock election exchange ratio) cash in an amount, without interest and rounded to the nearest cent, representing such holder’s proportionate interest in the net proceeds from the sale by the exchange agent, on behalf of all such holders, of all fractional shares of ACI common stock which would otherwise be issued.

Ownership of the Combined Company (Page 95)

Assuming all Rite Aid stockholders elect to receive the additional cash consideration, approximately 28.0% of the outstanding ACI common stock will be held by stockholders that were holders of Rite Aid common stock immediately prior to the effectiveness of the merger and approximately 72.0% of the ACI common stock will be held by stockholders that were holders of ACI common stock immediately prior to the effectiveness of the merger. Assuming all Rite Aid stockholders elect to receive the stock election exchange ratio, approximately 29.6% of the outstanding ACI common stock will be held by stockholders that were holders of Rite Aid common stock immediately prior to the effectiveness of the merger and approximately 70.4% of the ACI common stock will be held by stockholders that were holders of ACI common stock immediately prior to the effectiveness of the merger.

Governance of ACI Following the Merger (Page 144)

Headquarters

ACI and Rite Aid have agreed that ACI will have co-corporate headquarters, one in Boise, Idaho, and one in the Harrisburg, Pennsylvania metropolitan area.

Board of Directors

Upon the closing of the merger, the board of directors of the combined company will be comprised of nine (9) members. As of the date of this proxy statement/prospectus, Rite Aid and ACI have identified all nine (9) members of the combined company’s board of directors:

 

    ACI has identified its four (4) designees: Robert G. Miller, who was selected to be Chairman, Lenard B. Tessler, who was selected to be Lead Director, Allen M. Gibson and B. Kevin Turner;

 

    Rite Aid has identified its four (4) designees: John T. Standley, David R. Jessick, Michael N. Regan and Marcy Syms; and

 

    ACI and Rite Aid have identified Sharon L. Allen as the joint designee.

ACI first proposed that Allen M. Gibson or another identified person be jointly designated to the ninth director seat. Rite Aid requested that a different independent candidate be considered who, among other criteria and unlike the first two proposed persons, did not have any affiliation with or investment in Cerberus. ACI then proposed Sharon L. Allen to be jointly designated to the ninth director seat. Ms. Allen was asked to join the board of a predecessor company to ACI as an independent director when ACI was considering its proposed initial public offering in 2015, and has



 

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been on the board since June 2015. Ms. Allen had been the former Executive Chairman of Deloitte LLP from 2003 until her retirement in 2011, and currently is a director and Chair of the Audit Committee of each of Bank of America Corporation and First Solar Inc. Ms. Allen also served as the past Chairman of the National Board of the YMCA from 2012 to 2014 and she appeared on the Forbes list of “The 100 Most Powerful Women in the World” for four consecutive years from 2006 to 2009 and Directorships’ “100 Most Influential People in Corporate Governance” for four consecutive years from 2007 to 2010. Other than her service on the ACI board and its predecessor, Ms. Allen has no relationships with ACI, its current shareholders including Cerberus or Rite Aid, or their respective officers and directors. After carefully reviewing her qualifications, including through an interview of Ms. Allen conducted by Rite Aid’s lead independent director and all members of its nominating and governance committee, the Rite Aid board of directors unanimously approved the designation of Ms. Allen to the ACI board upon consummation of the merger.

After the effective time, and until such time as Cerberus ceases to beneficially own at least ten percent (10%) of the outstanding ACI common stock, the merger agreement requires the ACI board of directors to take all necessary action to nominate and cause two nominees designated by Cerberus to be elected to the ACI board of directors. From and after such time as Cerberus ceases to beneficially own at least ten percent (10%) of the outstanding ACI common stock, but beneficially owns at least five percent (5%) of the outstanding ACI common stock, the merger agreement requires the ACI board of directors to take all necessary action to nominate and cause one nominee designated by Cerberus to be elected to the ACI board of directors. Until such time as Cerberus ceases to beneficially own at least fifteen percent (15%) of the outstanding ACI common stock, the merger agreement requires the ACI board of directors to take all necessary action to nominate and cause directors designated by Cerberus to be elected Chairman and Lead Director, provided that, if Robert G. Miller has ceased to serve as Chairman, either the Chairman or the Lead Director will qualify as “independent” under the rules of the NYSE and will not be a partner or employee of Cerberus, its affiliates or any of the ACI Institutional Investors. Until such time as Cerberus ceases to beneficially own at least ten percent (10%) of the outstanding ACI common stock, the merger agreement requires the ACI board of directors to take all necessary action to nominate and cause a director designated by Cerberus to be elected Lead Director. Other than as described above, there are no agreements between Rite Aid and ACI regarding, and no decisions have been made with respect to, the selection of directors of ACI following the merger.

Management

ACI and Rite Aid expect that following the merger John T. Standley, the current Chairman and Chief Executive Officer of Rite Aid, will serve as Chief Executive Officer of ACI, although no agreement has been negotiated as of the date of this proxy statement/prospectus with respect to the terms of Mr. Standley’s expected employment. There can be no assurances that any such agreement with respect to Mr. Standley’s employment with ACI will be reached. Mr. Robert G. Miller, the current Chief Executive Officer of ACI, is expected to be the Chairman of the combined company following the merger. In addition to Mr. Standley, the leadership team is expected to include ACI’s recently appointed President and Chief Operating Officer, Jim Donald, who previously served as Chief Executive Officer of Starbucks Corporation and as a senior executive at several food and drug retailers, including Wal Mart Stores, Inc., Albertson’s, Inc. and Safeway Inc., and Rite Aid’s current President and Chief Operating Officer, Kermit Crawford, who has significant experience in the drug retail and healthcare industries, including serving as a senior executive at Walgreens Boots Alliance, Inc.

The rest of the combined company’s executive team will be identified in due course prior to the closing of the merger.



 

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Recommendation of the Rite Aid Board of Directors; Rite Aid’s Reasons for the Merger (Page 122)

The Rite Aid board of directors, after considering various factors described herein, unanimously determined that the merger agreement and the transactions contemplated by the merger agreement, including the mergers, are advisable, fair to and in the best interests of Rite Aid and its stockholders, and adopted, approved and declared advisable the merger agreement and the transactions contemplated by the merger agreement.

The Rite Aid board of directors unanimously recommends that you vote (i) “FOR” the proposal to approve the merger agreement and the transactions contemplated by the merger agreement, including the mergers, (ii) “FOR” the proposal to approve, by a non-binding, advisory vote, compensation that will or may become payable by Rite Aid to its named executive officers in connection with the merger and (iii) “FOR” the proposal to approve one or more adjournments of the special meeting to a later date or dates, if necessary or appropriate, to solicit additional proxies if there are insufficient votes to adopt the merger agreement at the time of the special meeting.

For more information on Rite Aid’s reasons for the merger and the recommendation of the Rite Aid board of directors, see the section entitled “The Merger—Recommendation of the Rite Aid Board of Directors; Rite Aid’s Reasons for the Merger” beginning on page 122 of this proxy statement/prospectus.

Opinion of Rite Aid’s Financial Advisor (Page 129)

In connection with the proposed mergers, Rite Aid’s financial advisor, Citigroup Global Markets Inc., which we refer to as Citi, delivered a written opinion, dated February 17, 2018, to the Rite Aid board of directors as to the fairness, from a financial point of view and as of the date of the opinion, of (i) the base exchange ratio plus the additional cash consideration or (ii) the stock election exchange ratio, as applicable, provided for in the merger agreement. The full text of Citi’s written opinion, dated February 17, 2018, to the Rite Aid board of directors, which describes the assumptions made, procedures followed, matters considered and limitations and qualifications on the review undertaken, is attached as Annex B to this proxy statement/prospectus and is incorporated herein by reference. The description of Citi’s opinion set forth below is qualified in its entirety by reference to the full text of Citi’s opinion. Citi’s opinion was provided for the information of the Rite Aid board of directors (in its capacity as such) in connection with its evaluation of (i) the base exchange ratio plus the additional cash consideration or (ii) the stock election exchange ratio, as applicable, from a financial point of view and did not address any other terms, aspects or implications of the mergers. Citi expressed no view as to, and its opinion did not address, the underlying business decision of Rite Aid to effect or enter into the mergers, the relative merits of the mergers as compared to any alternative business strategies that might exist for Rite Aid or the effect of any other transaction which Rite Aid might engage in or consider. Citi’s opinion is not intended to be and does not constitute a recommendation to any securityholder as to any election made by such securityholder or how such securityholder should vote or act on any matters relating to the proposed mergers or otherwise.



 

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Information About the Special Meeting (Page 86)

Date, Time and Place

The special meeting of Rite Aid stockholders will be held on August 9, 2018 at the office of Skadden, Arps, Slate, Meagher & Flom LLP, 4 Times Square, New York, NY 10036, at 8:30 a.m., Eastern time.

Purpose

At the special meeting, Rite Aid will ask Rite Aid stockholders of record as of the close of business on June 22, 2018, which we refer to as the record date, to vote on proposals (i) to approve the merger agreement and the transactions contemplated by the merger agreement, including the mergers, (ii) to approve, by a non-binding, advisory vote, compensation that will or may become payable by Rite Aid to its named executive officers in connection with the merger, and (iii) to approve one or more adjournments of the special meeting to a later date or dates, if necessary or appropriate, to solicit additional proxies if there are insufficient votes to adopt the merger agreement at the time of the special meeting.

Record Date; Shares Entitled to Vote

You are entitled to vote at the special meeting if you owned shares of Rite Aid common stock on the record date. You will have one vote at the special meeting for each share of Rite Aid common stock you owned at the close of business on the record date.

Quorum

As of the record date, there were approximately 1,067,312,183 shares of Rite Aid common stock outstanding and entitled to be voted at the special meeting. A quorum of stockholders is necessary to hold a special meeting. The holders of a majority of the outstanding shares of Rite Aid common stock entitled to vote at the special meeting, either present in person or represented by proxy, will constitute a quorum at the special meeting. As a result, 533,656,092 shares must be represented by proxy or by stockholders present and entitled to vote at the special meeting to have a quorum.

Required Vote

The affirmative vote of the holders of a majority of the outstanding shares of Rite Aid common stock entitled to vote thereon is required to approve the merger proposal. Assuming a quorum is present, approval of the compensation proposal requires the affirmative vote of a majority of the shares of Rite Aid common stock represented at the special meeting, either in person or by proxy, and entitled to vote thereon. Approval of the adjournment proposal, whether or not a quorum is present, requires the affirmative vote of a majority of the shares of Rite Aid common stock represented at the special meeting, either in person or by proxy, and entitled to vote thereon.

Share Ownership of Rite Aid Directors and Executive Officers

At the close of business on June 22, 2018, the record date, Rite Aid directors and executive officers beneficially owned and were entitled to vote, in the aggregate, 8,474,826 shares of Rite Aid common stock (excluding any shares of Rite Aid common stock that would be delivered upon exercise or conversion of stock options or other equity-based awards), which represented approximately 0.79% of the outstanding shares of Rite Aid common stock on that date. Rite Aid’s directors and executive



 

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officers have informed Rite Aid that they currently intend to vote all of their shares of Rite Aid common stock (i) “FOR” the proposal to approve the merger agreement and the transactions contemplated by the merger agreement, including the mergers, (ii) “FOR” the proposal to approve, by a non-binding, advisory vote, compensation that will or may become payable by Rite Aid to its named executive officers in connection with the merger and (iii) “FOR” the proposal to approve one or more adjournments or postponements of the special meeting, if necessary or appropriate, to solicit additional proxies if there are not sufficient votes in favor of approval of the merger agreement.

Voting of Proxies

Any Rite Aid stockholder of record entitled to vote at the special meeting may submit a proxy by returning a signed proxy card by mail or voting electronically over the Internet or by telephone, or may vote in person by appearing at the special meeting. If you are a beneficial owner and hold your shares of Rite Aid common stock in “street name” through a broker, bank or other nominee, you should instruct your broker, bank or other nominee on how you wish to vote your shares of Rite Aid common stock using the instructions provided by your broker, bank or other nominee. Under applicable stock exchange rules, if you fail to instruct your broker, bank or other nominee on how to vote your shares, your broker, bank or other nominee only has discretion to vote your shares on routine matters. Proposals 1, 2 and 3 in this proxy statement/prospectus are non-routine matters, and brokers, banks and other nominees therefore cannot vote on these proposals without your instructions. Therefore, it is important that you cast your vote or instruct your broker, bank or other nominee on how you wish to vote your shares.

If you are a stockholder of record, you may change your vote or revoke your proxy at any time before it is voted at the special meeting by submitting a new proxy electronically over the Internet or by telephone after the date of the earlier submitted proxy, signing another proxy card with a later date and returning it to Rite Aid prior to the special meeting or attending the special meeting and voting in person. If you hold your shares of common stock in “street name,” you should contact your broker, bank or other nominee for instructions regarding how to change your vote; or contact Rite Aid’s proxy solicitor, Morrow Sodali LLC at (800) 662-5200.

Treatment of Equity and Equity-Based Awards (Page 152)

The merger agreement provides that Rite Aid’s equity awards that are outstanding immediately prior to the effective time of the merger will be subject to the following treatment at the effective time of the merger:

Options.    Each Rite Aid stock option will be assumed by ACI and converted into an ACI stock option, on the same terms and conditions as were applicable immediately prior to the completion of the merger, to acquire a number of shares of ACI common stock equal to the product of (x) the number of shares of Rite Aid common stock subject to such Rite Aid stock option immediately prior to the effective time and (y) the base exchange ratio, with any fractional shares rounded down to the next lower whole number of shares after aggregating each individual holder’s Rite Aid stock options with the same exercise price. The exercise price of each such ACI stock option will be equitably adjusted to be equal to the quotient of (x) the excess of (i) the exercise price per share of Rite Aid common stock subject to such option over (ii) the additional cash consideration and (y) the base exchange ratio (which results will be rounded up to the nearest whole cent).

Rollover RSUs.     Each Rollover RSU will be assumed by ACI and converted into an ACI RSU, on the same terms and conditions as were applicable immediately prior to the completion of the



 

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merger, relating to a number of shares of ACI common stock equal to the product of (x) the number of Rollover RSUs held by the holder thereof immediately prior to the effective time, assuming achievement of any applicable performance metrics at the target level of achievement, and (y) the stock election exchange ratio, with any fractional shares rounded to the nearest whole number of shares.

Rollover RSAs.    Each Rollover RSA will be assumed by ACI and converted into an ACI RSA, on the same terms and conditions as were applicable immediately prior to the completion of the merger, relating to the number of shares of ACI common stock equal to the product of (x) the number of shares of Rite Aid common stock subject to such Rollover RSA immediately prior to the effective time and (y) the base exchange ratio, with any fractional shares rounded to the nearest whole number of shares, plus a number of shares of ACI common stock or an amount in cash equal to the product of (i) the number of shares of Rite Aid common stock subject to such Rollover RSA immediately prior to the effective time and (ii) the additional stock consideration or the additional cash consideration, as elected by the holder and settled or paid to the holder shortly following the completion of the merger.

Former Service Provider RSAs.    Each Former Service Provider RSA will vest and the holder will be entitled to receive a number of shares of ACI common stock equal to the product of (x) the number of shares of Rite Aid common stock subject to such Former Service Provider RSA immediately prior to the effective time, assuming achievement of any applicable performance metrics at the target level of achievement and (y) the base exchange ratio, with any fractional shares rounded to the nearest whole number of shares, plus a number of shares of ACI common stock or an amount in cash equal to the product of (i) the number of shares of Rite Aid common stock subject to such Former Service Provider RSA immediately prior to the effective time, assuming achievement of any applicable performance metrics at the target level of achievement and (ii) the additional stock consideration or the additional cash consideration, as elected by the holder.

Former Service Provider RSUs.    Each Former Service Provider RSU will vest and the holder will be entitled to receive a number of shares of ACI common stock equal to the product of (x) the number of shares of Rite Aid common stock subject to such Former Service Provider RSU immediately prior to the effective time, assuming achievement of any applicable performance metrics at the target level of performance and (y) the base exchange ratio, with any fractional shares rounded to the nearest whole number of shares, plus a number of shares of ACI common stock or an amount in cash equal to the product of (i) the number of shares of Rite Aid common stock subject to such Former Service Provider RSU immediately prior to the effective time, assuming achievement of any applicable performance metrics at the target level of achievement and (ii) the additional stock consideration or the additional cash consideration, as elected by the holder. To the extent that any Former Service Provider RSU by its terms provides for settlement in cash, the holder instead will be entitled to receive the cash value of the number of whole shares of ACI common stock equal to the product of (x) the number of shares of Rite Aid common stock subject to such Former Service Provider RSU immediately prior to the effective time, assuming achievement of any applicable performance metrics at the target level of achievement and (y) the base exchange ratio, with any fractional shares rounded to the nearest whole number of shares, plus an amount in cash equal to the product of (i) the number of shares of Rite Aid common stock subject to such Former Service Provider RSU immediately prior to the effective time, assuming achievement of any applicable performance metrics at the target level of achievement and (ii) the additional cash consideration.



 

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Interests of the Directors and Officers of Rite Aid in the Merger (Page 296)

Rite Aid stockholders should be aware that the directors and executive officers of Rite Aid may have certain interests in the merger that are different from, and in addition to, the interests of Rite Aid stockholders generally. The Rite Aid board of directors was aware of and considered these interests to the extent that such interests existed at the time, among other matters, in evaluating and overseeing the negotiation of the merger agreement, in approving the merger agreement and the transactions contemplated thereby and recommending that Rite Aid stockholders vote in favor of the merger proposal. These interests may include, among others:

 

    Continued indemnification and directors’ and officers’ liability insurance to be provided by the combined company.

 

    The treatment of outstanding equity awards described above in the section entitled “—Treatment of Equity and Equity-Based Awards” beginning on page 296 of this proxy statement/prospectus.

 

    Mr. Standley is expected to serve as Chief Executive Officer of the combined company following the merger.

 

    The entitlement of a Rite Aid executive officer to receive severance benefits under his or her employment agreement if (i) the officer is terminated other than for cause or (ii) the officer resigns with good reason (as such terms are defined in the employment agreements), which we refer to as a qualifying termination, as follows:

 

    Cash Severance.    Cash severance equal to two times the executive’s annual base salary and target annual bonus for each of Messrs. Standley, Karst, Crawford, Everett and Schroeder, and cash severance equal to two times the executive’s annual base salary for each other executive officer (including Ms. Konrad).

 

    Pro Rata Bonus.    A pro rata target annual bonus to the extent that such targets have been achieved or exceeded for the fiscal year (based on the number of days in the fiscal year prior to termination).

 

    Health Benefit Continuation.    Two (2) years of continued coverage under the combined company’s health and medical plans for the executive and his or her covered dependents.

 

    Accelerated Vesting of Certain Outstanding Equity Awards.

 

    The employment agreement with Mr. Standley provides for the accelerated vesting of then-outstanding unvested Rite Aid options upon the occurrence of a change in control. The merger is expected to constitute a change in control for the purposes of Mr. Standley’s employment agreement. As of the date of this proxy statement/prospectus, the exercise price of the options held by Mr. Standley that would vest exceeds the per share merger consideration assumed for purposes of this proxy statement/prospectus as further described in the section entitled “Interests of the Directors and Officers of Rite Aid in the Merger—Accelerated Vesting of Equity and Equity-Based Awards Upon Certain Terminations—Acceleration of Equity and Equity-Based Awards Upon Termination” beginning on page 298 of this proxy statement/prospectus. Mr. Standley’s employment agreement further provides that, upon a qualifying termination, all outstanding restrictions with respect to any Rite Aid restricted stock awards will lapse to the extent the restrictions would have lapsed had Mr. Standley remained employed by Rite Aid for a period of three (3) years following the date of such termination.

 

   

The employment agreements with each of the other executive officers (including other named executive officers) provides that, upon a qualifying termination, all outstanding Rite



 

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Aid stock options will immediately vest and become exercisable and, other than with respect to one executive officer, all restrictions with respect to any Rite Aid restricted stock awards will lapse, in each case, to the extent the restrictions would have lapsed had the executives remained employed by Rite Aid for a period of two (2) years following the date of such termination. As of the date of this proxy statement/prospectus, the exercise price of the options that would vest which are held by Rite Aid’s executive officers other than Mr. Crawford exceeds the per share merger consideration assumed for purposes of this proxy statement/prospectus as further described in the section entitled “Interests of the Directors and Officers of Rite Aid in the Merger—Accelerated Vesting of Equity and Equity-Based Awards Upon Certain Terminations—Acceleration of Equity and Equity-Based Awards Upon Termination” beginning on page 298 of this proxy statement/prospectus.

 

    The entitlement of a Rite Aid executive officer to accelerated vesting of the unvested portion of his or her individual account balance under Rite Aid’s supplemental executive retirement plan upon a termination without cause within twelve (12) months of the completion of the merger.

 

    The entitlement of a Rite Aid executive officer to accelerated vesting of his or her retention awards upon a qualifying termination.

If the proposal to adopt the merger agreement is approved by the Rite Aid stockholders and the merger closes, under the terms of the merger agreement, any shares of Rite Aid common stock held by Rite Aid’s directors and executive officers, including such shares held following the vesting or settlement of equity and equity-based awards, will be treated in the same manner as outstanding shares of common stock held by all other stockholders of Rite Aid entitled to receive the merger consideration described above in the section entitled “—Merger Consideration” beginning on page 16 of this proxy statement/prospectus.

Regulatory Approvals (Page 146)

General

Rite Aid and ACI have agreed to use their reasonable best efforts to take, and to assist and cooperate with each other in taking, all actions and to use their reasonable best efforts to do all things reasonably necessary, proper or advisable, to consummate the merger and the other transactions contemplated by the merger agreement, subject to certain specified limitations under the merger agreement. These approvals include approval under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, which we refer to as the HSR Act. Although Rite Aid and ACI expect that all required regulatory clearances and approvals will be obtained, Rite Aid and ACI cannot assure you that these regulatory clearances and approvals will be timely obtained or obtained at all, or that the granting of these regulatory clearances and approvals will not involve the imposition of additional conditions on the completion of the merger, including the requirement to divest assets, or require changes to the terms of the merger agreement. These conditions or changes could result in the conditions to the closing of the merger not being satisfied.

HSR Act and U.S. Antitrust Matters

Under the merger agreement, the merger cannot be completed until the applicable waiting periods under the HSR Act (and any extension thereof) have expired or been terminated. Rite Aid and ACI filed their respective HSR Act notifications on February 26, 2018. The required 30-day waiting period under the HSR Act expired at 11:59 p.m. Eastern time on March 28, 2018.



 

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Other Regulatory Approvals

Approval (or non-objection, grant of exemption or, in certain circumstances, alternative resolution, as the case may be) will be sought from (i) the state insurance regulator in the State of Ohio for the change of control of Envision Insurance Company, (ii) the Board of Pharmacy of the State of California with respect to the transfer of certain licenses, (iii) the Insurance Department of the State of Texas with respect to the change of control of Rite Aid’s subsidiaries licensed as third-party administrators in Texas, (iv) the state insurance regulator in the State of Utah with respect to the change of ownership of Rite Aid’s subsidiary licensed as a health discount program operator, and (v) the Boards of Pharmacy of the States of California, Georgia, Virginia, North Carolina and Maine and the California Department of Managed Care with respect to the application for certain licenses. To obtain these approvals, ACI and its applicable stockholders, or the applicable Rite Aid subsidiary, as the case may be, has filed or will file, acquisition of control or similar statements, notices or applications (or requests for grants of exemption relating thereto), as required by the insurance and health care laws and regulations of each applicable state or jurisdiction. The approval of a “Form A” application with the Ohio Department of Insurance for ACI and its applicable stockholder(s) (which was filed on April 24, 2018) is a condition to the completion of the merger. In addition, either prior to or following the completion of the merger, ACI or Rite Aid will be required to make change of control notification filings with various federal, state and local regulators pursuant to applicable insurance, pharmacy, health care, money transmitter, check cashing, liquor, tobacco, lottery/gaming, food stamp, seed/nursery agriculture, dairy, weights/measures and other laws and regulations (none of which notification filings are conditions to the completion of the merger).

No Appraisal Rights (Page 345)

Rite Aid stockholders will not have appraisal rights under the DGCL with respect to the merger because holders of shares of Rite Aid common stock are not required to receive consideration other than shares of ACI common stock (and cash in lieu of fractional shares, if any) in the merger and shares of ACI common stock will be listed on the NYSE immediately following the merger. The election to receive cash consideration is voluntary and dependent upon Rite Aid stockholders’ election (other than cash in lieu of fractional shares, if any).

Listing of ACI Common Stock on the NYSE (Page 147)

At this time, there is no established public trading market for ACI common stock. ACI common stock is not currently traded or quoted on a stock exchange or quotation system. At the closing of the merger, ACI will become a publicly traded company and the ACI common stock is expected to be listed on the NYSE under the symbol “ACI.”

Conditions to Completion of the Mergers (Page 176)

The obligations of ACI, Merger Sub I, Merger Sub II and Rite Aid to effect the merger are subject to the satisfaction or waiver by each of the parties to the merger agreement of the following conditions at or prior to the effective time:

 

    Approval of the merger agreement by holders of a majority of the outstanding shares of Rite Aid common stock entitled to vote on the merger;

 

    Expiration or earlier termination of the waiting period under the HSR Act (which condition was satisfied on March 28, 2018);


 

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    The absence of any law or order prohibiting the merger;

 

    Receipt by each of Rite Aid and ACI of the opinion of its respective counsel to the effect that the mergers, taken together, will be treated as a “reorganization” within the meaning of Section 368(a) of the Code;

 

    Approval for listing on the NYSE of the shares of ACI common stock to be issued in the merger and to be reserved for issuance in connection with the merger (which approval was obtained on June 21, 2018);

 

    Approval by the Ohio Department of Insurance (which “Form A” application was filed with the Ohio Department of Insurance on April 24, 2018);

 

    Effectiveness of the registration statement on Form S-4 of which this proxy statement/prospectus forms a part;

 

    Receipt by Rite Aid of no less than $4.076 billion of gross proceeds under the WBA asset purchase agreement (which condition was satisfied on March 13, 2018);

 

    Distribution by Albertsons Investor of all shares of ACI common stock owned by it to its respective equityholders;

 

    Delivery by ACI to Rite Aid of lock-up agreements, no action agreements and the standstill agreement, in each case, in the form agreed to by the parties to the merger agreement; and

 

    Absence of a material adverse effect on Rite Aid and ACI, in each case, as defined in the merger agreement.

For a more complete summary of the conditions that must be satisfied or waived prior to completion of the merger, see the section entitled “The Merger Agreement—Conditions to Completion of the Mergers” beginning on page 176 of this proxy statement/prospectus.

No Solicitation or Negotiation of Acquisition Proposals (Page 164)

As of the date of the merger agreement, Rite Aid agreed to immediately cease all activities, discussions or negotiations with any parties that may have been ongoing prior to the date of the merger agreement with respect to an acquisition proposal (as described below), to request that such parties promptly return or destroy all confidential information relating to Rite Aid or its subsidiaries previously furnished to such persons prior to the date of the merger agreement in connection with the consideration of alternative proposals and to immediately terminate access to data rooms previously granted to such parties.

Under the merger agreement, Rite Aid is generally not permitted to solicit or discuss acquisition proposals with third parties, subject to certain exceptions. Except as otherwise provided in the merger agreement, Rite Aid may not, and has agreed to cause its subsidiaries and its and its subsidiaries’ directors, officers and employees not to, and has agreed to use its reasonable best efforts to cause its and its subsidiaries’ representatives not to, directly or indirectly:

 

    initiate, solicit, knowingly encourage, knowingly induce or knowingly facilitate (including by providing nonpublic information relating to Rite Aid or its subsidiaries) the making of any acquisition proposal or any inquiry, offer or proposal that would reasonably be expected to lead to an acquisition proposal;

 

   

engage or otherwise participate in any negotiations or discussions concerning, or provide access to its properties, books and records or any confidential or nonpublic information or data



 

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to, any person in connection with, relating to or for the purpose of encouraging or facilitating, an acquisition proposal or any inquiry, offer or proposal that would reasonably be expected to lead to an acquisition proposal (other than as described below);

 

    approve, endorse or recommend, or propose publicly to approve, endorse or recommend, any acquisition proposal, which we refer to as an alternative acquisition agreement; or

 

    execute or enter into any letter of intent, agreement in principle, merger agreement, acquisition agreement or other similar written or oral agreement relating to any acquisition proposal.

For more information, see the section entitled “The Merger Agreement—Additional Agreements—No Solicitation” beginning on page 164 of this proxy statement/prospectus.

Alternative Proposals

Notwithstanding the restrictions described above, prior to, but not after, obtaining the stockholder approval of the proposal to adopt the merger agreement, Rite Aid is permitted to, in response to the receipt of a bona fide acquisition proposal made after the date of the merger agreement in circumstances not otherwise involving a breach of the merger agreement by Rite Aid and if the Rite Aid board of directors determines in good faith, after consultation with Rite Aid’s outside legal counsel and financial advisor, that such acquisition proposal constitutes or could reasonably be expected to lead to a superior proposal:

 

    furnish information with respect to Rite Aid to the party making such acquisition proposal pursuant to a confidentiality agreement, which we refer to as an acceptable confidentiality agreement, that contains terms (including standstill restrictions; provided that such standstill restrictions need not restrict a person from making an offer or proposal to Rite Aid (including the Rite Aid board of directors) in respect of an acquisition proposal) substantially no less restrictive to Rite Aid’s counterparty than those contained in the confidentiality agreement entered into by Rite Aid and ACI, dated September 18, 2017, which we refer to as the confidentiality agreement; and

 

    engage in discussions or negotiations with such party regarding such acquisition proposal.

In addition, following the receipt of an acquisition proposal made after the date of the merger agreement in circumstances not otherwise involving a breach of the merger agreement by Rite Aid, Rite Aid may contact the person who had made such acquisition proposal solely for the purpose of clarifying the material terms of any such proposal and the likelihood and timing of consummation thereof. For more information, see the section entitled “The Merger Agreement—Additional Agreements—No Solicitation” beginning on page 164 of this proxy statement/prospectus.

No Change in Recommendation or Alternative Acquisition (Page 166)

The merger agreement provides that prior to, but not after, obtaining the stockholder approval of the proposal to adopt the merger agreement, the Rite Aid board of directors may, in response to a bona fide, unsolicited acquisition proposal that was made after the date of the merger agreement in circumstances not otherwise involving a material violation of the provisions of the merger agreement regarding acquisition proposals by Rite Aid, effect a change of recommendation if:

 

   

The Rite Aid board of directors determines in good faith, after consultation with Rite Aid’s outside legal counsel and financial advisor, that such acquisition proposal constitutes a



 

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superior proposal and determines in good faith, after consultation with Rite Aid’s outside legal counsel, that the failure to effect the change of recommendation would be reasonably likely to be inconsistent with the Rite Aid board of directors’ fiduciary duties under applicable law;

 

    The Rite Aid board of directors provides ACI written notice of its intention to make a change of recommendation, which notice must include the material terms and conditions with respect to the acquisition proposal, including the identity of the party making such acquisition proposal and copies of any written proposals or offers, including proposed agreements;

 

    During the four (4) business days following such written notice, or such shorter period as described in the merger agreement, if requested by ACI, Rite Aid and its representatives negotiate in good faith with ACI and its representatives regarding any adjustments to the terms of the merger agreement proposed by ACI in response to the superior proposal; and

 

    After the four (4) business day period described above (as extended, if applicable, as described in the merger agreement) the Rite Aid board of directors reaffirms in good faith, after consultation with Rite Aid’s outside counsel and financial advisor (and taking into account any adjustment or modification of the terms of the merger agreement to which ACI has proposed), that the acquisition proposal continues to be a superior proposal and (after consultation with Rite Aid’s outside legal counsel) that the failure to effect the change of recommendation would be reasonably likely to be inconsistent with the Rite Aid board of directors’ fiduciary duties under applicable law.

In addition to the foregoing, the Rite Aid board of directors is permitted to effect a change of recommendation based on events, developments, circumstances, changes, effects, conditions or occurrences that were not known by the Rite Aid board of directors (or if known, the consequences of which were not known or reasonably foreseeable) as of the date of the merger agreement, in each case other than involving or relating to an acquisition proposal, if:

 

    The Rite Aid board of directors determines in good faith, after consultation with Rite Aid’s outside legal counsel, that the failure to effect the change of recommendation would be reasonably likely to be inconsistent with the Rite Aid board of directors’ fiduciary duties under applicable law;

 

    The Rite Aid board of directors provides ACI four (4) business days prior written notice of its intention to take such action, which notice must include the basis of the proposed action; and

 

    During the four (4) business days following such written notice, if requested by ACI, Rite Aid and its representatives negotiate in good faith with ACI and its representatives regarding any adjustments to the terms of the merger agreement proposed by ACI so that such event, development, circumstance, change, effect, condition or occurrence would cease to warrant a change of recommendation.

For more information, see the section entitled “The Merger Agreement—Additional Agreements—Change of Recommendation” beginning on page 166 of this proxy statement/prospectus.

Termination of the Merger Agreement (Page 178)

The merger agreement may be terminated and the merger may be abandoned at any time prior to the effective time of the merger:

 

    By the mutual written consent of ACI and Rite Aid;


 

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    by either ACI or Rite Aid:

 

    if any court of competent jurisdiction or other governmental entity has issued a legal restraint that prevents, makes illegal, prohibits, restrains or enjoins the consummation of the mergers and such legal restraint is or will become final and nonappealable, except this termination right will not be available to a party whose breach of the merger agreement was the primary cause of, or primarily resulted in, the issuance of such legal restraint, which we refer to as the Legal Restraint Termination Right;

 

    if the effective time of the merger has not occurred on or before August 18, 2018, which we refer to as the end date, except that this termination right will not be available to a party whose breach of the merger agreement was the primary cause of, or primarily resulted in, the failure of the effective time of the merger to occur on or before the end date; provided that either party may extend the end date to November 18, 2018 if on August 18, 2018 all of the conditions set forth in the merger agreement have been satisfied (or, with respect to the conditions that by their terms must be satisfied at the closing, would have been so satisfied if the closing would have occurred) or remain capable of being satisfied except for certain closing conditions relating to Rite Aid stockholder approval (due to the Rite Aid stockholders meeting not having been held yet), the antitrust consents, the Form S-4 effectiveness and the “Form A” application with the Ohio Department of Insurance, which we refer to as the End Date Termination Right; or

 

    if Rite Aid’s stockholders do not adopt the merger agreement and the transactions contemplated thereby at the stockholders meeting or at any adjournment or postponement of the stockholders meeting at which a vote on the adoption of the merger agreement was taken, which we refer to as the Stockholder Vote Termination Right.

 

    by Rite Aid:

 

    if there has been a breach of any representation, warranty, covenant or agreement by ACI, Merger Sub I or Merger Sub II, or if any such representation or warranty has become inaccurate, such that the closing conditions relating to the accuracy of the representations and warranties of ACI, Merger Sub I and Merger Sub II and performance of the obligations of ACI, Merger Sub I and Merger Sub II would not be satisfied, and such breach or inaccuracy has not been cured within thirty (30) days after the receipt of notice thereof or such breach or inaccuracy is not reasonably capable of being cured within such period; or

 

    prior to obtaining the Rite Aid stockholder approval, if (i) the Rite Aid board of directors has, after complying with its obligations with respect to acquisition proposals, entered into a definitive agreement in connection with a superior proposal concurrently with such termination and (ii) Rite Aid pays to ACI the termination fee under the merger agreement of $65 million; which we refer to as the Rite Aid Alternative Acquisition Termination Right;

 

    by ACI:

 

    if there has been a breach of any representation, warranty, covenant or agreement by Rite Aid, or if any such representation or warranty has become inaccurate, such that the closing conditions relating to the accuracy of the representations and warranties of Rite Aid and performance of the obligations of Rite Aid would not be satisfied, and such breach or inaccuracy has not been cured within thirty (30) days after the receipt of notice thereof or such breach or inaccuracy is not reasonably capable of being cured within such period, which we refer to as the Obligations of Rite Aid Termination Right; or


 

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    if prior to obtaining stockholder approval of the merger agreement and the transactions contemplated thereby, the Rite Aid board of directors effects a change of recommendation, which we refer to as the ACI Change of Recommendation Termination Right.

For more information, see the section entitled “The Merger Agreement—Termination of the Merger Agreement—Termination” beginning on page 178 of this proxy statement/prospectus.

Termination Fees and Expenses (Page 180)

Under the merger agreement, Rite Aid will be required to pay a termination fee of $65 million (less ACI expenses of up to $10 million, to the extent previously paid by Rite Aid) in connection with a termination of the merger agreement under the following circumstances:

 

    in the event the merger agreement is terminated by Rite Aid pursuant to the Rite Aid Alternative Acquisition Termination Right;

 

    in the event the merger agreement is terminated by ACI pursuant to the ACI Change of Recommendation Termination Right (provided that such termination was not the result of a material adverse effect on ACI); or

 

    in the event the merger agreement is terminated by Rite Aid or ACI pursuant to the Stockholder Vote Termination Right or End Date Termination Right or by ACI pursuant to the Obligations of Rite Aid Termination Right, and in either such case prior to such termination, any person has publicly announced an intention to make an acquisition proposal, or an acquisition proposal has otherwise become publicly known, and within twelve (12) months after such termination, (i) Rite Aid or any of its subsidiaries enter into a definitive agreement with respect to such acquisition proposal or (ii) an acquisition proposal is consummated involving Rite Aid or any of its subsidiaries, provided that for the purposes of this bullet, references to twenty percent (20%) in the definition of acquisition proposal are deemed to be references to fifty percent (50%).

Under the merger agreement, ACI will be required to pay a termination fee of $65 million in the event the merger agreement is terminated by ACI or Rite Aid pursuant to (i) the Legal Restraint Termination Right if the applicable legal restraint giving rise to such termination right is issued under or pursuant to any antitrust law or (ii) the End Date Termination Right, in each case of (i) and (ii), if on the termination date the only conditions to closing that have not been satisfied (other than those conditions that by their nature are to be satisfied at the closing which conditions would be capable of being satisfied at the closing if the closing date were on the termination date) are the Legal Restraints Condition (and the applicable legal restraint causing the Legal Restraints Condition not to be satisfied is issued under or pursuant to any antitrust law) and/or the condition that the applicable waiting periods under the HSR Act have expired or been earlier terminated. Notwithstanding the foregoing, ACI will not be required to pay a termination fee of $65 million to Rite Aid if ACI confirms in writing that ACI is willing to agree to the sale, divestiture or disposition of assets of Rite Aid or its subsidiaries in excess of the threshold of $45 million in retail four-wall EBITDA, described in the section entitled “The Merger Agreement—Further Action; Efforts” beginning on page 167 of this proxy statement/prospectus, in order to obtain any required antitrust consents and Rite Aid determines not to agree to such a sale, divestiture or disposition.

If the merger agreement is terminated by either Rite Aid or ACI pursuant to the Stockholder Vote Termination Right, and, prior to the Rite Aid stockholder vote having not been obtained, (i) an acquisition proposal has been publicly announced and (ii) the Rite Aid board of directors has made a change of recommendation or taken no position on such acquisition proposal, then Rite Aid will be



 

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required to reimburse ACI (or its designee) for up to $10 million of the documented out-of-pocket expenses incurred by ACI, Merger Sub I or Merger Sub II in connection with or related to the authorization, preparation, negotiation, execution and performance of the merger agreement and the transactions contemplated by the merger agreement. The amount of any termination fee payable by Rite Aid to ACI would be reduced by any such expense reimbursement amount paid.

For more information, see the sections entitled “The Merger Agreement—Termination of the Merger Agreement—Termination Fees” beginning on page 180, “The Merger Agreement—Expense Reimbursement” beginning on page 180 and “The Merger Agreement—Expenses” beginning on page 181 of this proxy statement/prospectus.

Other Related Agreements (Page 183)

Registration Rights Agreement

At the closing of the merger, ACI will enter into a registration rights agreement, which we refer to as the registration rights agreement, with each holder of ACI common stock immediately prior to the closing of the merger, who we refer to as the ACI Holders. Pursuant to the registration rights agreement, ACI will grant each ACI Holder certain registration rights with respect to the shares of ACI common stock owned by them (whether directly or by means of beneficial ownership) as of the date of the closing of the merger, which we refer to as the registrable securities. These rights will include certain demand registration rights for Cerberus and the ACI Institutional Investors, as well as “piggyback” registration rights for all ACI Holders, and customary indemnification. The registration rights are subject to certain delay, suspension and cutback provisions. All fees, costs and expenses related to registrations generally will be borne by ACI, other than underwriting discounts and commissions attributable to the sale of registrable securities. The ACI Holders may be required to deliver lock-up agreements to underwriters in connection with registered offerings of shares.

See the section entitled “Other Related Agreements—Registration Rights Agreement” beginning on page 183 of this proxy statement/prospectus.

Lock-Up Agreements

Prior to the closing of the merger, each ACI Holder will deliver a lock-up agreement to ACI. Pursuant to the lock-up agreements, each such ACI Holder will agree, subject to certain exceptions, that it will not offer, sell, contract to sell, pledge, grant any option to purchase, make any short sale or otherwise dispose of any shares of ACI common stock held by them or any options or warrants to purchase common stock of ACI, or any securities convertible into, exchangeable for or that represent the right to receive common stock of ACI, owned by them (whether directly or by means of beneficial ownership) immediately prior to the closing of the merger. Beginning six months after the closing of the merger, ACI Holders will be permitted to sell up to one-third (which amount may be increased in certain circumstances) of the initial number of such restricted shares in a registered offering pursuant to the registration rights agreement. Beginning twelve months after the closing of the merger, ACI Holders will be permitted to sell up to two-thirds (which amount may be increased in certain circumstances) of the initial number of such restricted shares, minus the amounts sold in months 6-12, in a registered offering pursuant to the registration rights agreement. Beginning eighteen months after the closing of the merger, the restrictions of the lock-up agreements will expire, except that ACI Holders that beneficially own at least 5% of the total outstanding shares of ACI common stock must continue to sell shares in registered offerings pursuant to the terms of the registration rights agreement.



 

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See the section entitled “Other Related Agreements—Lock-Up Agreements” beginning on page 184 of this proxy statement/prospectus.

Standstill Agreement

On February 18, 2018, Rite Aid entered into a standstill agreement, which we refer to as the standstill agreement, with ACI and Cerberus, pursuant to which Cerberus has agreed not to: (i) purchase shares of ACI common stock or other securities issued by ACI, except Cerberus may acquire beneficial ownership of ACI common stock provided that such beneficial ownership does not result in ownership of 30% or more of the issued and outstanding shares of ACI common stock in the aggregate following such transaction, (ii) make any public statement or public disclosure regarding any intent, purpose, plan or proposal by Cerberus or any of its controlled affiliates to the composition of the ACI board of directors, any merger, consolidation or acquisition of ACI or its subsidiaries, (iii) engage in any solicitation of proxies or otherwise solicit the stockholders of ACI or (iv) enter into any agreements to make any investment with any person that engages or offers or proposes to engage in any of (i) through (iii) during the standstill period. The standstill period commences at the effective time of the merger and terminates upon the earliest to occur of (a) thirty days following the date that Cerberus does not have any of its designees on the ACI board of directors, (b) the date on which Cerberus no longer has the right to appoint (and has not appointed) at least one director to the ACI board of directors and (c) the date on which ACI materially breaches or takes any action challenging the validity or enforceability of the provisions of the merger agreement that grant Cerberus certain rights to appoint directors to the ACI board of directors. In addition, pursuant to the standstill agreement, from February 18, 2018 until the effective time of the merger, Cerberus has agreed not to acquire or agree to acquire beneficial ownership of any shares of ACI common stock, Rite Aid common stock or other securities or debt issued by ACI or Rite Aid that would result in beneficial ownership of 30% or more of the issued and outstanding shares of ACI common stock at the effective time of the merger (assuming for the purposes of such calculation that the effective time occurred immediately after such acquisition).

See the section entitled “Other Related Agreements—Standstill Agreement” beginning on page 186 of this proxy statement/prospectus.

No Action Agreements

At or prior to the consummation of the merger, ACI is required to cause each of Cerberus and the ACI Institutional Investors (excluding Colony NorthStar, Inc.) to enter into no action agreements, substantially in the form attached as Annex H to this proxy statement/prospectus. Pursuant to the terms of the no action agreements, each such party will agree for a period of the earlier of five years after the consummation of the merger or until such party ceases to beneficially own five percent of the outstanding ACI common stock that such party will not (i) coordinate the exercise of voting rights of ACI common stock with Cerberus or any other ACI Institutional Investor, (ii) form a group within the meaning of Section 13(d)(3) of the Exchange Act with Cerberus or any other ACI Institutional Investor or (iii) purchase any ACI common stock from Cerberus or any other ACI Institutional Investor.

See the section entitled “Other Related Agreements—No Action Agreements” beginning on page 186 of this proxy statement/prospectus.

Accounting Treatment (Page 147)

ACI prepares its financial statements in accordance with GAAP. The merger will be accounted for using the acquisition method of accounting. ACI will be treated as the acquirer for accounting purposes.



 

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Material U.S. Federal Income Tax Consequences (Page 320)

The obligations of Rite Aid and ACI to complete the mergers are subject to, among other customary closing conditions described in this proxy statement/prospectus, the receipt by each of Rite Aid and ACI of the opinion of its respective counsel to the effect that the mergers, taken together, will be treated as a “reorganization” within the meaning of the Code. Assuming the mergers qualify as a reorganization, the U.S. federal income tax consequences of the mergers to each Rite Aid stockholder will depend on whether such stockholder receives shares of ACI common stock or a combination of cash and shares of ACI common stock in exchange for such stockholder’s shares of Rite Aid common stock pursuant to the terms of the merger agreement.

For more information on the U.S. federal income tax consequences of the mergers, see the section entitled “Material U.S. Federal Income Tax Consequences” beginning on page 320 of this proxy statement/prospectus.

Rite Aid stockholders are strongly urged to consult with their tax advisors regarding the tax consequences of the merger to them, including the effects of U.S. federal, state and local, foreign and other tax laws.

Federal Securities Law Consequences (Page 147)

All ACI common stock received by Rite Aid stockholders upon consummation of the merger will be freely tradable without restriction under the Securities Act, except that ACI common stock received in the merger by persons who become affiliates of ACI for purposes of Rule 144 under the Securities Act may be resold by them only in transactions permitted by Rule 144, or as otherwise permitted under the Securities Act.

Debt Matters (Page 95)

ACI received the debt commitment letter on February 18, 2018, as amended and restated on March 12, 2018 and as further amended and restated on May 8, 2018 (which we refer to, as so amended and restated, as the debt commitment letter), with Bank of America, N.A., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Credit Suisse AG, Credit Suisse Loan Funding LLC, Goldman Sachs Bank USA, Morgan Stanley Senior Funding, Inc., Deutsche Bank Securities Inc., Deutsche Bank AG New York Branch, Deutsche Bank AG Cayman Islands Branch, Barclays Bank PLC, Royal Bank of Canada, Wells Fargo Bank, National Association, Wells Fargo Securities, LLC, PNC Bank, National Association, PNC Capital Markets LLC, Suntrust Robinson Humphrey Inc., Suntrust Bank, U.S. Bank, National Association, The Bank of Tokyo-Mitsubishi UFJ, Ltd., Bank of Montreal, Fifth Third Bank, TD Bank, N.A. and Capital One, National Association (which we refer to collectively as the Commitment Parties), pursuant to which, among other things, the Commitment Parties have committed to provide ACI with (i) $4,667 million of commitments to a new $5,000 million aggregate principal amount best efforts asset-based revolving credit facility (which we refer to as the Best-Efforts ABL Facility); (ii) incremental commitments under the ACI ABL Facility (as defined herein) in an aggregate principal amount of $1,000 million in the event that the Best-Efforts ABL Facility does not become effective on the closing date; (iii) a new asset-based term loan facility in an aggregate principal amount of $1,500 million (which we refer to as the ABL Term Loan Facility); and (iv) a new secured bridge loan facility in an aggregate principal amount of $500 million less the gross proceeds received by ACI and its subsidiaries of new senior notes issued prior to the closing date (which we refer to as the Secured Bridge Facility) (which we refer to, collectively, as the Financing), in each case on the terms and



 

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subject to the conditions set forth in the debt commitment letter. The proceeds of the Financing will be used, among other things, to partially refinance certain of Rite Aid’s existing indebtedness that is outstanding as of the closing date, including Rite Aid’s 6.75% Senior Notes due 2021, which we refer to as the 2021 Rite Aid Notes, and Rite Aid’s 6.125% Senior Notes due 2023, which we refer to as the 2023 Rite Aid Notes, and the Amended and Restated Credit Agreement, dated as of June 27, 2001, as amended and restated as of January 13, 2015 (as amended, restated, amended and restated, supplemented or otherwise modified from time to time), among Rite Aid, the lenders from time to time party thereto and Citicorp North America, Inc., as administrative agent and collateral agent, which we refer to as Rite Aid’s credit agreement, pay fees and expenses in connection with the merger and finance cash consideration, if any, in connection with the merger. The Best-Efforts ABL Facility will be utilized by ACI only if the remaining $333 million of commitments are fully allocated to new or existing lenders prior to the date on which the merger is consummated, in which case the incremental commitments described under clause (ii) above will cease to apply.

On March 12, 2018, ACI, Bank of America, N.A., as administrative and collateral agent, and the co-borrowers, guarantors and lenders party to the ACI ABL Facility, entered into an amendment to the ACI ABL Facility, which we refer to as the ABL Amendment. The ABL Amendment, among other things, permits the incurrence of the ABL Term Loan Facility and the Secured Bridge Facility and implements other modifications in connection with the merger.

The merger agreement provides that Rite Aid may redeem, repurchase or otherwise satisfy and discharge its 9.25% Senior Notes due 2020, which we refer to as the 2020 Rite Aid Notes, the 2021 Rite Aid Notes and the 2023 Rite Aid Notes (and, together with the 2021 Rite Aid Notes and the 2021 Rite Aid Notes, we refer to as the Rite Aid Notes), at any time prior to the closing date and to the extent that any Rite Aid Notes remain outstanding on the closing date, such notes will be redeemed or otherwise satisfied and discharged in full.

On February 27, 2018, Rite Aid announced that it had commenced an offer to purchase up to $900,000,000 of the outstanding Rite Aid Notes, pursuant to the asset sale provisions of the indentures of the Rite Aid Notes. On March 29, 2018, Rite Aid accepted for payment, pursuant to its offer to purchase, $3,454,000 principal amount of the 2020 Rite Aid Notes, representing 0.38% of the outstanding principal amount of the 2020 Rite Aid Notes, $3,471,000 principal amount of the 2021 Rite Aid Notes, representing 0.43% of the outstanding principal amount of the 2021 Rite Aid Notes, and $41,751,000 principal amount of the 2023 Rite Aid Notes, representing 2.32% of the outstanding principal amount of the 2023 Rite Aid Notes. On April 12, 2018, Rite Aid redeemed all of the 2020 Rite Aid Notes that remained outstanding pursuant to the terms of the indenture of the 2020 Rite Aid Notes. On April 19, 2018, Rite Aid announced that it had commenced a similar asset sale offer to purchase up to $700,000,000 of the 2021 Rite Aid Notes and the 2023 Rite Aid Notes, pursuant to the respective indentures governing the 2021 Rite Aid Notes and the 2023 Rite Aid Notes. On May 21, 2018, Rite Aid accepted for payment, pursuant to its offer to purchase, $1,360,000 principal amount of the 2021 Rite Aid Notes, representing 0.17% of the outstanding principal amount of the 2021 Rite Aid Notes, and $4,759,000 principal amount of the 2023 Rite Aid Notes, representing 0.27% of the outstanding principal amount of the 2023 Rite Aid Notes. On May 25, 2018, Rite Aid announced that it had issued a notice of redemption for all $805,169,000 aggregate principal amount of the outstanding 2021 Rite Aid Notes on June 25, 2018, pursuant to the terms of the indenture of the 2021 Rite Aid Notes.

On June 6, 2018, ACI priced its private offering of $750.0 million in aggregate principal amount of new floating rate senior secured notes due 2024 (such notes, which we refer to as the Floating Rate Notes) at an issue price of 99.5%. The proceeds to be received pursuant to such offering, in addition to ACI’s cash on hand and borrowings under the ACI ABL Facility and ABL Term Loan Facility, will be



 

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used (i) to pay a portion of the cash portion, if any, of the merger consideration in connection with the merger, (ii) to repay certain indebtedness of Rite Aid outstanding on the date the merger is completed, (iii) to pay fees and expenses in connection with the merger and the offering of the Floating Rate Notes and (iv) for general corporate purposes. In the event the merger is not completed, ACI will required to use such proceeds to redeem the Floating Rate Notes. The Floating Rate Notes are expected to be issued on or about June 25, 2018, subject to customary closing conditions. The Floating Rate Notes will bear interest at LIBOR (with a floor of 0%) plus 3.75% per annum. The Floating Rate Notes will mature on January 15, 2024 and interest on the Floating Rate Notes will be payable quarterly in arrears on January 15, April 15, July 15 and October 15, commencing on October 15, 2018. The Floating Rate Notes will be secured by the same collateral that would have secured the Secured Bridge Facility. Upon the issuance of the Floating Rate Notes, the commitments with respect to the Secured Bridge Facility will terminate pursuant to the terms of the debt commitment letter.

In addition, the merger agreement also provides that all amounts outstanding under Rite Aid’s revolving credit facility, if any, will be repaid on or prior to the closing date and all commitments thereunder will be terminated. ACI and Rite Aid expect that Rite Aid’s 7.70% Senior Notes due 2027, which we refer to as the 2027 Rite Aid Notes, and Rite Aid’s 6.875% Senior Notes due 2028, which we refer to as the 2028 Rite Aid Notes, will remain outstanding following the closing date. On the closing date, the 2027 Rite Aid Notes and the 2028 Rite Aid Notes will receive an equal and ratable lien solely on the assets of Rite Aid (and not its subsidiaries) that secure the ACI Term Loan Facility (as defined herein). The closing of the merger is not subject to any debt financing condition or contingency.

ACI expects that on the closing date, it will enter into the Best-Efforts ABL Facility and the ABL Term Loan Facility. For a description of the Best-Efforts ABL Facility, the ABL Term Loan Facility, the Floating Rate Notes, the 2027 Rite Aid Notes and the 2028 Rite Aid Notes, see the section entitled “The Merger—Debt Matters” beginning on page 95 of this proxy statement/prospectus and the section entitled “Description of Indebtedness” beginning on page 306 of this proxy statement/prospectus.

For more information on debt matters, see the section entitled “The Merger—Debt Matters” beginning on page 95 of this proxy statement/prospectus.

Amendment and Restatement of ACI Certificate of Incorporation and Bylaws (Page 145)

Pursuant to the terms of the merger agreement, immediately prior to the closing of the merger, ACI’s certificate of incorporation and bylaws will be amended to be in substantially the forms attached as Annex C and Annex D, respectively, of this proxy statement/prospectus. We refer to these as the new ACI certificate of incorporation and the new ACI bylaws. For a more detailed description of the new ACI charter and new ACI bylaws, see the section entitled “Description of ACI Capital Stock” beginning on page 325 of this proxy statement/prospectus.

Comparison of Rights of ACI Stockholders and Rite Aid Stockholders (Page 332)

The rights of Rite Aid stockholders are governed by Rite Aid’s amended and restated articles of incorporation, which we refer to as the Rite Aid certificate of incorporation, by Rite Aid’s amended and restated bylaws, which we refer to as the Rite Aid bylaws, and by the DGCL. Pursuant to the terms of the merger agreement, immediately prior to the closing of the merger, ACI’s certificate of incorporation and bylaws will be amended to be in substantially the forms attached as Annex C and Annex D, respectively, of this proxy statement/prospectus. As a result, your rights as a stockholder of ACI following the merger will be governed by the new ACI certificate of incorporation, by the new ACI



 

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bylaws and by the DGCL. Your rights under the new ACI certificate of incorporation, the new ACI bylaws and the DGCL will differ in certain material respects from your rights under the Rite Aid certificate of incorporation, the Rite Aid bylaws and the DGCL. For more detailed information regarding a comparison of your rights as a stockholder of Rite Aid and as a stockholder of ACI, see the section entitled “Comparison of Rights of ACI Stockholders and Rite Aid Stockholders” beginning on page 332 of this proxy statement/prospectus.

Litigation Related to the Merger (Page 148)

On April 24, 2018, Mel Aklile, a Rite Aid stockholder, brought a putative class action in Delaware Court of Chancery against Rite Aid, ACI, Merger Sub I, Merger Sub II and each of the Rite Aid directors, which we refer to as the Director Defendants, Del. C.A. No. 2018-0305-AGB. Mr. Aklile contends that Rite Aid stockholders have appraisal rights under Section 262 of the DGCL because, notwithstanding that (i) Rite Aid stockholders are not required to receive consideration other than shares of ACI common stock (and cash in lieu of fractional shares, if any) in the merger and shares of ACI common stock will be listed on the NYSE immediately after the merger, and (ii) the election to receive cash consideration is voluntary and dependent upon Rite Aid stockholders’ election (other than cash in lieu of fractional shares, if any), the alleged disparity in value between the additional cash consideration of $0.1832 per share and the additional stock exchange ratio of 0.0079 ACI common stock per share of Rite Aid common stock amounts to a “false choice” designed to deprive Rite Aid stockholders of their alleged appraisal rights. Plaintiff alleges breach of fiduciary duty claims against the Director Defendants for their alleged failure to provide, and inform Rite Aid stockholders of, their alleged statutory appraisal rights under Delaware law and for allegedly falsely informing Rite Aid stockholders that they will not have appraisal rights. Plaintiff further contends that the proxy statement/prospectus previously filed on April 6, 2018 was deficient under Section 262(d)(1) of the DGCL for failure to inform stockholders of their alleged appraisal rights. Mr. Aklile seeks declarations from the Delaware Court of Chancery that the action is a proper class action and that the Director Defendants breached their fiduciary duties by failing to adequately inform class members of their appraisal rights under Delaware law, to enjoin the proposed action from closing until such time as class members are afforded the ability to seek appraisal of their shares, or otherwise permit class members to petition the Delaware Court of Chancery for appraisal, and attorneys, fees, expenses and costs to Plaintiff.

On May 9, 2018, the Delaware Court of Chancery denied Plaintiff’s motion to expedite and declined to schedule a preliminary injunction hearing, ruling that Plaintiff failed to state a colorable claim. On May 16, 2018, Defendants filed a motion to dismiss Plaintiff’s complaint.

Defendants oppose Plaintiff’s claims on the ground that Rite Aid stockholders have no right of appraisal under the DGCL because they have a right to receive all stock consideration as described in the proxy statement/prospectus previously filed on April 6, 2018.

For more information on litigation related to the merger, see the section entitled “The Merger—Litigation Related to the Merger” beginning on page 148 of this proxy statement/prospectus.

Risk Factors (Page 50)

You should also carefully consider the risks that are described in the section entitled “Risk Factors” beginning on page 50 of this proxy statement/prospectus.



 

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Information on the Combined Company

The combination of ACI and Rite Aid will create a diversified leader in food, health and wellness. The combined company is expected to operate 4,868 stores and 4,327 pharmacies across 38 states and the District of Columbia under 21 well-known banners, including Albertsons, Rite Aid, Safeway, Jewel-Osco, Shaw’s, Acme, Vons, Tom Thumb, United Supermarkets, Market Street, Pavilions, Randalls, Star Market, Carrs, and Haggen. On a pro forma basis for the fiscal year ended February 24, 2018, the combined company would have generated approximately $81.4 billion in revenue and been the largest integrated food and drug retailer on the U.S. West Coast by sales. With approximately 336,000 talented and dedicated employees between the two companies currently, the combined company is expected to serve over 40 million customers each week and fill over 317 million prescriptions per year. The company will strive to provide its customers with innovative, convenient and value-added services and product offerings through its 25 million active loyalty program accounts, its leading portfolio of own brands, its PBM (EnvisionRxOptions), its 75 RediClinics and Health Dialog business, and its sophisticated online ordering platform and array of delivery models. Upon completion of the merger, the combined company will continue to honor ACI’s and Rite Aid’s pledge to running great stores and offering customers personalized, convenient and innovative experiences that differentiate the company from its competitors.

The combined company’s leadership team is expected to include Chief Executive Officer John Standley and Chairman of the Board Robert Miller, each of whom shares significant industry experience and a commitment to driving sales through improvements to the customer experience. Messrs. Standley and Miller will be supported by a best-in-class management team with decades of operating experience in the food and drug retail industry. The leadership team is expected to include ACI’s recently appointed President and Chief Operating Officer, Jim Donald, who previously served as Chief Executive Officer of Starbucks Corporation and as a senior executive at several food and drug retailers, including Wal Mart Stores, Inc., Albertson’s, Inc. and Safeway Inc., and Rite Aid’s current President and Chief Operating Officer, Kermit Crawford, who has significant experience in the drug retail and healthcare industries, including serving as a senior executive at Walgreens Boots Alliance, Inc. The remainder of ACI’s executive team will be identified prior to the closing of the merger, and is expected to include highly talented members of each of ACI’s and Rite Aid’s management teams.

Opportunities for Enhanced Growth

The combination of ACI and Rite Aid will provide opportunities to deploy each company’s innovative service solutions and store offerings across the combined company. With over 25 million active loyalty accounts on a combined basis and a large database of historical transactions, the combined company will have the ability to leverage its data analytics capabilities to offer customers more personalized offerings and provide divisional and local managers with targeted marketing strategies and optimized shelf assortment. In addition, the combination will allow the company to deploy ACI’s $11.5 billion portfolio of own brand grocery products, including ACI’s O Organics and Signature products, and Rite Aid’s over-the-counter medications and personal care, vitamin supplements and health and beauty care products, including Rite Aid’s own brands, Rite Aid ” and Daylogic, across the nationwide footprint. By leveraging each company’s respective product offerings and expertise, the combined company will be well-positioned to drive significant additional sales penetration for its own brands portfolio. In addition, the combined company will seek to drive sales through the roll out of many of ACI’s value-added product offerings, including an assortment of grab-and-go, individually packaged, and snack-sized meals, to Rite Aid stores.

The combined company intends to provide its customers with choices of how, when and where they shop with a sophisticated and comprehensive online ordering platform and several new delivery



 

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models, including same-day delivery, one-to-two hour delivery by Instacart and unattended delivery, as well as drive-up pharmacy service and a growing number of stores offering “Drive Up and Go” pick-up service. Today, ACI is able to offer its customers grocery delivery in eight of the top ten MSAs in the U.S. through a combination of more than 1,000 ACI home delivery trucks and Instacart delivery from 1,700 ACI stores. The combined network of stores is expected to provide the company with an effective solution to the “last mile” delivery challenge of online ordering by allowing the combined company to provide convenient delivery to its customers while preserving the value, quality and freshness they receive from the combined company’s stores. In addition, the combined company expects to leverage its current delivery models as well as consider additional delivery models to offer expanded prescription drug home delivery from its ACI and Rite Aid stores. In addition to company specific websites such as Albertsons.com and Riteaid.com, the combined company’s products are expected to be available on Instacart’s Marketplace providing an additional channel for the combined company’s customers.

In addition to combining ACI’s and Rite Aid’s store base to build out a food and drug retail network, the combined company will seek to become a diversified leader in health and wellness. By leveraging its 4,327 pharmacies in 38 states and the District of Columbia, EnvisionRxOptions and Rite Aid’s growing network of 75 convenient and affordable RediClinics, the company will have opportunities to attract additional pharmacy customers and strengthen relationships with other PBMs and regional payors. We believe this is most evident in the West Coast regions where increased choice, convenience and access driven by the combination of ACI and Rite Aid stores will provide strong incentives for PBMs, payors and individual customers to build relationships with the combined company, including through the creation of preferred or limited “narrow network” partnerships. In addition, the combined company will seek to strengthen its preferred relationships by offering additional healthcare services, such as the expected roll out of additional RediClinics and dieticians in its stores and offering of tailored meal solutions for specific health programs. ACI customers who fill prescriptions in-store typically spend more than 2.5x more on groceries each week compared to those who do not. As the combined company attracts additional pharmacy customers, the company should be well positioned to drive incremental sales.

The combined company also intends to grow EnvisionRxOptions, a fully integrated provider with a differentiated approach to pharmacy benefits. Following the merger, EnvisionRxOptions will continue to provide both transparent and traditional PBM options through its EnvisionRxOptions and MedTrak PBMs, respectively. In addition, EnvisionRxOptions’s LakerSoftware will continue to provide a modern, scalable adjudication platform to power both EnvisionRxOptions and MedTrakRx, as well as other PBMs across the country that currently license this system. EnvisionRxOptions will also offer fully integrated mail, specialty and compounding pharmacy services through EnvisionPharmacies; provide discounts for under and uninsured patients through EnvisionSavings; and serve one of the fastest growing demographics in healthcare—seniors enrolled in Medicare Part D—through Envision Insurance Company and the company’s national prescription drug plan, EnvisionRxPlus.



 

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Synergy and Revenue Opportunities

The combination of ACI and Rite Aid is expected to drive significant cost synergies, approximately two-thirds of which are expected to be achieved within the first two fiscal years following completion of the merger. ACI and Rite Aid management have identified approximately $375 million in potential annual run rate cost synergies that they believe can be realized by February 26, 2022, with associated one-time costs of approximately $400 million. These expected cost synergies consist of approximately:

 

    24% from reduction in costs from reduced cost of goods on branded products, increased vendor funding, and the elimination of certain duplicative third-party merchandising fees;

 

    24% related to increased penetration of higher margin private label products and reduction of combined cost of goods, through leveraging ACI’s fresh, natural and organics category expertise and Rite Aid’s health and beauty aids, and general merchandise category expertise;

 

    20% from reduction in costs related to combined pharmacy purchasing, formulary optimization and expansion of central fill capabilities;

 

    15% from reduction in costs related to other services including print advertising, agency and production, lowered insurance premiums, credit card swipe fees and goods not for resale;

 

    10% from reduction in costs related to consolidated back office corporate administrative functions and the combination of regional pharmacy operations; and

 

    7% from reduction in costs related to supply chain and manufacturing efficiencies, including the self-manufacture of milk and bread for Rite Aid stores utilizing ACI’s plants.

In addition, the combination of ACI and Rite Aid is expected to provide significant revenue opportunities, particularly as the combined company targets additional high-value pharmacy customers who typically spend 2.5x more on groceries each week than non-pharmacy customers. ACI and Rite Aid management have identified approximately $3.6 billion in potential annual revenue opportunities that they believe can be realized by February 26, 2022, with associated one-time costs of approximately $300 million. These expected revenue opportunities are primarily related to:

 

    the creation of preferred or limited “narrow network” partnerships on the U.S. West Coast and the Northeast as a result of offering payors and PBMs, including Rite Aid’s PBM, additional convenient locations and reduced drug costs for the customers, which is expected to result in the addition of new pharmacy customers, greater script count and improved food and drug revenue;

 

    increased brand awareness through use of Rite Aid branded pharmacies in the majority of existing ACI stores and the planned combination of ACI and Rite Aid loyalty programs, with resulting estimated increases in store traffic and basket size;

 

    increased script volume as a result of the addition of RediClinics using pre-built clinic spaces in ACI stores and an increased branding focus on health and wellness;

 

    the leveraging of ACI’s expertise in grocery including fresh, organic and prepared foods to grow Rite Aid’s front end sales and Rite Aid’s broad over-the-counter medications and personal care, vitamin supplements and health and beauty care product selection to grow ACI’s grocery revenues, including through offering ACI’s O Organics and Signature own brand products and Rite Aid’s Rite Aid” and Daylogic own brand products; and

 

    the expansion of ACI e-commerce investments and third-party delivery partnerships to Rite Aid stores, the expansion of prescription delivery to drive additional customers, the introduction of “Drive Up and Go” pick up services in Rite Aid stores and the introduction of dietary-specific Plated meal kits tailored to customers’ and health providers’ needs.


 

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The first two categories above are expected to make up more than 75% of the identified potential annual revenue opportunities.

Estimating synergies and revenue opportunities and, in each case, the components thereof, is inherently uncertain and there can be no assurance that the combined company will be able to realize such cost synergies or revenue opportunities in the currently anticipated amounts, percentages, categories and time-frame, if at all. The above estimates of cost synergies and revenue opportunities represent the estimates of ACI and Rite Aid management and remain subject to risks and uncertainties as further described in the sections entitled “Risk Factors—Risks Relating to the Combined Company Following the Merger” beginning on page 56 and “Cautionary Statement Regarding Forward-Looking Statements” beginning on page 83 of this proxy statement/prospectus. Actual cost savings and revenue opportunities, if achieved, may be lower than what the combined company expects, may take longer to achieve than anticipated and may require greater charges than currently anticipated. Even if the combined company achieves cost synergies or revenue opportunities, there can be no assurance that the combined company will realize such synergies and opportunities in the categories and related amounts and percentages described above.

Significant Owned Real Estate

ACI owns or ground-leases 42% of its operating stores and 59% of its industrial properties (distribution centers, Plated fulfillment centers, warehouses and manufacturing plants). The total ACI owned and ground leased properties have a value of approximately $11.2 billion, based on appraisals of ACI real estate conducted by Cushman and Wakefield, Inc. during the fiscal year ended February 25, 2017, after taking into account asset sales of properties since the respective dates of the appraisals. Rite Aid owns or ground-leases 9% of its operating stores and 64% of its industrial properties (distribution centers, warehouses and manufacturing plants).



 

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The following illustrative map represents the combined company’s store network as of February 24, 2018 (reflecting Rite Aid stores that have been sold to WBA):

 

LOGO

Upon completion of the merger and prior to the anticipated consolidation and rationalization of any facilities, the combined company is also expected to operate 34 strategically located distribution centers and 21 manufacturing facilities (adjusting for the pending sale of certain Rite Aid distribution centers to WBA). ACI has recently implemented a plan to automate several of its distribution centers in the upcoming fiscal years, and the combined company is expected to benefit from improved labor productivity, storage density, stocking times and inventory management as these capital improvements are completed.

Strong Financial Position

The combined company is expected to maintain a strong financial position and substantial liquidity as a result of continued operating cash flow generation and availability under the combined company’s asset based revolving credit facility. As of the end of the fiscal year ended February 24, 2018, ACI and Rite Aid had approximately $3.1 billion and $2.9 billion, respectively, of availability under their asset based revolving credit facilities (which will be refinanced and combined as part of the transaction). ACI and Rite Aid management believe the combined company will maintain the ability to generate strong operating cash flows following completion of the acquisition. In addition, as of February 24, 2018, on a pro forma basis assuming completion of the merger transactions and the debt refinancing transactions contemplated thereby (see the section entitled “The Merger—Debt Matters” beginning on page 95 of this proxy statement/prospectus), the combined company would have had $3.2 billion of availability under its asset based revolving credit facilities.

The combined company intends to pursue opportunities to further generate operating cash flow and could also utilize asset sales to reduce leverage levels. For example, during the third and fourth



 

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quarters of the fiscal year ended February 24, 2018, ACI completed two sale-leaseback transactions of approximately 94 stores, generating net proceeds of approximately $962 million. In addition to potential sales of real estate assets, the combined company’s financial position and liquidity are expected to benefit from the Tax Cuts and Jobs Act signed into law in December 2017, which we refer to as the Tax Act, as well as both companies’ expecting to benefit from their respective net operating loss carryforwards, which we refer to as NOLs, in the combined company. There can be no assurances if or when the combined company will consummate any such transaction or the magnitude of such transaction, or whether the combined company will be able to utilize any remaining NOLs in the future.



 

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Summary Selected Historical Consolidated Financial Data of ACI

Albertsons Companies, Inc. was formed for the purpose of reorganizing the organizational structure of AB Acquisition and its direct and indirect consolidated subsidiaries. Prior to December 3, 2017, Albertsons Companies, Inc. had no material assets or operations. On December 3, 2017, Albertsons Companies, LLC and its parent, AB Acquisition, completed a reorganization of their legal entity structure whereby the existing equityholders of AB Acquisition each contributed their equity interests in AB Acquisition to Albertsons Investor and KIM ACI. In exchange, equityholders received a proportionate share of units in Albertsons Investor and KIM ACI, respectively. Albertsons Investor and KIM ACI then contributed all of the equity interests they received to Albertsons Companies, Inc. in exchange for common stock issued by Albertsons Companies, Inc. As a result, Albertsons Investor and KIM ACI became the parents of Albertsons Companies, Inc., owning all of its outstanding common stock with AB Acquisition and its subsidiary, Albertsons Companies, LLC, becoming wholly-owned subsidiaries of Albertsons Companies, Inc. On February 25, 2018, Albertsons Companies, LLC merged with and into Albertsons Companies, Inc., with Albertsons Companies, Inc. as the surviving corporation. Prior to February 25, 2018, substantially all of the assets and operations of Albertsons Companies, Inc. were those of its subsidiary, Albertsons Companies, LLC. The ACI Reorganization Transactions were accounted for as a transaction between entities under common control, and accordingly, there was no change in the basis of the underlying assets and liabilities. The Consolidated Financial Statements are reflective of the changes that occurred as a result of the Reorganization Transactions. Prior to February 25, 2018, the Consolidated Financial Statements of ACI reflect the net assets and operations of Albertsons Companies, Inc.



 

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The selected consolidated financial information set forth below is derived from Albertsons Companies, Inc.’s annual consolidated financial statements for the periods indicated below, including the consolidated balance sheets at February 24, 2018 and February 25, 2017 and the related consolidated statements of operations and comprehensive income (loss) and consolidated statements of cash flows for each of the 52-week periods ended February 24, 2018, February 25, 2017 and February 27, 2016 and notes thereto appearing elsewhere in this proxy statement/prospectus.

 

     Fiscal Year
Ended
February 24,
2018
    Fiscal Year
Ended
February 25,
2017
    Fiscal Year
Ended
February 27,
2016
 

Results of Operations:

      

Net sales and other revenue

   $ 59,925     $ 59,678     $ 58,734  

Gross profit

   $ 16,361     $ 16,641     $ 16,062  

Selling and administrative expenses

     16,224       16,000       15,660  

Goodwill impairment

     142              
  

 

 

   

 

 

   

 

 

 

Operating (loss) income

     (5     641       402  

Interest expense, net

     875       1,004       951  

(Gain) loss on debt extinguishment

     (5     112        

Other expense (income)

     43       (11     (7
  

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (918     (464     (542

Income tax benefit

     (964     (90     (40
  

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 46     $ (374   $ (502
  

 

 

   

 

 

   

 

 

 

Other Financial Data:

      

Adjusted EBITDA(1)

   $ 2,398     $ 2,817     $ 2,681  

Adjusted Net Income (1)

     74       378       365  

Capital expenditures

     1,547       1,415       960  

Free Cash Flow(1)

     851       1,402       1,721  

Other Operating Data:

      

Identical store sales

     (1.3 )%      (0.4 )%      4.4

Store count (at end of fiscal period)

     2,318       2,324       2,271  

Gross square footage (at end of fiscal period) (in millions)

     115       115       113  

Fuel sales

   $ 3,105     $ 2,693     $ 2,955  

Balance Sheet Data (at end of period):

      

Cash and equivalents

   $ 670     $ 1,219     $ 580  

Total assets

     21,812       23,755       23,770  

Total stockholders’ / member equity

     1,398       1,371       1,613  

Total debt, including current portion

     11,876       12,338       12,226  

 

    Fiscal Year Ended
February 24, 2018
    Fiscal Year Ended
February 25, 2017
    Fiscal Year Ended
February 27, 2016
 
 

Q4’17

   

Q3’17

   

Q2’17

   

Q1’17

   

Q4’16

   

Q3’16

   

Q2’16

   

Q1’16

   

Q4’15

   

Q3’15

    Q2’15     Q1’15  

Supplemental Identical Store Sales(2)

    0.6%       (1.8)%       (1.8)%       (2.1)%       (3.3)%       (2.1)%       0.1%       2.9%       4.7%       5.1%       4.5%       4.3%  

 

(1) Adjusted EBITDA is a Non-GAAP Measure defined as earnings (net income (loss)) before interest, income taxes, depreciation and amortization, further adjusted to eliminate the effects of items management does not consider in assessing ongoing performance. Adjusted Net Income is a Non-GAAP Measure defined as net income (loss) adjusted to eliminate the effects of items management does not consider in assessing ongoing performance. ACI defines Free Cash Flow as Adjusted EBITDA less capital expenditures.

Adjusted EBITDA, Adjusted Net Income and Free Cash Flow are Non-GAAP Measures that provide supplemental information ACI believes is useful to analysts and investors to evaluate ongoing results of operations, when considered alongside other GAAP measures such as net income, operating income and gross profit. These Non-GAAP Measures exclude the financial impact of items management does not consider in assessing ongoing operating performance, and thereby facilitate review of our operating performance on a period-to-period basis. Other companies may have different



 

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capital structures or different lease terms, and comparability to ACI’s results of operations may be impacted by the effects of acquisition accounting on our depreciation and amortization. As a result of the effects of these factors and factors specific to other companies, ACI believes Adjusted EBITDA, Adjusted Net Income and Free Cash Flow provide helpful information to analysts and investors to facilitate a comparison of ACI’s operating performance to that of other companies. Set forth below is a reconciliation of Adjusted Net Income and Adjusted EBITDA to net income (see the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations of ACI” beginning on page 212 of this proxy statement/prospectus, for a reconciliation of cash flow from operating activities to Free Cash Flow):

 

    Fiscal Year
Ended
February 24,
2018
    Fiscal Year
Ended
February 25,
2017
    Fiscal Year
Ended
February 27,
2016
 

Net income (loss)

  $ 46     $ (374   $ (502

Adjustments:

     

(Gain) loss on interest rate and commodity hedges, net

    (6     (7     16  

Facility closures and related transition costs(a)

    12       23       25  

Integration costs(b)

    156       144       125  

Acquisition-related costs(c)

    62       70       217  

Equity-based compensation expense

    46       53       98  

Net loss (gain) on property dispositions, asset impairments and lease exit costs

    67       (39     103  

Goodwill impairment

    142              

LIFO expense (benefit)

    3       (8     30  

Amortization and write-off of original issue discount, deferred financing costs and loss on extinguishment of debt

    67       253       82  

Collington acquisition(d)

          79        

Amortization of intangible assets resulting from acquisitions

    422       404       377  

Other(e)

    66       45       45  

Effect of ACI Reorganization Transactions, Tax Act and reversal of valuation allowance

    (609            

Tax impact of adjustments to Adjusted Net Income(f)

    (400     (265     (251
 

 

 

   

 

 

   

 

 

 

Adjusted Net Income

  $ 74     $ 378     $ 365  

Adjustments:

     

Tax impact of adjustments to Adjusted Net Income(f)

    400       265       251  

Effect of tax restructuring, tax reform, and reversal of valuation allowance

    609              

Income tax benefit

    (964     (90     (40

Amortization and write-off of original issue discount, deferred financing costs and loss on extinguishment of debt

    (67     (253     (82

Interest expense, net

    875       1,004       951  

(Gain) loss on debt extinguishment

    (5     112        

Amortization of intangible assets resulting from acquisitions

    (422     (404     (377

Depreciation and amortization

    1,898       1,805       1,613  
 

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  $ 2,398     $ 2,817     $ 2,681  
 

 

 

   

 

 

   

 

 

 

 

  (a) Includes costs related to facility closures and the transition to ACI’s decentralized operating model.
  (b) Related to activities to integrate acquired businesses, primarily the Safeway acquisition.
  (c) Includes expenses related to acquisition and financing activities, including management fees of $13.8 million in each year. The fiscal year ended February 25, 2017 and the fiscal year ended February 27, 2016 include adjustments to tax indemnification assets of $12.3 million and $30.8 million, respectively. The fiscal year ended February 27, 2016 also includes losses of $44.2 million related to acquired contingencies in connection with the Safeway acquisition.
  (d) The fiscal year ended February 25, 2017 includes a charge to pension expense, net related to the settlement of a pre-existing contractual relationship and assumption of the pension plan related to the acquisition of Collington from C&S Wholesale Grocers, Inc. during the first quarter of the fiscal year ended February 25, 2017.
  (e) Primarily includes lease adjustments related to deferred rents and deferred gains on leases. Also includes amortization of unfavorable leases on acquired Safeway surplus properties, estimated losses related to the security breach, changes in the fair value of the CVRs (as defined herein), changes in ACI’s equity investment in Casa Ley, S.A. de C.V., which we refer to as Casa Ley, foreign currency translation gains, costs related to ACI’s planned initial public offering and pension expense (exclusive of the charge related to the Collington acquisition) in excess of cash contributions.
  (f) The tax impact was determined based on the taxable status of the subsidiary to which each of the above adjustments relates.
(2) Includes acquired Safeway, NALP and United stores, irrespective of date of acquisition.


 

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Summary Selected Historical Consolidated Financial Data of Rite Aid

The selected consolidated financial information set forth below is derived from Rite Aid’s audited financial statements for the fiscal years ended March 3, 2018, March 4, 2017, February 27, 2016, February 28, 2015 and March 1, 2014. The financial statements for the fiscal years ended March 4, 2017, February 27, 2016 and February 28, 2015 are incorporated by reference in this proxy statement/prospectus.

As previously disclosed, on September 18, 2017, Rite Aid entered into the WBA asset purchase agreement with WBA and Walgreen Co., a wholly-owned subsidiary of WBA, which we refer to as the Buyer. Under the WBA asset purchase agreement, the Buyer has purchased or will purchase a total of 1,932 stores, three distribution centers and related inventory from Rite Aid, which we refer to collectively as the Disposal Group, for an all-cash purchase price of $4.375 billion on a cash-free, debt-free basis. We refer to such transaction as the Sale. As of the date of this proxy statement/prospectus, all 1,932 stores and related inventory have been transferred to Buyer. The transfer of the three distribution centers and related inventory is expected to begin after September 1, 2018. The majority of the closing conditions to the Sale have been satisfied, and the subsequent transfer of the distribution centers and related assets remains subject to minimal customary closing conditions applicable only to the distribution centers being transferred at such distribution center closing, as specified in the WBA asset purchase agreement. The information set forth below reflects the Disposal Group as a discontinued operation.

The information set forth below is only a summary and is not necessarily indicative of future results. You should read the data set forth in the table below in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Rite Aid’s audited and unaudited financial statements and the accompanying notes incorporated by reference in this proxy statement/prospectus.

 

     Fiscal Year Ended(2)  
     March 3,
2018
(52 weeks)(*)
    March 4,
2017
(53 weeks)(*)
     February 27,
2016
(52 weeks)(*)
     February 28,
2015
(52 weeks)
     March 1,
2014
(52 weeks)
 
     (Dollars in thousands, except per share amounts)  

Summary of Continuing Operations:

             

Revenues from continuing operations

   $ 21,528,968     $ 22,927,540      $ 20,770,237      $ 16,558,195      $ 15,874,638  

Net (loss) income from continuing operations

   $ (349,532   $ 4,080      $ 102,088      $ 2,011,846      $ 199,458  

Basic and diluted income per share:

             

Basic (loss) income per share—continuing operations

   $ (0.33   $ 0.00      $ 0.10      $ 2.07      $ 0.18  
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Diluted (loss) income per share—continuing operations

   $ (0.33   $ 0.00      $ 0.10      $ 1.98      $ 0.17  
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Year-End Financial Position:

             

Total assets(1)

     8,989,327       11,593,752        11,277,010        8,777,425        6,860,672  

Total debt(1)

     3,939,265       7,328,693        6,994,136        5,559,116        5,672,944  

 

(*) Includes the results of the Pharmacy Services segment, which was acquired on June 24, 2015.
(1) As of February 27, 2016, Rite Aid early adopted Accounting Standard Update No. 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs issued by the Financial Accounting Standards Board in April 2015. The effect of the adoption on Rite Aid’s consolidated balance sheet is a reduction in other assets and long-term debt, net of current maturities of $85,827 and $84,199 as of February 28, 2015 and March 1, 2014, respectively.


 

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(2) As noted above, in connection with the Sale, Rite Aid has applied discontinued operations treatment for the Sale as required by Accounting Standards Codification 210-05—Discontinued Operations, which we refer to as ASC 210-05. In accordance with Accounting Standards Codification 205-20, which we refer to as ASC 205-20, Rite Aid reclassified the Disposal Group to assets and liabilities held for sale on its consolidated balance sheets, and reclassified the financial results of the Disposal Group in its consolidated statements of operations and consolidated statements of cash flows for all periods presented.


 

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Selected Unaudited Pro Forma

Condensed Combined Consolidated Financial Data

The following selected unaudited pro forma condensed consolidated balance sheet data as of February 24, 2018 reflects the merger and the Transactions (as defined in the section entitled “Unaudited Pro Forma Condensed Combined Financial Statements” beginning on page 190 of this proxy statement/prospectus) as if they occurred on February 24, 2018. The unaudited pro forma condensed consolidated statement of continuing operations data for the 52 weeks ended February 24, 2018 reflects the merger and the Transactions as if they occurred on February 26, 2017, the first day of ACI’s fiscal year ended February 24, 2018.

The following selected unaudited pro forma combined financial information has been prepared for illustrative purposes only and is not necessarily indicative of what the combined company’s condensed financial position or results of operations actually would have been had the merger and the Transactions been completed as of the dates indicated. In addition, the unaudited pro forma combined financial information does not purport to project the future financial position or operating results of the combined company. Future results may vary significantly from the results reflected because of various factors. The following selected unaudited pro forma combined financial information should be read in conjunction with the section entitled “Selected Historical Consolidated Financial Data of ACI” beginning on page 188 and “Unaudited Pro Forma Condensed Combined Financial Statements” and related notes beginning on page 190 of this proxy statement/prospectus.

 

     February 24, 2018
(in millions)
 

Selected Unaudited Pro Forma Condensed Combined Balance Sheet Information

  

Total assets

   $ 31,058  

Total debt, including current portion(1)

     15,392  

Total liabilities

     27,470  

Total equity

     3,588  

 

     52 Weeks Ended
February 24, 2018
 
     (in millions,
except per share
amounts)
 

Selected Unaudited Pro Forma Condensed Combined Statement of Continuing Operations Information

  

Revenue

   $ 81,436  

Net loss from continuing operations

     (298

Basic and diluted loss per share from continuing operations

     (0.77

EBITDA

     2,499  

Adjusted EBITDA

     3,045  

 

(1) Total debt, net of cash and cash equivalents as of February 24, 2018 was $14,533 on a pro forma combined basis.


 

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The following is a reconciliation of Pro Forma Net Loss to Pro Forma Adjusted EBITDA (in millions):

 

     52 Weeks
Ended
February 24,
2018
 

Pro Forma Net Loss

   $ (298

Depreciation and amortization

     2,349  

Interest expense, net

     1,102  

Income tax benefit

     (654
  

 

 

 

Pro Forma EBITDA

   $ 2,499  
  

 

 

 
  

Gain on interest rate and commodity hedges, net

     (6

Gain on debt extinguishment

     (5

Goodwill impairment

     404  

Facility closures and related transition costs (1)

     12  

Acquisition and integration costs (2)

     207  

Equity-based compensation expense

     72  

Net loss on property dispositions, asset impairments and lease exit costs

     100  

LIFO benefit

     (26

Walgreens Boots Alliance merger termination fee

     (325

Other (3)

     113  
  

 

 

 

Pro forma Adjusted EBITDA

   $ 3,045  
  

 

 

 

 

(1) Includes costs related to facility closures and the transition to ACI’s decentralized operating model.
(2) Primarily includes costs related to acquisitions, integration of acquired businesses and expenses related to management fees paid in connection with acquisition and financing activities.
(3) Primarily includes lease adjustments related to deferred rents and deferred gains on leases. Also includes amortization of unfavorable leases on acquired Safeway surplus properties, estimated losses related to the security breach, changes in ACI’s equity method investment in Casa Ley, changes in fair value of the CVRs, foreign currency translation gains, costs related to ACI’s initial public offering and pension expense in excess of cash contributions.


 

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RISK FACTORS

By voting in favor of the merger proposal, Rite Aid stockholders will be choosing to invest in ACI common stock following the completion of the merger. An investment in ACI common stock involves a high degree of risk. Before you vote, you should carefully consider the risks described below, those described in the section entitled “Cautionary Statement Regarding Forward-Looking Statements” beginning on page 83 of this proxy statement/prospectus and the other information contained in this proxy statement/prospectus or in the documents of Rite Aid incorporated by reference into this proxy statement/prospectus, particularly the risk factors discussed in this section of this proxy statement/prospectus entitled “Risk Factors” and in the section entitled “Risk Factors” in Rite Aid’s Annual Report on Form 10-K for the fiscal year ended March 3, 2018, which is incorporated by reference into this proxy statement/prospectus. See the section entitled “Where You Can Find More Information” beginning on page 353 of this proxy statement/prospectus. In addition to the risks set forth below, new risks may emerge from time to time and it is not possible to predict all risk factors, nor can ACI or Rite Aid assess the impact of all factors on the merger and the combined company following the merger or the extent to which any factor or combination of factors may cause actual results to differ materially from those contained in or implied by any forward-looking statements.

Risks Relating to the Merger

The market price for ACI common stock may be affected by factors different from those that historically have affected Rite Aid common stock.

Following the merger, Rite Aid stockholders will become stockholders of ACI. The combined company’s business will differ from that of Rite Aid, and accordingly the results of operations of ACI following the merger will be affected by some factors that are different from those currently affecting the results of operations of Rite Aid. This proxy statement/prospectus describes the business of ACI and incorporates by reference important information regarding the business of Rite Aid and also describes important factors to consider in connection with those businesses and the business of the combined company. For a discussion of these matters, see, for example, the sections entitled “Business of ACI”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations of ACI”, “Index to Financial Statements of Albertsons Companies, Inc.” and “Unaudited Pro Forma Condensed Combined Financial Statements” in this proxy statement/prospectus as well as the section entitled “Where You Can Find More Information” beginning on page 353 of this proxy statement/prospectus for the location of information incorporated by reference into this proxy statement/prospectus.

Regulatory approval could prevent, or substantially delay, consummation of the merger.

The special meeting of Rite Aid stockholders at which the merger agreement will be considered may take place before all of the required regulatory approvals have been obtained and before all conditions to such approvals, if any, are known. In this event, if the merger proposal is approved, ACI and Rite Aid may subsequently agree to conditions without further seeking stockholder approval, even if such conditions could have an adverse effect on Rite Aid, ACI or the combined company, except as required by applicable law.

For a more complete summary of the requirements of ACI and Rite Aid related to regulatory approvals and the regulatory approvals that must be satisfied or waived prior to completion of the merger, see the sections entitled “The Merger Agreement—Further Action; Efforts” beginning on page 167 and “The Merger Agreement—Conditions to Completion of the Mergers” beginning on page 176 of this proxy statement/prospectus.

 

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The closing of the merger is subject to many conditions and if these conditions are not satisfied or waived, the merger will not be completed.

The closing of the merger is subject to a number of conditions as set forth in the merger agreement that must be satisfied or waived, including, among other things, approval of the merger agreement by holders of a majority of the outstanding shares of Rite Aid common stock entitled to vote on the merger; expiration or earlier termination of the waiting period (and any extension thereof) under the HSR Act (which condition was satisfied on March 28, 2018); absence of any law or order prohibiting the merger; approval for listing on the NYSE of the shares of ACI common stock to be issued in the merger and to be reserved for issuance in connection with the merger (which approval was obtained on June 21, 2018); the approval of a “Form A” application with the Ohio Department of Insurance for ACI and its applicable stockholder(s) (which was filed on April 24, 2018); effectiveness of the registration statement on Form S-4 of which this proxy statement/prospectus forms a part; receipt by Rite Aid of not less than $4.076 billion of gross proceeds under the WBA asset purchase agreement (which condition was satisfied on March 13, 2018); distribution by Albertsons Investor of all shares of ACI common stock owned by it to its respective equityholders; delivery by ACI to Rite Aid of the lock-up agreements, no action agreements and standstill agreement, in each case, in the form agreed to by the parties to the merger agreement; and absence of a material adverse effect on Rite Aid and ACI, in each case, as defined in the merger agreement.

The closing of the merger is also dependent on the accuracy of representations and warranties made by the parties to the merger agreement (subject to customary materiality qualifiers and other customary exceptions) and the performance in all material respects by the parties of obligations imposed under the merger agreement.

For a more complete summary of the conditions that must be satisfied or waived prior to completion of the merger, see the section entitled “The Merger Agreement—Conditions to Completion of the Mergers” beginning on page 176 of this proxy statement/prospectus.

There can be no assurance as to whether or when the conditions to the closing of the merger will be satisfied or waived or as to whether or when the merger will be consummated.

The merger is subject to approval by Rite Aid stockholders.

The merger cannot be completed unless Rite Aid stockholders approve the merger proposal by the affirmative vote of the holders of a majority of the outstanding shares of Rite Aid common stock entitled to vote on the merger. If Rite Aid stockholders do not approve the merger proposal, the merger will not be completed.

Litigation filed against ACI, Rite Aid, Merger Sub I, Merger Sub II and/or the members of the Rite Aid board of directors could prevent or delay the consummation of the mergers or result in the payment of damages following completion of the mergers.

In connection with the mergers, third parties may file lawsuits against ACI, Rite Aid, Merger Sub I, Merger Sub II and/or the members of the Rite Aid board of directors. The outcome of any such litigation is uncertain. If a dismissal is not granted or a settlement is not reached, any such lawsuits could prevent or delay completion of the mergers and result in substantial costs to ACI, Rite Aid or the combined company following the mergers. The defense or settlement of any lawsuit or claim that remains unresolved at the time the mergers are completed may adversely affect the combined company’s business, financial condition, results of operations and cash flows.

 

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The pendency of the merger may cause disruptions in Rite Aid’s and ACI’s businesses, which could have an adverse effect on its business, financial condition or results of operations.

The pendency of the merger could cause disruptions in and create uncertainty regarding Rite Aid’s and ACI’s businesses, which could have an adverse effect on their financial conditions and results of operations, regardless of whether the merger is completed. These risks, which could be exacerbated by a delay in the completion of the merger, include the following:

 

    certain vendors may change their programs or processes which might adversely affect the supply or cost of the products, which then might adversely affect Rite Aid’s and ACI’s stores sales or gross profit;

 

    negotiations with third party payors might be adversely affected which then might adversely affect Rite Aid’s and ACI’s stores sales or gross profit;

 

    Rite Aid’s and ACI’s current and prospective associates may experience uncertainty about their future roles with ACI, which might adversely affect Rite Aid’s and ACI’s ability to attract and retain key personnel;

 

    key management and other employees may be difficult to retain or may become distracted from day-to-day operations because matters related to the merger may require substantial commitments of their time and resources, which could adversely affect Rite Aid’s and ACI’s operations and financial results;

 

    Rite Aid’s and ACI’s current and prospective customers may experience uncertainty about the ability of Rite Aid’s and ACI’s stores to meet their needs, which might cause customers to make purchases or fill their prescriptions elsewhere;

 

    Rite Aid’s and ACI’s ability to pursue alternative business opportunities, including strategic acquisitions, is limited by the terms of the merger agreement. If the merger is not completed for any reason, there can be no assurance that any other transaction acceptable to Rite Aid or ACI will be offered or that its business, prospects or results of operations will not be adversely affected;

 

    Rite Aid’s and ACI’s ability to make appropriate changes to their businesses may be restricted by covenants in the merger agreement; these restrictions generally require Rite Aid and ACI to conduct their businesses in the ordinary course and subject Rite Aid and ACI to a variety of specified limitations absent ACI’s or Rite Aid’s prior written consent, as applicable. Rite Aid and ACI may find that these and other contractual restrictions in the merger agreement may delay or prevent Rite Aid or ACI from responding, or limit Rite Aid’s and ACI’s ability to respond effectively, to competitive pressures, industry developments and future business opportunities that may arise during such period, even if Rite Aid’s or ACI’s management believes they may be advisable; and

 

    the costs and potential adverse outcomes of litigation relating to the merger.

The merger agreement contains restrictions on the ability of Rite Aid to pursue other alternatives to the merger.

The merger agreement contains non-solicitation provisions that, subject to limited exceptions, restrict the ability of Rite Aid to solicit, initiate or knowingly facilitate any inquiries regarding any third-party offer or proposal that might reasonably be expected to lead to a takeover proposal. Further, subject to limited exceptions, consistent with applicable law, the merger agreement provides that the Rite Aid board of directors will not withhold, withdraw or modify in a manner adverse to ACI its recommendation that Rite Aid stockholders vote in favor of the merger proposal, and in specified circumstances, if ACI requests, ACI has a right to negotiate with Rite Aid in order to match any competing takeover proposals that may be made. Although the Rite Aid board of directors is permitted

 

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to take certain actions in response to a superior proposal or a takeover proposal that is reasonably likely to result in a superior proposal if it determines that the failure to do so would be reasonably likely to be inconsistent with its fiduciary duties, doing so in specified situations could require Rite Aid to pay to ACI a termination fee of $65 million. In addition, Rite Aid may be required to reimburse ACI for its reasonable and documented out-of-pocket transaction fees and expenses, up to an amount of $10 million (with such payment credited to any termination fee subsequently paid by Rite Aid). See the sections entitled “The Merger Agreement—Additional Agreements—No Solicitation” beginning on page 164 of this proxy statement/prospectus and “The Merger Agreement—Termination of the Merger Agreement” beginning on page 178 of this proxy statement/prospectus for a more complete discussion of these restrictions and consequences.

Such provisions could discourage a potential acquirer that might have an interest in making a proposal from considering or proposing any such transaction, even if it were prepared to pay consideration with a higher value to Rite Aid stockholders than that to be paid in the merger. There also is a risk that the requirement to pay the termination fee or expense payment to ACI in certain circumstances may result in a potential acquirer proposing to pay a lower per share price to acquire Rite Aid than it might otherwise have proposed to pay.

The merger agreement may be terminated in accordance with its terms and the merger may not be completed.

The merger agreement is subject to a number of conditions that must be fulfilled to complete the merger, including, among other things, approval of the merger agreement by holders of a majority of the outstanding shares of Rite Aid common stock entitled to vote on the merger; expiration or earlier termination of the waiting period (and any extension thereof) under the HSR Act (which condition was satisfied on March 28, 2018); absence of any law or order prohibiting the merger; approval for listing on the NYSE of the shares of ACI common stock to be issued in the merger and to be reserved for issuance in connection with the merger (which approval was obtained on June 21, 2018); the approval of a “Form A” application with the Ohio Department of Insurance for ACI and its applicable stockholder(s) (which was filed on April 24, 2018); effectiveness of the registration statement on Form S-4 of which this proxy statement/prospectus forms a part; receipt by Rite Aid of not less than $4.076 billion of gross proceeds under the WBA asset purchase agreement (which condition was satisfied on March 13, 2018); distribution by Albertsons Investor of all shares of ACI common stock owned by it to its respective equityholders; delivery by ACI to Rite Aid of the lock-up agreements, no action agreements and standstill agreement, in each case, in the form agreed to by the parties to the merger agreement; and absence of a material adverse effect on Rite Aid and ACI, in each case, as defined in the merger agreement. These conditions to the closing of the merger may not be fulfilled and, accordingly, the mergers may not be completed. In addition, either ACI or Rite Aid may terminate the merger agreement under certain circumstances including, among other reasons, if the merger is not completed by August 18, 2018. For a discussion of the circumstances under which the merger agreement could be terminated and when a termination fee and expense payment may be payable by Rite Aid, see the sections entitled “The Merger Agreement—Additional Agreements—No Solicitation” beginning on page 164, The Merger Agreement—Termination of the Merger Agreement—Termination Fees” beginning on page 180 and “The Merger Agreement—Expense Reimbursement” beginning on page 180 of this proxy statement/prospectus.

The termination of the merger agreement could negatively impact Rite Aid.

If the merger is not completed for any reason, including as a result of Rite Aid stockholders failing to approve the merger proposal, the ongoing businesses of Rite Aid may be adversely affected and, without realizing any of the anticipated benefits of having completed the merger, Rite Aid would be subject to a number of risks, including the following:

 

    Rite Aid may experience negative reactions from the financial markets, including a decline of its stock price (which may reflect a market assumption that the merger will be completed);

 

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    Rite Aid may experience negative reactions from its customers, regulators and employees;

 

    Rite Aid will be required to pay certain costs relating to the merger, whether or not the merger is completed; and

 

    matters relating to the merger (including integration planning) will require substantial commitments of time and resources by Rite Aid management, which would otherwise have been devoted to day-to-day operations and other opportunities that may have been beneficial to Rite Aid as an independent company.

If the merger agreement is terminated and the Rite Aid board of directors seeks another merger, business combination or other transaction, Rite Aid stockholders cannot be certain that Rite Aid will be able to find a party willing to offer equivalent or more attractive consideration than the consideration Rite Aid stockholders would receive in the merger. If the merger agreement is terminated under certain circumstances specified in the merger agreement, Rite Aid may be required to pay ACI a termination fee of $65 million, depending on the circumstances surrounding the termination. In addition, Rite Aid may be required to reimburse ACI for its reasonable and documented out-of-pocket transaction fees and expenses, up to an amount of $10 million (with such payment credited to any termination fee subsequently paid by Rite Aid). See the section entitled “The Merger Agreement—Termination of the Merger Agreement” beginning on page 178 of this proxy statement/prospectus for a more complete discussion of the circumstances under which the merger agreement could be terminated and when the termination fee and expense payment may be payable by Rite Aid.

Directors and executive officers of Rite Aid have interests in the merger that are different from, and in addition to, those of Rite Aid stockholders generally.

The directors and executive officers of Rite Aid have interests in the merger that are different from, and in addition to, those of Rite Aid stockholders generally. These interests include the continued employment of certain executive officers of Rite Aid, including John T. Standley, who is expected to serve as Chief Executive Officer of the combined company, the treatment in the merger of Rite Aid stock options, Rollover RSUs, Rollover RSAs, Former Service Provider RSAs and Former Service Provider RSUs, annual bonus opportunities and other rights held by Rite Aid’s directors and executive officers, and the indemnification of former Rite Aid directors and officers by ACI. Rite Aid stockholders should be aware of these interests when they consider the recommendation of the Rite Aid board of directors that they vote in favor of the merger proposal. The Rite Aid board of directors was aware of and considered these interests when it determined that the terms of the merger agreement and the transactions contemplated thereby were fair to, and in the best interests of, Rite Aid and its stockholders, and recommended that Rite Aid stockholders approve the merger proposal and the transactions contemplated by the merger agreement.

See the section entitled “Interests of the Directors and Officers of Rite Aid in the Merger” beginning on page 296 of this proxy statement/prospectus for additional details regarding these interests.

The unaudited pro forma condensed combined financial statements included in this proxy statement/prospectus are presented for illustrative purposes only and the actual financial condition and results of operations of the combined company following the merger may differ materially.

The unaudited pro forma condensed combined financial statements contained in this proxy statement/prospectus are presented for illustrative purposes only, are based on various adjustments, assumptions and preliminary estimates, and may not be an indication of financial condition or results of operations of the combined company following the merger for several reasons. The actual financial

 

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condition and results of operations of the combined company following the merger may not be consistent with, or evident from, these unaudited pro forma condensed combined financial statements. In addition, the assumptions used in preparing the unaudited pro forma condensed combined financial statements may not prove to be accurate, and other factors may affect the combined company’s financial condition or results of operations following the merger. Any potential decline in the combined company’s financial condition or results of operations may cause significant variations in the stock price of ACI following the closing of the merger.

Rite Aid stockholders will have less influence, as a group, as stockholders of ACI following the closing of the merger than as stockholders of Rite Aid.

Following the merger, former Rite Aid stockholders, who currently collectively own 100% of Rite Aid, will own, on a fully diluted basis, between approximately 28.0% and 29.6% of the outstanding ACI common stock, depending on the number of holders of Rite Aid common stock who elect to receive the additional cash consideration. Consequently, Rite Aid stockholders, as a group, will exercise less influence over the management and policies of the combined company than they currently may have over the management and policies of Rite Aid.

The shares of ACI common stock to be received by Rite Aid stockholders as a result of the merger will have rights different from the shares of Rite Aid common stock.

Pursuant to the terms of the merger agreement, immediately prior to the closing of the merger, ACI’s certificate of incorporation and bylaws will be amended to be in substantially the forms attached as Annex C and Annex D, respectively, of this proxy statement/prospectus. As a result, the rights of Rite Aid stockholders, who will become stockholders of ACI following the merger, will be governed by the new ACI certificate of incorporation, by the new ACI bylaws and by the DGCL. The rights under the new ACI certificate of incorporation and the new ACI bylaws will differ in certain material respects from the rights under the Rite Aid certificate of incorporation and the Rite Aid bylaws. See the section entitled “Comparison of Rights of ACI Stockholders and Rite Aid Stockholders” beginning on page 332 of this proxy statement/prospectus for a discussion of these rights.

The mergers, taken together, are expected to, but may not, qualify as a “reorganization” within the meaning of the Code.

The parties expect the mergers, taken together, to be treated as a “reorganization” within the meaning of the Code, and the obligation of Rite Aid and ACI to complete the mergers is conditioned upon the receipt of U.S. federal income tax opinions to that effect from their respective tax counsel. These tax opinions represent the legal judgment of counsel rendering the opinion and are not binding on the Internal Revenue Service, which we refer to as the IRS, or the courts. The expectation that the mergers, taken together, will be treated as a “reorganization” within the meaning of the Code reflects assumptions and was prepared taking into account the relevant information available to ACI and Rite Aid at the time. However, this information is not fact and should not be relied upon as necessarily indicative of future results. Furthermore, such expectation constitutes a forward looking statement. For information on forward looking statements, see the section entitled “Cautionary Statement Regarding Forward-Looking Statements” beginning on page 83 of this proxy statement/prospectus. If the mergers do not qualify as a “reorganization,” then a Rite Aid stockholder may be required to recognize any gain with respect to the entire consideration received in the merger, including any shares of ACI common stock received as well as any cash amount received. For further information, please refer to the section entitled “Material U.S. Federal Income Tax Consequences” beginning on page 320 of this proxy statement/prospectus. You should consult your tax advisor to determine the particular tax consequences of the merger to you.

 

 

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The financial forecasts for each of Rite Aid and ACI contained herein have not been audited and are subject to change.

This document includes certain financial forecasts for Rite Aid and ACI. The financial forecasts have been prepared by management of ACI or Rite Aid, as applicable, and neither company’s independent accountants have audited or reviewed such financial information. There can be no assurance that ACI’s or Rite Aid’s actual results for the periods presented herein will not differ from the financial forecasts presented herein and such changes could be material.

Risks Relating to the Combined Company Following the Merger

ACI may fail to realize the anticipated benefits of the merger.

The success of the merger will depend on, among other things, ACI’s ability to combine its business with that of Rite Aid in a manner that facilitates growth opportunities and cost savings, including projected revenue opportunities and cost synergies. ACI believes that the merger will provide an opportunity for revenue growth, including a number of new business areas for ACI and Rite Aid.

However, ACI must successfully combine the businesses of ACI and Rite Aid in a manner that permits these anticipated benefits to be realized. In addition, the combined company must achieve the anticipated growth and cost savings without adversely affecting current revenues and investments in future growth. If the combined company is not able to successfully achieve these objectives, the anticipated benefits of the merger may not be realized fully, or at all, or may take longer to realize than expected.

The combined company may be unable to retain Rite Aid and/or ACI personnel during the pendency of the merger or after the merger is completed. ACI and Mr. Standley may be unable to reach an agreement with respect to Mr. Standley’s employment with the combined company.

The success of the merger will depend in part on the combined company’s ability to retain the talents and dedication of key employees currently employed by ACI and Rite Aid. It is possible that these employees may decide not to remain with ACI or Rite Aid, as applicable, while the merger is pending or with the combined company after the merger is consummated. Additionally, ACI may be unable to reach an agreement with John T. Standley, who is currently expected to serve as Chief Executive Officer of the combined company, with respect to Mr. Standley’s employment with the combined company. If certain executive officers or key employees choose not to continue or terminate their employment, or if an insufficient number of employees is retained to maintain effective operations, the combined company’s business activities may be adversely affected and management’s attention may be diverted from successfully integrating Rite Aid to hiring suitable replacements, all of which may cause the combined company’s business to suffer. In addition, ACI and Rite Aid may not be able to locate suitable replacements for any key employees who leave either company, or offer employment to potential replacements on reasonable terms.

The failure by the combined company to integrate successfully the business and operations of Rite Aid and ACI and execute on its business strategy in the expected time frame may adversely affect the combined company’s future results.

Historically, ACI and Rite Aid have operated as independent companies, and they will continue to do so until the completion of the merger. There can be no assurances that their businesses can be integrated successfully or that the combined company can increase revenue growth or profitability. ACI and Rite Aid currently expect to achieve $375 million in annual cost synergies, with associated one-time costs of $400 million, as a result of the merger, as well as $3.6 billion in additional revenue

 

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opportunities, with associated one-time costs of $300 million, as a result of the merger. However, there is no guarantee that ACI and Rite Aid will successfully realize these anticipated cost synergies or revenue opportunities in full or at all (or in the anticipated categories and/or percentages), and the anticipated benefits of the integration plan may not be realized. Actual revenue opportunities and cost savings, if achieved, may be lower than what the combined company expects and may take longer to achieve than anticipated or require greater charges than anticipated. If ACI is not able to adequately address integration challenges, the combined company may be unable to successfully integrate ACI’s and Rite Aid’s operations or to realize the anticipated benefits of the integration of the two companies.

Furthermore, it is possible that the integration process could result in the loss of key ACI or Rite Aid employees, the loss of customers, the disruption of either company’s or both companies’ ongoing businesses or in unexpected integration issues, higher than expected integration costs and an overall post-completion integration process that takes longer than originally anticipated. Specifically, the following issues, among others, must be addressed in integrating the operations of ACI and Rite Aid in order to realize the anticipated benefits of the merger:

 

    combining the companies’ operations;

 

    combining the businesses of ACI and Rite Aid and meeting the capital requirements of the combined company in a manner that permits ACI and Rite Aid to achieve the cost savings and revenue opportunities anticipated to result from the merger, the failure of which would result in the material anticipated benefits of the merger not being realized in the time frame currently anticipated or at all;

 

    integrating the companies’ technologies (see “—Risks Relating to ACI’s Business and Industry—ACI may be adversely affected by risks related to its dependence on IT systems. Any future changes to or intrusion into these IT systems, even if ACI is compliant with industry security standards, could materially adversely affect its reputation, financial condition and operating results” beginning on page 72 of this proxy statement/prospectus for more information);

 

    integrating and unifying the offerings and services available to customers, including ACI’s just for U, MyMixx and fuel rewards programs and Rite Aid’s Wellness+ loyalty program;

 

    identifying and eliminating redundant and underperforming functions and assets;

 

    harmonizing the companies’ operating practices, employee development and compensation programs, internal controls and other policies, procedures and processes;

 

    integrating the companies’ financial reporting and internal control systems, including compliance by the combined company with Section 404 of the Sarbanes-Oxley Act of 2002, as amended, and the rules promulgated thereunder by the SEC;

 

    maintaining existing agreements with customers, distributors, providers and vendors and avoiding delays in entering into new agreements with prospective customers, distributors, providers and vendors, including clients of EnvisionRxOptions;

 

    addressing possible differences in business backgrounds, corporate cultures and management philosophies;

 

    consolidating the companies’ administrative and information technology infrastructure;

 

    coordinating distribution and marketing efforts;

 

    managing the movement of certain positions to different locations; and

 

    effecting actions that may be required in connection with obtaining regulatory approvals.

 

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In addition, at times the attention of certain members of either company’s or both companies’ management and resources may be focused on completion of the merger and the integration of the businesses of the two companies and diverted from day-to-day business operations, which may disrupt each company’s ongoing business and the business of the combined company following the merger.

Combining the businesses of ACI and Rite Aid may be more difficult, costly or time-consuming than expected, which may adversely affect the combined company’s results and negatively affect the value of its common stock following the merger.

ACI and Rite Aid have entered into the merger agreement because each believes that the merger will be beneficial to its respective companies and stockholders and that combining the businesses of ACI and Rite Aid will produce revenue opportunities and cost savings. If the combined company is not able to successfully combine the businesses of ACI and Rite Aid in an efficient and effective manner, the anticipated revenue opportunities and cost savings of the merger may not be realized fully, or at all, or may take longer to realize than expected, and the value of ACI common stock may be affected adversely.

An inability to realize the full extent of the anticipated benefits of the merger and the other transactions contemplated by the merger agreement, as well as any delays encountered in the integration process, could have an adverse effect upon the revenues, level of expenses and operating results of the combined company, which may adversely affect the value of ACI common stock following the merger.

In addition, the actual integration may result in additional and unforeseen expenses, and the anticipated benefits of the integration plan may not be realized. Rite Aid is also obligated to continue providing services to WBA pursuant to a transition services agreement, which may result in difficulties in integrating Rite Aid’s and ACI’s businesses. Actual growth and cost savings, if achieved, may be lower than what the combined company expects and may take longer to achieve than anticipated. If ACI is not able to adequately address integration challenges, the combined company may be unable to successfully integrate ACI’s and Rite Aid’s operations or to realize the anticipated benefits of the integration of the two companies.

ACI and Rite Aid will incur significant integration, transaction and merger-related costs in connection with the merger.

ACI and Rite Aid have incurred and expect to incur a number of non-recurring costs associated with the merger. These costs and expenses include fees paid to financial, legal and accounting advisors, facilities and systems consolidation costs, capital expenditures, severance and other potential employment-related costs, including payments that may be made to certain Rite Aid executive officers, filing fees, printing expenses and other related charges. Some of these costs are payable by ACI and Rite Aid regardless of whether or not the merger is completed. There are also a large number of processes, policies, procedures, operations, technologies and systems that must be integrated in connection with the merger and the integration of the two companies’ businesses. While both ACI and Rite Aid have assumed that a certain level of expenses would be incurred in connection with the merger and the other transactions contemplated by the merger agreement, there are many factors beyond their control that could affect the total amount or the timing of the integration and implementation expenses.

ACI and Rite Aid also expect to incur significant costs in connection with achieving the cost synergies and revenue opportunities that ACI and Rite Aid expect to achieve as a result of the merger. These costs may be higher than expected, and the expected cost synergies and revenue opportunities may not be achieved in full or at all, or within the identified categories or at the estimated amounts

 

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and/or percentages. There may also be additional unanticipated significant costs and charges in connection with the merger that the combined company may not recoup. These costs and expenses could reduce the realization of efficiencies, strategic benefits and additional income ACI and Rite Aid expect to achieve from the merger. Although ACI and Rite Aid expect that these benefits will offset the transaction expenses and implementation costs over time, this net benefit may not be achieved in the near term or at all.

Third parties may terminate or alter existing contracts or relationships with ACI or Rite Aid.

ACI and Rite Aid have contracts with customers, suppliers, vendors, landlords, licensors and other business partners which may require ACI or Rite Aid to obtain consents from these other parties in connection with the merger. Additionally, Envision Insurance Company is party to several health plan agreements featuring change of control provisions that may give third parties the right to terminate or alter their contracts with Envision Insurance Company as a result of the merger. If consents under these and other agreements cannot be obtained, ACI or Rite Aid may suffer a loss of potential future revenues and may lose rights that are material to its respective businesses and the business of the combined company. In addition, third parties with whom ACI or Rite Aid currently have relationships may terminate or otherwise reduce the scope of their relationship with either party in anticipation of the merger. Any such disruptions could limit the combined company’s ability to achieve the anticipated benefits of the merger. The adverse effect of such disruptions could also be exacerbated by a delay in the completion of the merger or the termination of the merger agreement.

The combined company may be unable to retain Rite Aid and/or ACI personnel successfully after the merger is completed.

The success of the merger will depend in part on the combined company’s ability to retain the talents and dedication of key employees currently employed by ACI and Rite Aid. It is possible that these employees may decide not to remain with ACI or Rite Aid, as applicable, while the merger is pending or with the combined company after the merger is consummated. If key employees terminate their employment, or if an insufficient number of employees is retained to maintain effective operations, the combined company’s business activities may be adversely affected and management’s attention may be diverted from successfully integrating Rite Aid to hiring suitable replacements, all of which may cause the combined company’s business to suffer. In addition, ACI and Rite Aid may not be able to locate suitable replacements for any key employees who leave either company, or offer employment to potential replacements on reasonable terms.

Rite Aid will experience an “ownership change” under Section 382 of the Code, potentially limiting its use of tax attributes, such as net operating losses and other tax attributes, to reduce future tax liabilities after completion of the mergers.

Rite Aid has substantial net operating losses and other tax attributes for U.S. federal income tax purposes. The utilization of these tax attributes following completion of the mergers depends on the timing and amount of taxable income earned by ACI and Rite Aid in the future, which Rite Aid is not able to predict. Moreover, Rite Aid will experience an “ownership change” under Section 382 of the Code as a result of the mergers, potentially limiting the use of Rite Aid’s tax attributes to reduce future tax liabilities of ACI and Rite Aid for U.S. federal income tax purposes. This limitation may affect the timing of when these tax attributes may be used which, in turn, may impact the timing and amount of cash taxes payable by ACI and Rite Aid.

 

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Risks Relating to Ownership of ACI Common Stock

Because there is currently no public market for ACI common stock, the market price and trading volume of ACI common stock may be volatile, and holders of common stock may not be able to sell shares of ACI common stock following the merger or sell shares of ACI common stock at an attractive price.

Prior to the completion of the merger, ACI common stock will not be publicly traded and there will not have been any public market for ACI common stock. Following the completion of the merger, an active trading market for the ACI common stock may not develop or be sustained. As a result, no public market price is available to Rite Aid stockholders for use in determining the value of ACI common stock they are entitled to receive as merger consideration. We cannot predict the extent to which investor interest will lead to the development of an active trading market in shares of ACI common stock or whether such a market will be sustained following the merger.

The market price of ACI common stock after the completion of the merger will be subject to significant fluctuations in response to, among other factors, variations in operating results and market conditions specific to the combined company’s industry. If an active public market does not develop or is not sustained, it may be difficult for you to sell your shares at a price that is attractive to you, or at all. The market price of ACI common stock could fluctuate significantly for many reasons, including, without limitation:

 

    as a result of the risk factors listed in this proxy statement/prospectus;

 

    actual or anticipated fluctuations in the combined company’s operating results;

 

    for reasons unrelated to operating performance, such as reports by industry analysts, investor perceptions, or negative announcements by the combined company’s customers or competitors regarding their own performance;

 

    regulatory changes that could impact the combined company’s business; and

 

    general economic and industry conditions.

Following the merger, Cerberus will have significant influence over the combined company and may have conflicts of interest with the combined company in the future.

Following the merger, Cerberus will own approximately 25.8% of ACI common stock on a fully diluted basis, assuming all Rite Aid stockholders elect to receive the stock election exchange ratio, or 26.3% of ACI common stock on a fully diluted basis, assuming all Rite Aid stockholders elect to receive the additional cash consideration. Additionally, so long as Cerberus continues to directly or indirectly own a significant amount of the outstanding shares of ACI common stock, the merger agreement requires the ACI board of directors to take all necessary action to cause certain Cerberus nominees to be appointed to the ACI board of directors following the effective time. After the effective time of the merger, and until such time as Cerberus ceases to beneficially own at least ten percent (10%) of the outstanding ACI common stock, the merger agreement requires the ACI board of directors to take all necessary action to nominate and cause two nominees designated by Cerberus to be elected to the ACI board of directors. From and after such time as Cerberus ceases to beneficially own at least ten percent (10%) of the outstanding ACI common stock, but beneficially owns at least five percent (5%) of the outstanding ACI common stock, the merger agreement requires the ACI board of directors to take all necessary action to nominate and cause one nominee designated by Cerberus to be elected to the ACI board of directors. Until such time as Cerberus ceases to beneficially own at least fifteen percent (15%) of the outstanding ACI common stock, the merger agreement requires the ACI board of directors to take all necessary action to nominate and cause directors designated by Cerberus to be elected Chairman and Lead Director, provided that, if Robert G. Miller has ceased to serve as

 

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Chairman, either the Chairman or the Lead Director will qualify as “independent” under the rules of the NYSE and will not be a partner or employee of Cerberus, its affiliates or any of the ACI Institutional Investors. Until such time as Cerberus ceases to beneficially own at least ten percent (10%) of the outstanding ACI common stock, the merger agreement requires the ACI board of directors to take all necessary action to nominate and cause a director designated by Cerberus to be elected Lead Director.

As a result, Cerberus will have significant influence over the management of the combined company and decisions of the board of directors as well as over any action requiring the approval of the holders of ACI common stock, including adopting any amendments to the new ACI certificate of incorporation, electing directors and approving mergers or sales of substantially all of the combined company’s capital stock or its assets. Any directors designated by Cerberus will have significant influence over decisions affecting the capital structure of the combined company, including the issuance of additional capital stock, incurrence of additional indebtedness, the implementation of stock repurchase programs and the decision of whether or not to declare dividends. Cerberus is in the business of making investments in companies and may, from time to time, acquire and hold interests in businesses that compete directly or indirectly with ACI. Cerberus may also separately pursue acquisition opportunities that may be complementary to ACI’s business and, as a result, those acquisition opportunities may not be available to ACI. For more information about Cerberus’s nomination rights following the effective time of the merger, see the section entitled “The Merger—Governance of ACI Following the Merger” beginning on page 144 of this proxy statement/prospectus.

Future sales of ACI common stock in the public market by existing holders of ACI common stock could cause volatility in the price of ACI common stock or cause the share price to fall.

If Cerberus or the other ACI Holders, and in particular, the ACI Institutional Investors, sell substantial amounts of ACI common stock in the public market following the merger, the market price of ACI common stock could decrease. The perception in the public market that Cerberus and the ACI Institutional Investors might sell shares of common stock could also create a perceived overhang and depress our market price. Upon the closing of the merger, between 63.7% (assuming that all Rite Aid stockholders elect to receive the stock election consideration pursuant to the merger agreement) and 65.1% (assuming that all Rite Aid stockholders elect to receive the cash election consideration pursuant to the merger agreement) of the shares of ACI common stock will be held by Cerberus or the ACI Institutional Investors on a fully diluted basis. Prior to the closing of the merger, each ACI Holder, including Cerberus and the ACI Institutional Investors, will deliver a lock-up agreement to ACI. Pursuant to the lock-up agreements, each ACI Holder will agree, subject to certain exceptions, that it will not offer, sell, contract to sell, pledge, grant any option to purchase, make any short sale or otherwise dispose of any shares of ACI common stock, or any options or warrants to purchase common stock of ACI, or any securities convertible into, exchangeable for or that represent the right to receive common stock of ACI, owned by them (whether directly or by means of beneficial ownership) held by them immediately prior to the closing of the merger. Beginning six months after the closing of the merger, the ACI Holders will be permitted to sell up to one-third (which amount may be increased in certain circumstances) of the initial number of such restricted shares in a registered offering pursuant to the registration rights agreement. Beginning twelve months after the closing of the merger, the ACI Holders will be permitted to sell up to two-thirds (which amount may be increased in certain circumstances) of the initial number of such restricted shares in a registered offering pursuant to the registration rights agreement. Beginning eighteen months after the closing of the merger, the restrictions of the lock-up agreements will expire, except that ACI Holders that beneficially own at least 5% of the total outstanding shares of ACI common stock would continue to be required to sell shares in a registered offering pursuant to the terms of the registration rights agreement. Under certain circumstances, shares may be sold outside of a registered offering during the lock-up period. See the section entitled “Other Related Agreements—Lock-Up Agreements” beginning on page 184 of this

 

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proxy statement/prospectus. The market price for shares of ACI common stock may drop when the restrictions on resale by Cerberus and the other ACI Holders lapse.

In addition, Cerberus and the ACI Institutional Investors will have substantial demand and piggyback registration rights. Cerberus and the ACI Institutional Investors will have the ability to cause ACI to file registration statements and engage in underwritten offerings so that they can sell their restricted shares. These registration rights could cause ACI to expend significant time and expense and we cannot assure you if or when such holders will exercise their registration rights. See “Other Related Agreements—Registration Rights Agreement” beginning on page 183 of this proxy statement/prospectus.

ACI does not currently intend to pay a dividend and its ability to pay regular dividends to its stockholders is subject to the discretion of the board of directors and may be limited by ACI’s debt agreements and limitations under Delaware law.

It is not currently anticipated that ACI will pay a regular quarterly dividend following the closing of the merger. In addition, any such determination to pay dividends will be at the discretion of the board of directors and will be dependent on then-existing conditions, including the combined company’s financial condition, earnings, legal requirements, including limitations under Delaware law, restrictions in ACI’s debt agreements that limit its ability to pay dividends to stockholders and other factors the board of directors deems relevant. The ACI board of directors may, in its sole discretion, change the amount or frequency of dividends or discontinue the payment of dividends entirely. For these reasons, you will not be able to rely on dividends to receive a return on your investment. Accordingly, realization of a gain on your shares of ACI common stock received in the merger may depend on the appreciation of the price of ACI common stock, which may not occur.

The new ACI certificate of incorporation will designate the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by ACI stockholders, which could limit ACI stockholders’ ability to obtain a favorable judicial forum for disputes with ACI or its directors, officers, employees or agents.

Similar to the exclusive forum provision in the Rite Aid bylaws, the new ACI certificate of incorporation will provide that, unless ACI consents in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for (i) any derivative action or proceeding brought on ACI’s behalf, (ii) any action asserting a breach of a fiduciary duty owed by any of ACI’s directors, officers employees or agents to ACI or ACI stockholders, (iii) any action asserting a claim pursuant to any provision of the DGCL, the new ACI certificate of incorporation or the new ACI bylaws or (iv) any action asserting a claim governed by the internal affairs doctrine. Any person or entity purchasing or otherwise acquiring any interest in any share of ACI common stock will be deemed to have notice of and to consent to these provisions of the new ACI certificate of incorporation. This exclusive forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with ACI or its current or former directors, officers, employees or agents, which may discourage such lawsuits against ACI and such persons. Alternatively, if a court were to find these provisions of the new ACI certificate of incorporation inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, ACI may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect ACI’s business, results of operations, and financial condition.

Risks Relating to ACI’s Business and Industry

You should read and consider the following risk factors specific to ACI’s business, which will also affect the combined company after the merger. Please note that the risk factors described below apply

 

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only to ACI’s business and do not address risks relating to Rite Aid’s business or the combined company. For information on risks relating to the merger and the combined company following the merger, please see the prior sections entitled “—Risks Relating to the Merger” and “—Risks Relating to the Combined Company Following the Merger.” For more information on risks relating to Rite Aid’s business, please see the section entitled “Risk Factors” in Rite Aid’s Annual Report on Form 10-K for the fiscal year ended March 3, 2018, and in other documents incorporated by reference into this proxy statement/prospectus. See the section entitled “Where You Can Find More Information” beginning on page 353 of this proxy statement/prospectus for the location of information incorporated by reference into this proxy statement/prospectus.

Various operating factors and general economic conditions affecting the food retail industry may affect ACI’s business and may adversely affect ACI’s business and operating results.

ACI’s operations and financial performance are affected by economic conditions such as macroeconomic conditions, credit market conditions and the level of consumer confidence. While the combination of improved economic conditions, the trend towards lower unemployment, higher wages and lower gasoline prices have contributed to improved consumer confidence, there is continued uncertainty about the strength of the economic recovery. If the economy does not continue to improve or if it weakens, or if gasoline prices rebound, consumers may reduce spending, trade down to a less expensive mix of products or increasingly rely on food discounters, all of which could impact ACI’s sales. In addition, consumers’ perception or uncertainty related to the economic recovery and future fuel prices could also dampen overall consumer confidence and reduce demand for ACI’s product offerings. Both inflation and deflation affect ACI’s business. Food deflation could reduce sales growth and earnings, while food inflation could reduce gross profit margins. Several food items and categories, such as meat, eggs and dairy, experienced price deflation in the fiscal years ended February 25, 2017 and February 24, 2018, and this deflation could continue in the future. ACI is unable to predict if the economy will continue to improve, the rate at which the economy may improve, the direction of gasoline prices or if deflationary trends will occur. If the economy does not continue to improve or if it weakens, fuel prices increase or deflationary trends continue, ACI’s business and operating results could be adversely affected.

Competition in ACI’s industry is intense, and ACI’s failure to compete successfully may adversely affect ACI’s profitability and operating results.

The food and drug retail industry is large and dynamic, characterized by intense competition among a collection of local, regional and national participants. ACI faces strong competition from other brick and mortar food and/or drug retailers, supercenters, club stores, discount stores, online retailers, specialty and niche supermarkets, drug stores, general merchandisers, wholesale stores, convenience stores, natural food stores, farmers’ markets, local chains and stand-alone stores that cater to the individual cultural preferences of specific neighborhoods, restaurants and home delivery and meal solution companies. Shifts in the competitive landscape, consumer preference or market share may have an adverse effect on ACI’s profitability and results of operations.

As a result of consumers’ growing desire to shop online, ACI also faces increasing competition from both ACI’s existing competitors that have incorporated the internet as a direct-to-consumer channel and online providers that sell grocery products. Although ACI has a growing internet presence and offers ACI customers the ability to shop online for both home delivery and in-store pick-up, there is no assurance that these online initiatives will be successful. In addition, these initiatives may have an adverse impact on ACI’s profitability as a result of lower gross profits or greater operating costs to compete.

ACI’s ability to attract customers is dependent, in large part, upon a combination of channel preference, location, store conditions, quality, price, service, convenience and selection. In each of

 

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these areas, traditional and non-traditional competitors compete with ACI and may successfully attract ACI’s customers by matching or exceeding what ACI offers or by providing greater shopping convenience. In recent years, many of ACI’s competitors have aggressively added locations and adopted a multi-channel approach to marketing and advertising. ACI’s responses to competitive pressures, such as additional promotions, increased advertising, additional capital investment and the development of ACI’s internet offerings, could adversely affect ACI’s profitability and cash flow. ACI cannot guarantee that ACI’s competitive response will succeed in increasing or maintaining ACI’s share of retail food sales.

An increasingly competitive industry and deflation in the prices of certain foods have made it difficult for food retailers to achieve positive identical store sales growth on a consistent basis. ACI and its competitors have attempted to maintain or grow ACI’s and their respective share of retail food sales through capital and price investment, increased promotional activity and new store growth, creating a more difficult environment to consistently increase year-over-year sales. Several of ACI’s primary competitors are larger than ACI is or have greater financial resources available to them and, therefore, may be able to devote greater resources to invest in price, promotional activity and new or remodeled stores in order to grow their share of retail food sales. Price investment by ACI’s competitors has also, from time to time, adversely affected ACI’s operating margins. In recent years, ACI has invested in price in order to remain competitive and generate sales growth; however, there can be no assurance this strategy will be successful.

Because ACI faces intense competition, ACI needs to anticipate and respond to changing consumer preferences and demands more effectively than its competitors. ACI devotes significant resources to differentiating ACI’s banners in the local markets where ACI operates and invests in loyalty programs to drive traffic. ACI’s local merchandising teams spends considerable time working with store directors to make sure ACI is satisfying consumer preferences. In addition, ACI strives to achieve and maintain favorable recognition of its own brands and offerings, and market these offerings to consumers and maintain and enhance a perception of value for consumers. While ACI seeks to continuously respond to changing consumer preferences, there are no assurances that ACI’s responses will be successful.

ACI’s continued success is dependent upon its ability to control operating expenses, including managing health care and pension costs stipulated by its collective bargaining agreements to effectively compete in the food retail industry. Several of ACI’s primary competitors are larger than it is, or are not subject to collective bargaining agreements, allowing them to more effectively leverage their fixed costs or more easily reduce operating expenses. Finally, ACI needs to source, market and merchandise efficiently. Changes in ACI’s product mix also may negatively affect its profitability. Failure to accomplish ACI’s objectives could impair its ability to compete successfully and adversely affect its profitability.

Profit margins in the food retail industry are low. In order to increase or maintain ACI’s profit margins, ACI develops operating strategies to increase revenues, increase gross margins and reduce costs, such as new marketing programs, new advertising campaigns, productivity improvements, shrink reduction initiatives, distribution center efficiencies, manufacturing efficiencies, energy efficiency programs and other similar strategies. ACI’s failure to achieve forecasted revenue growth, gross margin improvement or cost reductions could have a material adverse effect on its profitability and operating results.

Increased commodity prices may adversely impact ACI’s profitability.

Many of ACI’s own and sourced products include ingredients such as wheat, corn, oils, milk, sugar, proteins, cocoa and other commodities. Commodity prices worldwide have been volatile. Any

 

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increase in commodity prices may cause an increase in ACI’s input costs or the prices ACI’s vendors seek from it.

Although ACI typically is able to pass on modest commodity price increases or mitigate vendor efforts to increase its costs, ACI may be unable to continue to do so, either in whole or in part, if commodity prices increase materially. If ACI is forced to increase prices, ACI’s customers may reduce their purchases at ACI’s stores or trade down to less profitable products. Both may adversely impact ACI’s profitability as a result of reduced revenue or reduced margins.

Fuel prices and availability may adversely affect ACI’s results of operations.

ACI currently operates 397 fuel centers that are adjacent to many of ACI’s store locations. As a result, ACI sells a significant amount of gasoline. Increased regulation or significant increases in wholesale fuel costs could result in lower gross profit on fuel sales, and demand could be affected by retail price increases as well as by concerns about the effect of emissions on the environment. ACI is unable to predict future regulations, environmental effects, political unrest, acts of terrorism and other matters that may affect the cost and availability of fuel, and how ACI’s customers will react, which could adversely affect ACI’s results of operations.

ACI’s stores rely heavily on sales of perishable products, and product supply disruptions may have an adverse effect on ACI’s profitability and operating results.

Reflecting consumer preferences, ACI has a significant focus on perishable products. Sales of perishable products accounted for approximately 41.0% of ACI’s total sales in the fiscal year ended February 24, 2018. ACI relies on various suppliers and vendors to provide and deliver ACI’s perishable product inventory on a continuous basis. ACI could suffer significant perishable product inventory losses and significant lost revenue in the event of the loss of a major supplier or vendor, disruption of ACI’s distribution network, extended power outages, natural disasters or other catastrophic occurrences.

Severe weather and natural disasters may adversely affect ACI’s business.

Severe weather conditions such as hurricanes, earthquakes, floods, extended winter storms, heat waves or tornadoes, as well as other natural disasters, in areas in which ACI has stores or distribution centers or from which ACI sources or obtains products may cause physical damage to ACI’s properties, closure of one or more of ACI’s stores, manufacturing facilities or distribution centers, lack of an adequate work force in a market, temporary disruption in the manufacture of products, temporary disruption in the supply of products, disruption in the transport of goods, delays in the delivery of goods to ACI’s distribution centers or stores, a reduction in customer traffic and a reduction in the availability of products in ACI’s stores. In addition, adverse climate conditions and adverse weather patterns, such as drought or flood, that impact growing conditions and the quantity and quality of crops yielded by food producers may adversely affect the availability or cost of certain products within the grocery supply chain. Any of these factors may disrupt ACI’s business and adversely affect its business.

ACI’s quarterly results may fluctuate significantly.

ACI’s operating results have historically varied on a quarterly basis and may continue to fluctuate significantly in the future. Factors that may affect our quarterly operating results, some of which are beyond the control of management, include, but are not limited to inflation, fluctuations in inventory, energy, transportation, labor, healthcare and other costs, significant acquisitions, dispositions, joint ventures and other strategic initiatives, asset impairment charges, weather conditions, the timing of holidays and other risk factors discussed herein. Accordingly, investors should not rely on the results of any particular quarter as an indication of ACI’s future performance.

 

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Threats or potential threats to security of food and drug safety, the occurrence of a widespread health epidemic or regulatory concerns in ACI’s supply chain may adversely affect ACI’s business.

Acts or threats, whether perceived or real, of war or terror or other criminal activity directed at the food or drug store industry or the transportation industry, whether or not directly involving ACI’s stores, could increase ACI’s operating costs and operations, or impact general consumer behavior and consumer spending. Other events that give rise to actual or potential food contamination, drug contamination or food-borne illnesses, or a widespread regional, national or global health epidemic, such as pandemic flu, could have an adverse effect on ACI’s operating results or disrupt production and delivery of its products, its ability to appropriately staff its stores and potentially cause customers to avoid public gathering places or otherwise change their shopping behaviors.

ACI sources its products from vendors and suppliers and related networks across the globe who may be subject to regulatory actions or face criticism due to actual or perceived social injustices, including human trafficking, child labor or environmental, health and safety violations. A disruption in ACI’s supply chain due to any regulatory action or social injustice could have an adverse impact on its supply chain and ultimately its business, including potential harm to its reputation.

ACI could be affected if consumers lose confidence in the food supply chain or the quality and safety of ACI’s products.

ACI could be adversely affected if consumers lose confidence in the safety and quality of certain food products. Adverse publicity about these types of concerns, whether valid or not, may discourage consumers from buying ACI’s products or cause production and delivery disruptions. The real or perceived sale of contaminated food products by ACI could result in product liability claims, a loss of consumer confidence and product recalls, which could have a material adverse effect on ACI’s business.

Consolidation in the healthcare industry could adversely affect ACI’s business, financial condition and results of operations after the merger.

Many organizations in the healthcare industry, including PBMs, have consolidated to create larger healthcare enterprises with greater market power, which has resulted in greater pricing pressures. If this consolidation trend continues, it could give the resulting enterprises even greater bargaining power, which may lead to further pressure on the prices for ACI’s products and services, including after the proposed merger. If these pressures result in reductions in ACI’s prices, ACI will become less profitable unless it is able to achieve corresponding reductions in costs or develop profitable new revenue streams. ACI expects that market demand, government regulation, third-party reimbursement policies, government contracting requirements, and societal pressures will continue to cause the healthcare industry to evolve, potentially resulting in further business consolidations and alliances among the industry participants ACI will engage with after the merger, which may adversely impact ACI’s business, financial condition and results of operations.

Certain risks are inherent in providing pharmacy services, and ACI’s insurance may not be adequate to cover any claims against ACI.

ACI currently operates 1,777 pharmacies and, after the merger, will operate 4,327 pharmacies, and, as a result, ACI is exposed to risks inherent in the packaging, dispensing, distribution, and disposal of pharmaceuticals and other healthcare products, such as risks of liability for products which cause harm to consumers, as well as increased regulatory risks and related costs. Although ACI maintains insurance, ACI cannot guarantee that the coverage limits under its insurance programs will be adequate to protect it against future claims, or that ACI will be able to maintain this insurance on

 

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acceptable terms in the future, or at all. ACI’s results of operations, financial condition or cash flows may be materially adversely affected if in the future ACI’s insurance coverage proves to be inadequate or unavailable, or there is an increase in the liability for which ACI self-insures, or ACI suffers harm to its reputation as a result of an error or omission.

ACI is subject to numerous federal and state regulations. Each of ACI’s in-store pharmacies must be licensed by the state government. The licensing requirements vary from state to state. An additional registration certificate must be granted by the U.S. Drug Enforcement Administration, which we refer to as the DEA, and, in some states, a separate controlled substance license must be obtained to dispense controlled substances. In addition, pharmacies selling controlled substances are required to maintain extensive records and often report information to state and federal agencies. If ACI fails to comply with existing or future laws and regulations, ACI could suffer substantial civil or criminal penalties, including the loss of its licenses to operate pharmacies and its ability to participate in federal and state healthcare programs. As a consequence of the severe penalties ACI could face, ACI must devote significant operational and managerial resources to complying with these laws and regulations.

During the fiscal year ended February 28, 2015, ACI received two subpoenas from the DEA requesting information concerning its record keeping, reporting and related practices concerning the theft or significant loss of controlled substances. On June 7, 2016, ACI received a third subpoena requesting information concerning potential diversion by one former employee in the Seattle/Tacoma area (Washington State). On July 18, 2017, the DEA and U.S. Department of Justice announced that they had reached an agreement with Safeway with respect to the matters under investigation. Under the agreement, Safeway (1) has paid a penalty of $3.0 million; (2) has surrendered its controlled substances license at one of its pharmacies in California and has had its controlled substances license at one of its pharmacies in Washington State suspended for four months; and (3) is subject to a three year corrective action plan.

Recently, pharmaceutical manufacturers, wholesale distributors and retailers have faced intense scrutiny and, in some cases, investigations and litigation relating to the distribution of prescription opioid pain medications. On May 22, 2018, ACI received a subpoena from the Office of the Attorney General for the State of Alaska, which we refer to as the Alaska Attorney General, stating that the Alaska Attorney General has reason to believe ACI has engaged in unfair or deceptive trade practices under Alaska’s Unfair Trade Practices and Consumer Act and seeking documents regarding our policies, procedures, controls, training, dispensing practices and other matters in connection with the sale and marketing of opioid pain medications. ACI intends to cooperate with the Alaska Attorney General in this investigation. ACI does not currently have a basis to believe it has violated Alaska’s Unfair Trade Practices and Consumer Act. However, due to the early stages of the investigation, ACI is unable to predict the outcome of this matter or estimate a range of reasonably possible loss.

Application of federal and state laws and regulations could subject ACI’s current practices to allegations of impropriety or illegality, or could require ACI to make significant changes to its operations. In addition, ACI cannot predict the impact of future legislation and regulatory changes on its pharmacy business or assure that it will be able to obtain or maintain the regulatory approvals required to operate its business.

Integrating acquisitions may be time-consuming and create costs that could reduce ACI’s net income and cash flows.

Part of ACI’s strategy includes pursuing acquisitions that ACI believes will be accretive to its business, including the merger. With respect to the merger and any possible future acquisitions, the process of integrating the acquired business may be complex and time consuming, may be disruptive

 

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to the business and may cause an interruption of, or a distraction of management’s attention from, the business as a result of a number of obstacles, including, but not limited to:

 

    failure to consummate the merger or a potential future acquisition;

 

    transaction litigation;

 

    a failure of ACI’s due diligence process to identify significant risks or issues;

 

    the loss of customers of the acquired company or ACI;

 

    negative impact on the brands or banners of the acquired company or ACI;

 

    a failure to maintain or improve the quality of customer service;

 

    difficulties assimilating the operations and personnel of the acquired company;

 

    ACI’s inability to retain key personnel of the acquired company;

 

    the incurrence of unexpected expenses and working capital requirements;

 

    ACI’s inability to achieve the financial and strategic goals, including synergies, for the combined businesses; and

 

    difficulty in maintaining internal controls, procedures and policies.

Any of the foregoing obstacles, or a combination of them, could decrease gross profit margins or increase selling, general and administrative expenses in absolute terms and/or as a percentage of net sales, which could in turn negatively impact ACI’s net income and cash flows.

ACI may not be able to consummate acquisitions in the future on terms acceptable to ACI, or at all. In addition, acquisitions are accompanied by the risk that the obligations and liabilities of an acquired company may not be adequately reflected in the historical financial statements of that company and the risk that those historical financial statements may be based on assumptions which are incorrect or inconsistent with ACI’s assumptions or approach to accounting policies. Any of these material obligations, liabilities or incorrect or inconsistent assumptions could adversely impact ACI’s results of operations and financial condition.

See “—Risks Relating to the Merger” beginning on page 50 of this proxy statement/prospectus for more information about risks relating to the proposed merger.

A significant majority of ACI’s employees are unionized, and ACI’s relationship with unions, including labor disputes or work stoppages, could have an adverse impact on ACI’s operations and financial results.

As of February 24, 2018, approximately 187,000 of ACI’s employees were covered by collective bargaining agreements and, including the addition of Rite Aid’s employees after the merger, approximately 204,500 of ACI’s employees after the merger will be covered by collective bargaining agreements. During the fiscal year ending February 23, 2019, collective bargaining agreements covering approximately 54,000 of ACI’s employees are scheduled to expire. In future negotiations with labor unions, ACI expects that health care, pension costs and/or contributions and wage costs, among other issues, will be important topics for negotiation. If, upon the expiration of such collective bargaining agreements, ACI is unable to negotiate acceptable contracts with labor unions, it could result in strikes by the affected workers or lockouts by the employer and thereby significantly disrupt ACI’s operations. As part of ACI’s collective bargaining agreements, ACI may need to fund additional pension contributions, which would negatively impact its Free Cash Flow. Further, if ACI is unable to control health care and pension costs provided for in the collective bargaining agreements, ACI may experience increased operating costs and an adverse impact on its financial results.

 

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Increased pension expenses, contributions and surcharges may have an adverse impact on ACI’s financial results.

ACI is party to defined benefit retirement plans for employees at its Safeway, United and NALP stores and distribution centers. The funded status of these plans (the difference between the fair value of the plan assets and the projected benefit obligation) is a significant factor in determining annual pension expense and cash contributions to fund the plans. In recent years, cash contributions have declined due to improved market conditions and the impact of the pension funding stabilization legislation, which increased the discount rate used to determine pension funding.

If financial markets do not improve or if financial markets decline, increased pension expense and cash contributions may have an adverse impact on ACI’s financial results. Under the Employee Retirement Income Security Act of 1974, as amended, which we refer to as ERISA, the PBGC has the authority to petition a court to terminate an underfunded pension plan under limited circumstances. In the event that ACI’s defined benefit pension plans are terminated for any reason, ACI could be liable to the PBGC for the entire amount of the underfunding, as calculated by the PBGC based on its own assumptions (which would result in a larger obligation than that based on the actuarial assumptions used to fund such plans). Under ERISA and the Code, the liability under these defined benefit plans is joint and several with all members of the control group, such that each member of the control group would be liable for the defined benefit plans of each other member of the control group.

In addition, ACI participates in various multiemployer pension plans for substantially all employees represented by unions that require ACI to make contributions to these plans in amounts established under collective bargaining agreements. Under the Pension Protection Act of 2006, which we refer to as the PPA, contributions in addition to those made pursuant to a collective bargaining agreement may be required in limited circumstances in the form of a surcharge that is equal to 5% of the contributions due in the first year and 10% each year thereafter until the applicable bargaining agreement expires.

Pension expenses for multiemployer pension plans are recognized by ACI as contributions are made. Benefits generally are based on a fixed amount for each year of service. ACI’s contributions to multiemployer plans were $431.2 million, $399.1 million and $379.8 million during the fiscal years ended February 24, 2018, February 25, 2017 and February 27, 2016, respectively.

Based on an assessment of the most recent information available, ACI believes that most of the multiemployer plans to which it contributes are underfunded. ACI is only one of a number of employers contributing to these plans, and the underfunding is not a direct obligation or liability of ACI. However, ACI has attempted, as of February 24, 2018, to estimate its share of the underfunding of multiemployer plans to which ACI contributes, based on the ratio of its contributions to the total of all contributions to these plans in a year. As of February 24, 2018, ACI’s estimate of the its share of the underfunding of multiemployer plans to which it contributes was $4.1 billion. ACI’s share of underfunding described above is an estimate and could change based on the results of collective bargaining efforts, investment returns on the assets held in the plans, actions taken by trustees who manage the plans’ benefit payments, interest rates, if the employers currently contributing to these plans cease participation, and requirements under the PPA, the Multiemployer Pension Reform Act of 2014 and applicable provisions of the Code.

Additionally, underfunding of the multiemployer plans means that, in the event ACI were to exit certain markets or otherwise cease making contributions to these plans, ACI could trigger a substantial withdrawal liability. Any accrual for withdrawal liability will be recorded when a withdrawal is probable and can be reasonably estimated, in accordance with GAAP. All trades or businesses in the employer’s control group are jointly and severally liable for the employer’s withdrawal liability.

 

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ACI is subject to withdrawal liability from certain multiemployer plans related to Safeway’s previous closure of its Dominick’s division. One of the plans, the UFCW & Employers Midwest Pension Fund, which we refer to as the Midwest Plan, had asserted ACI may be liable for mass withdrawal liability, if the plan has a mass withdrawal, in addition to the liability the Midwest Plan already has assessed. ACI’s management believes it is unlikely that a mass withdrawal will occur in the foreseeable future and disputes that the Midwest Plan would have the right to assess mass withdrawal liability against ACI if the Midwest Plan had a mass withdrawal. A mass withdrawal would require monthly installment payments to be made by ACI in perpetuity. ACI’s installment payments would be limited to 20 years if it is not part of, or the Midwest Plan does not experience, a mass withdrawal. ACI is disputing in arbitration the amount of the withdrawal liability the Midwest Plan has assessed. The amount of withdrawal liability ACI recorded as of February 24, 2018 for the closure of the Dominick’s division was $160.1 million.

See Note 12—Employee Benefit Plans and Collective Bargaining Agreements in ACI’s consolidated financial statements, included elsewhere in this prospectus, for more information relating to ACI’s participation in these multiemployer pension plans.

Unfavorable changes in government regulation may have a material adverse effect on ACI’s business.

ACI’s stores are subject to various federal, state, local and foreign laws, regulations and administrative practices. ACI must comply with numerous provisions regulating health and sanitation standards, food labeling, energy, environmental, equal employment opportunity, minimum wages, pension, health insurance and other welfare plans, and licensing for the sale of food, drugs and alcoholic beverages. ACI cannot predict either the nature of future laws, regulations, interpretations or applications, or the effect either additional government laws, regulations or administrative procedures, when and if promulgated, or disparate federal, state, local and foreign regulatory schemes would have on ACI’s future business. In addition, regulatory changes could require the reformulation of certain products to meet new standards, the recall or discontinuance of certain products not able to be reformulated, additional record keeping, expanded documentation of the properties of certain products, expanded or different labeling and/or scientific substantiation. Any or all of such requirements could have an adverse effect on ACI’s business.

The minimum wage continues to increase and is subject to factors outside of ACI’s control. Changes to wage regulations could have an impact on ACI’s future results of operations.

A considerable number of ACI’s employees are paid at rates related to the federal minimum wage. Additionally, many of ACI’s stores are located in states, including California, where the minimum wage is greater than the federal minimum wage and where a considerable number of employees receive compensation equal to the state’s minimum wage. For example, as of February 24, 2018, ACI employed approximately 71,000 associates in California, where the current minimum wage was recently increased to $11.00 per hour effective January 1, 2018, and will gradually increase to $15.00 per hour by January 1, 2022. In Maryland, where ACI employed approximately 8,000 associates as of February 24, 2018, the minimum wage was recently increased to $9.25 per hour, and will increase to $10.10 per hour on July 1, 2018. Moreover, municipalities may set minimum wages above the applicable state standards. For example, the minimum wage in Seattle, Washington, where ACI employed approximately 2,000 associates as of February 24, 2018, was recently increased to $15.00 per hour effective January 1, 2017 for employers with more than 500 employees nationwide. In Chicago, Illinois, where ACI employed approximately 6,200 associates as of February 24, 2018, the minimum wage was recently increased to $11.00 per hour, and will gradually increase to $13.00 per hour by July 1, 2019. Any further increases in the federal minimum wage or the enactment of additional state or local minimum wage increases could increase ACI’s labor costs, which may adversely affect ACI’s results of operations and financial condition.

 

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The food retail industry is labor intensive. ACI’s ability to meet its labor needs, while controlling wage and labor-related costs, is subject to numerous external factors, including the availability of qualified persons in the workforce in the local markets in which ACI is located, unemployment levels within those markets, prevailing wage rates, changing demographics, health and other insurance costs and changes in employment and labor laws. Such laws related to employee hours, wages, job classification and benefits could significantly increase operating costs. In the event of increasing wage rates, if ACI fails to increase its wages competitively, the quality of ACI’s workforce could decline, causing ACI’s customer service to suffer, while increasing wages for ACI’s employees could cause ACI’s profit margins to decrease. If ACI is unable to hire and retain employees capable of meeting ACI’s business needs and expectations, ACI’s business and brand image may be impaired. Any failure to meet ACI’s staffing needs or any material increase in turnover rates of ACI’s employees may adversely affect its business, results of operations and financial condition.

Failure to attract and retain qualified associates could materially adversely affect ACI’s financial performance.

ACI’s ability to continue to conduct and expand its operations depends on its ability to attract and retain a large and growing number of qualified associates. ACI’s ability to meet its labor needs, including its ability to find qualified personnel to fill positions that become vacant at ACI’s existing stores and distribution centers, while controlling its associate wage and related labor costs, is generally subject to numerous external factors, including the availability of a sufficient number of qualified persons in the work force of the markets in which ACI operates, unemployment levels within those markets, prevailing wage rates, changing demographics, health and other insurance costs and adoption of new or revised employment and labor laws and regulations. If ACI is unable to locate, to attract or to retain qualified personnel, the quality of service ACI provides to its customers may decrease and its financial performance may be adversely affected.

Unfavorable changes in, failure to comply with or increased costs to comply with environmental laws and regulations could adversely affect ACI. The storage and sale of petroleum products could cause disruptions and expose ACI to potentially significant liabilities.

ACI’s operations, including its 397 fuel centers, are subject to various laws and regulations relating to the protection of the environment, including those governing the storage, management, disposal and cleanup of hazardous materials. Some environmental laws, such as the Comprehensive Environmental Response, Compensation and Liability Act and similar state statutes, impose strict, and under certain circumstances joint and several, liability for costs to remediate a contaminated site, and also impose liability for damages to natural resources.

Federal regulations under the Clean Air Act require phase out of the production of ozone-depleting refrigerants that include hydrochlorofluorocarbons, the most common of which is R-22. By 2020, production of new R-22 refrigerant gas will be completely phased out; however, recovered and recycled/reclaimed R-22 will be available for servicing systems after 2020. ACI is reducing its R-22 footprint while continuing to repair leaks, thus extending the useful lifespan of existing equipment. For the fiscal year ended February 24, 2018, $15 million was budgeted for system retrofits, and ACI has budgeted approximately $15 million in subsequent years. Leak repairs are part of the ongoing refrigeration maintenance budget. ACI may be required to spend additional capital above and beyond what is currently budgeted for system retrofits and leak repairs which could have a significant impact on ACI’s business, results of operations and financial condition.

Third-party claims in connection with releases of or exposure to hazardous materials relating to ACI’s current or former properties or third-party waste disposal sites can also arise. In addition, the presence of contamination at any of ACI’s properties could impair its ability to sell or lease the

 

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contaminated properties or to borrow money using any of these properties as collateral. The costs and liabilities associated with any such contamination could be substantial, and could have a material adverse effect on ACI’s business. Under current environmental laws, ACI may be held responsible for the remediation of environmental conditions regardless of whether ACI leases, sublease or own the stores or other facilities and regardless of whether such environmental conditions were created by ACI or a prior owner or tenant. In addition, the increased focus on climate change, waste management and other environmental issues may result in new environmental laws or regulations that negatively affect ACI directly or indirectly through increased costs on its suppliers. There can be no assurance that environmental contamination relating to prior, existing or future sites or other environmental changes will not adversely affect ACI through, for example, business interruption, cost of remediation or adverse publicity.

ACI is subject to, and may in the future be subject to, legal or other proceedings that could have a material adverse effect on ACI.

From time to time, ACI is a party to legal proceedings, including matters involving personnel and employment issues, personal injury, antitrust claims, intellectual property claims and other proceedings arising in or outside of the ordinary course of business. In addition, there are an increasing number of cases being filed against companies generally, which contain class-action allegations under federal and state wage and hour laws. ACI estimates its exposure to these legal proceedings and establishes reserves for the estimated liabilities. Assessing and predicting the outcome of these matters involves substantial uncertainties. Although not currently anticipated by management, unexpected outcomes in these legal proceedings or changes in management’s forecast assumptions or predictions, could have a material adverse impact on ACI’s results of operations.

ACI may be adversely affected by risks related to its dependence on IT systems. Any future changes to or intrusion into these IT systems, even if ACI is compliant with industry security standards, could materially adversely affect its reputation, financial condition and operating results.

ACI has complex IT systems that are important to the success of its business operations and marketing initiatives. If ACI were to experience failures, breakdowns, substandard performance or other adverse events affecting these systems, or difficulties accessing the proprietary business data stored in these systems, or in maintaining, expanding or upgrading existing systems or implementing new systems, ACI could incur significant losses due to disruptions in ACI’s systems and business.

ACI’s ability to effectively manage the day-to-day business of approximately 515 NALP stores depends significantly on IT services and systems provided by SuperValu pursuant to two transition services agreements, which we refer to as the SVU TSAs. Prior to NALP’s transition onto Safeway’s IT systems, the failure of SuperValu’s systems to operate effectively or to integrate with other systems, or unauthorized access into SuperValu’s systems, could cause ACI to incur significant losses due to disruptions in ACI’s systems and business. On October 17, 2017, Albertson’s LLC and NALP entered into wind-down agreements with SuperValu providing for, among other things, the termination of the SVU TSAs on September 21, 2018. Although ACI expects to complete the transition of the properties covered by the SVU TSAs onto Safeway’s IT systems prior to September 1, 2018, ACI may experience disruptions as a part of that process. As a result, if ACI is unable to complete the transition of certain properties by September 1, 2018, ACI will be required to pay SuperValu additional fees under the wind-down agreements and remain dependent upon SuperValu to provide these services until the transition is complete.

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ACI. Despite ACI’s considerable efforts to secure its respective computer networks, security could be compromised, confidential information could be misappropriated or system disruptions could occur, as has occurred with a number of other retailers. If ACI (or through SuperValu) experiences a data security breach, ACI could be exposed to government enforcement actions, possible assessments from the card brands if credit card data was involved and potential litigation. In addition, ACI’s customers could lose confidence in its ability to protect their personal information, which could cause them to stop shopping at ACI’s stores altogether. The loss of confidence from a data security breach involving ACI’s employees could hurt its reputation and cause employee recruiting and retention challenges.

Improper activities by third parties, exploitation of encryption technology, new data-hacking tools and discoveries and other events or developments may result in future intrusions into or compromise of ACI’s networks, payment card terminals or other payment systems. In particular, the techniques used by criminals to obtain unauthorized access to sensitive data change frequently and often cannot be recognized until launched against a target; accordingly, ACI may not be able to anticipate these frequently changing techniques or implement adequate preventive measures for all of them. Any unauthorized access into ACI’s customers’ sensitive information, or data belonging to ACI or its suppliers, even if ACI is compliant with industry security standards, could put ACI at a competitive disadvantage, result in deterioration of its customers’ confidence in ACI, and subject it to potential litigation, liability, fines and penalties and consent decrees, resulting in a possible material adverse impact on its financial condition and results of operations.

As merchants who accept debit and credit cards for payment, ACI is subject to the Payment Card Industry, which we refer to as PCI, Data Security Standard, which we refer to as PCI DSS, issued by the PCI Council. PCI DSS contains compliance guidelines and standards with regard to ACI’s security surrounding the physical administrative and technical storage, processing and transmission of individual cardholder data. By accepting debit cards for payment, ACI is also subject to compliance with American National Standards Institute, which we refer to as ANSI, data encryption standards and payment network security operating guidelines. In addition, ACI is required to comply with PCI DSS version 3.2 for its 2018 assessment, and is replacing or enhancing ACI’s in-store systems to comply with these standards. Failure to be PCI compliant or to meet other payment card standards may result in the imposition of financial penalties or the allocation by the card brands of the costs of fraudulent charges to ACI. Despite ACI’s efforts to comply with these or other payment card standards and other information security measures, ACI cannot be certain that all of its (or through SuperValu) IT systems will be able to prevent, contain or detect all cyber-attacks or intrusions from known malware or malware that may be developed in the future. To the extent that any disruption results in the loss, damage or misappropriation of information, ACI may be adversely affected by claims from customers, financial institutions, regulatory authorities, payment card associations and others. In addition, the cost of complying with stricter privacy and information security laws and standards, including PCI DSS version 3.2 and ANSI data encryption standards, could be significant.

Furthermore, on October 1, 2015, the payment card industry began to shift liability for certain transactions to retailers who are not able to accept Europay, Mastercard, and Visa, which we refer to as EMV, chip card transactions, which we refer to as the EMV Liability Shift. ACI has substantially completed the process of implementing EMV chip card technology in ACI’s stores and is currently implementing EMV chip card technology in its fuel centers. Before the implementation of EMV chip card technology is completed by ACI, it may be liable for costs incurred by payment card issuing banks and other third parties or subject to fines and higher transaction fees, which could have an adverse effect on ACI’s business, financial condition or cash flows.

 

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Termination of the SuperValu transition services agreement or the failure of SuperValu to perform its obligations thereunder could adversely affect ACI’s business, financial results and financial condition.

ACI’s ability to effectively monitor and control the operations of its company depends to a large extent on the proper functioning of its IT and business support systems. In connection with ACI’s acquisition of NALP, Albertson’s LLC and NALP each entered into an SVU TSA. Pursuant to the SVU TSAs, Albertson’s LLC and NALP each pay fees to SuperValu for certain services, including back office, administrative, IT, procurement, insurance and accounting services. The SVU TSAs limit the liability of SuperValu to instances in which SuperValu has committed gross negligence in regard to the provision of services or has breached its obligations under the SVU TSAs. The SVU TSAs terminated and replaced a transition services agreement providing for substantially similar services, which ACI had previously entered into with SuperValu in connection with ACI’s June 2006 acquisition of certain Albertsons stores. ACI is dependent upon SuperValu to continue to provide these services to Albertson’s LLC and NALP until ACI transitions Albertson’s LLC and NALP onto Safeway’s IT system and otherwise replaces SuperValu as a service provider to Albertson’s LLC and NALP. In addition, ACI may depend on SuperValu to manage IT services and systems for additional stores ACI acquires, including the stores ACI has acquired from A&P, until ACI is able to transition such stores onto Safeway’s IT system. The failure by SuperValu to perform its obligations under the SVU TSAs prior to Albertson’s LLC’s and NALP’s transition onto Safeway’s IT systems and to other service providers (external or internal) could adversely affect ACI’s business, financial results, prospects and results of operations.

On October 17, 2017, Albertson’s LLC and NALP entered into wind-down agreements with SuperValu providing for, among other things, the termination of the SVU TSAs on September 21, 2018. Although ACI expects to complete the transition of the properties covered by the SVU TSAs onto Safeway’s IT systems prior to September 1, 2018, ACI may suffer disruptions as part of that process. As a result, if ACI is unable to complete the transition of certain properties by September 1, 2018, ACI will be required to pay SuperValu additional fees under the wind-down agreements and remain dependent upon SuperValu to provide these services until ACI’s transition is complete.

Furthermore, SuperValu manages and operates NALP’s distribution center located in the Lancaster, Pennsylvania area. Under an operating and supply agreement with SuperValu for the operation of, and supply of products from, the distribution center located in the Lancaster, Pennsylvania area, which we refer to as the Lancaster Agreement, SuperValu supplies NALP’s Acme and Shaw’s stores from the distribution center under a shared costs arrangement. The failure by SuperValu to perform its obligations under the Lancaster Agreement could adversely affect ACI’s business, financial results and financial condition.

ACI’s third-party IT services provider discovered unauthorized computer intrusions in 2014. These intrusions could adversely affect ACI’s brands and could discourage customers from shopping in ACI’s Albertsons and NALP stores.

ACI’s third-party IT services provider for Albertsons and NALP, SuperValu, informed ACI in the summer of 2014 that it discovered unlawful intrusions to approximately 800 Shaw’s, Star Market, Acme, Jewel-Osco and Albertsons banner stores in an attempt to obtain payment card data. ACI has contacted the appropriate law enforcement authorities regarding these incidents and has coordinated with ACI’s merchant bank and payment processors to address the situation. ACI maintains insurance to address potential liabilities for cyber risks and, in the case of ACI and NALP, is self-insured for cyber risks for periods prior to August 11, 2014. ACI has also notified its various insurance carriers of these incidents and is providing further updates to the carriers as the investigation continues.

 

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On October 6, 2015, ACI received a letter from the Office of the Attorney General of the Commonwealth of Pennsylvania stating that the Illinois and Pennsylvania Attorneys General Offices are leading a multi-state group that includes the attorneys general for 14 other states requesting specified information concerning the two data breach incidents. The multistate group has not made a monetary demand, and ACI is unable to estimate the possibility of or reasonable range of loss, if any. ACI has cooperated with the investigation. In addition, the payment card networks required that forensic investigations be conducted of the intrusions. The forensic firm retained by ACI to conduct an investigation has issued separate reports for each intrusion (copies of which have been provided to the payment card networks).

In both reports, the forensic firm found that not all of the PCI DSS standards had been met at the time of the intrusions and that some of this non-compliance may have contributed to or caused at least some portion of the compromise that occurred during the intrusions. On August 5, 2016, ACI was notified that MasterCard had asserted its initial assessment for incremental counterfeit fraud losses and non-ordinary course expenses (such as card reissuance costs) as well as its case management assessment. On December 5, 2016, ACI was further notified that MasterCard had asserted its final assessment of approximately $6.0 million, which ACI paid on December 9, 2016; however ACI disputes the MasterCard assessment. and, on March 10, 2017, filed a lawsuit against MasterCard seeking recovery of the assessment. On May 5, 2017, MasterCard filed a motion to dismiss the litigation. In a decision dated August 25, 2017, the court denied MasterCard’s motion, and the litigation is ongoing. On January 2, 2018, ACI was notified that Visa, Inc., which we refer to as Visa, had asserted its assessment for incremental fraud losses and card reissuance costs for $1.0 million. ACI paid the assessment in the fiscal quarter ended February 24, 2018. On October 20, 2015, ACI agreed with one of its third-party payment administrators to provide a $15 million letter of credit to cover any claims from the payment card networks and to maintain a minimum level of card processing until the potential claims from the payment card networks are resolved. On January 4, 2018, this third-party payment administrator agreed to reduce the letter of credit to the Visa assessment amount of approximately $1.0 million. ACI has recorded an estimated liability for probable losses that ACI expects to incur in connection with the claims or potential claims to be made by the payment card networks. The estimated liability is based on information currently available to ACI and may change as new information becomes available or if other payment card networks assert their claims against ACI. ACI will continue to evaluate information as it becomes available and will record an estimate of additional loss, if any, when it is both probable that a loss has been incurred and the amount of the loss is reasonably estimable. Currently, the potential range of any loss above ACI’s currently recorded amount cannot be reasonably estimated given other claims may still be asserted by the payment card networks other than MasterCard and Visa and because significant factual and legal issues remain unresolved.

ACI believes the intrusions may have been an attempt to collect payment card data. As a result of the criminal intrusions, two class action complaints were filed against ACI by consumers and are currently pending, Mertz v. SuperValu Inc. et al, filed in federal court in the state of Minnesota and Rocke v. SuperValu Inc. et al, filed in federal court in the state of Idaho, alleging deceptive trade practices, negligence and invasion of privacy. The plaintiffs seek unspecified damages. The Judicial Panel on Multidistrict Litigation has consolidated the class actions and transferred the cases to the District of Minnesota. On August 10, 2015, ACI, together with SuperValu, filed a motion to dismiss the class actions, which was granted without prejudice on January 7, 2016. The plaintiffs filed a motion to alter or amend the court’s judgment, which was denied on April 20, 2016. The court also denied leave to amend the complaint. On May 18, 2016, the plaintiffs filed a notice of appeal to the Eighth Circuit Court of Appeals and defendants filed a cross-appeal. In a decision dated August 30, 2017, the Eighth Circuit Court of Appeals reversed the District Court’s dismissal of the case as to one of the 16 named plaintiffs, affirmed the dismissal as to the remaining 15 named plaintiffs and remanded the case to the District Court for further proceedings. On November 3, 2017, ACI filed a motion to dismiss with respect to the remaining plaintiff’s claim on the basis that the plaintiff was not a customer of any of ACI’s

 

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stores, and on March 7, 2018, ACI’s motion to dismiss was granted with prejudice and these complaints are now resolved.

There can be no assurance that ACI will not suffer a similar criminal attack in the future or that unauthorized parties will not gain access to personal information of ACI’s customers. While ACI has recently implemented additional security software and hardware designed to provide additional protections against unauthorized intrusions, there can be no assurance that unauthorized individuals will not discover a means to circumvent ACI’s security. Computer intrusions could adversely affect ACI’s brands, have caused ACI to incur legal and other fees, may cause ACI to incur additional expenses for additional security measures and could discourage customers from shopping in ACI’s stores.

Three of ACI’s insurance carriers have denied its claim for cyber insurance coverage for losses resulting from the intrusions based on, among other things, the insurers’ conclusions that the intrusions began prior to the start date for coverage under the cyber insurance policy. ACI responded to the insurers’ denials disagreeing with the conclusions and reserving ACI’s rights. ACI’s claims with other of its insurance carriers remain outstanding.

ACI uses a combination of insurance and self-insurance to address potential liabilities for workers’ compensation, automobile and general liability, property risk (including earthquake and flood coverage), director and officers’ liability, employment practices liability, pharmacy liability and employee health care benefits.

ACI uses a combination of insurance and self-insurance to address potential liabilities for workers’ compensation, automobile and general liability, property risk (including earthquake and flood coverage), director and officers’ liability, employment practices liability, pharmacy liability and employee health care benefits and cyber and terrorism risks. ACI estimates the liabilities associated with the risks retained by ACI, in part, by considering historical claims experience, demographic and severity factors and other actuarial assumptions which, by their nature, are subject to a high degree of variability. Among the causes of this variability are unpredictable external factors affecting future inflation rates, discount rates, litigation trends, legal interpretations, benefit level changes and claim settlement patterns.

The majority of ACI’s workers’ compensation liability is from claims occurring in California. California workers’ compensation has received intense scrutiny from the state’s politicians, insurers, employers and providers, as well as the public in general.

ACI’s long-lived assets, primarily goodwill and store-level assets, are subject to periodic testing for impairment.

ACI’s long-lived assets, primarily goodwill and store-level assets, are subject to periodic testing for impairment. ACI has incurred significant impairment charges to earnings in the past. Long-lived asset impairment charges were $100.9 million, $46.6 million and $40.2 million in the fiscal years ended February 24, 2018, February 25, 2017 and February 27, 2016, respectively. Failure to achieve sufficient levels of cash flow at reporting units and at store-level could result in impairment charges on long-lived assets. During the second quarter of the fiscal year ended February 24, 2018, ACI recorded a goodwill impairment loss of $142.3 million. The annual evaluation of goodwill performed for ACI’s reporting units during the fourth quarters of the fiscal years ended February 24, 2018, February 25, 2017 and February 27, 2016 did not result in impairment.

 

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ACI’s operations are dependent upon the availability of a significant amount of energy and fuel to manufacture, store, transport and sell products.

ACI’s operations are dependent upon the availability of a significant amount of energy and fuel to manufacture, store, transport and sell products. Energy and fuel costs are influenced by international, political and economic circumstances and have experienced volatility over time. To reduce the impact of volatile energy costs, ACI has entered into contracts to purchase electricity and natural gas at fixed prices to satisfy a portion of ACI’s energy needs. ACI also manages its exposure to changes in energy prices utilized in the shipping process through the use of short-term diesel fuel derivative contracts. Volatility in fuel and energy costs that exceeds offsetting contractual arrangements could adversely affect ACI’s results of operations.

ACI may have liability under certain operating leases that were assigned to third parties.

ACI may have liability under certain operating leases that were assigned to third parties. If any of these third parties fail to perform their obligations under the leases, ACI could be responsible for the lease obligation.

With respect to other leases ACI has assigned to third parties, because of the wide dispersion among third parties and the variety of remedies available, ACI believes that if an assignee became insolvent it would not have a material effect on ACI’s financial condition, results of operations or cash flows. No liability has been recorded for assigned leases in ACI’s consolidated balance sheet related to these contingent obligations.

ACI may be unable to attract and retain key personnel, which could adversely impact its ability to successfully execute its business strategy.

The continued successful implementation of ACI’s business strategy depends in large part upon the ability and experience of members of its senior management. In addition, ACI’s performance is dependent on its ability to identify, hire, train, motivate and retain qualified management, technical, sales and marketing and retail personnel. ACI cannot assure you that it will be able to retain such personnel on acceptable terms or at all. If ACI loses the services of members of its senior management or is unable to continue to attract and retain the necessary personnel, ACI may not be able to successfully execute its business strategy, which could have an adverse effect on its business.

Risks Relating to ACI’s Safeway, A&P and Haggen Acquisitions and Integration

ACI may not be able to achieve the full amount of synergies that are anticipated, or achieve the synergies on the schedule anticipated, from the Safeway acquisition.

Although ACI currently expects to achieve annual synergies from the Safeway acquisition of approximately $823 million on a run-rate basis by February 23, 2019 with remaining associated one-time costs of approximately $200 million, including approximately $65 million of Safeway integration-related capital expenditures, inclusion of the projected synergies in this proxy statement/prospectus should not be viewed as a representation that ACI in fact will achieve this annual synergy target by February 23, 2019, or at all. ACI achieved synergies from the Safeway acquisition of approximately $575 million and $675 million during the fiscal years ended February 25, 2017 and February 24, 2018, respectively, or approximately $750 million on an annual run-rate basis by February 24, 2018, principally from savings related to corporate and division overhead, ACI’s own brands, the conversion of Albertsons and NALP onto Safeway’s IT systems, marketing and advertising cost reduction and operational efficiencies within ACI’s back office and distribution and manufacturing organizations.

 

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To the extent ACI fails to achieve these synergies, its results of operations may be impacted, and any such impact may be material. Actual synergies, the expenses and cash required to realize the synergies and the sources of the synergies could differ materially from these estimates, and ACI cannot assure you that it will achieve the full amount of synergies on the schedule anticipated, or at all, or that these synergy programs will not have other adverse effects on ACI’s business. In light of these significant uncertainties, you should not place undue reliance on ACI’s estimated synergies.

ACI has incurred, and will continue to incur, significant integration costs in connection with Safeway.

ACI expects that it will continue to incur a number of costs associated with integrating the operations of Safeway to achieve expected synergies. The substantial majority of these costs will be non-recurring expenses resulting from the Safeway acquisition and will consist of ACI’s transition of NALP to Safeway’s IT systems, consolidation costs and employment-related costs. Anticipated synergies are expected to require approximately $200 million of remaining associated one-time costs, including approximately $65 million of one-time integration-related capital expenditures during the fiscal year ending February 23, 2019. Additional unanticipated costs may be incurred in the integration of Safeway’s business. Although ACI expects that the elimination of duplicative costs, as well as the realization of other efficiencies related to the integration of the businesses, may offset incremental transaction and merger-related costs over time, this net benefit may not be achieved in the near term, or at all.

New business initiatives and strategies may be less successful than anticipated and could adversely affect ACI’s business.

The introduction, implementation, success and timing of new business initiatives and strategies, including, but not limited to, initiatives to increase revenue or reduce costs, may be less successful or may be different than anticipated, which could adversely affect ACI’s business.

See “—Risks Relating to the Combined Company Following the Merger—The failure by the combined company to integrate successfully the business and operations of Rite Aid and ACI and execute on its business strategy in the expected time frame may adversely affect the combined company’s future results” beginning on page 56 of this proxy statement/prospectus for a discussion of risks relating to the integration of the business and operations of Rite Aid and ACI.

Risks Relating to ACI’s Indebtedness

ACI’s substantial level of indebtedness could adversely affect its financial condition and prevent ACI from fulfilling its obligations under its indebtedness.

ACI has a significant amount of indebtedness. As of February 24, 2018, on an actual basis, ACI had $11.3 billion of debt outstanding, and ACI would have been able to borrow an additional $3.1 billion under the borrowing bases under the ACI ABL Facility. In addition, as of February 24, 2018 and on a pro forma basis for the consummation of the merger and the refinancing transactions contemplated thereby (as further discussed in the section entitled “The Merger—Debt Matters” beginning on page 95 of this proxy statement/prospectus), ACI’s total indebtedness would have been approximately $14.9 billion, and ACI expects that it would have been able to borrow an additional $3.2 under the ACI ABL Facility (or the Best-Efforts ABL Facility).

ACI’s substantial indebtedness could have important consequences to you. For example, it could:

 

    adversely affect the market price of ACI common stock;

 

    increase ACI’s vulnerability to general adverse economic and industry conditions;

 

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    require ACI to dedicate a substantial portion of ACI’s cash flow from operations to payments on its indebtedness, thereby reducing the availability of ACI’s cash flow to fund working capital, capital expenditures and other general corporate purposes, including acquisitions;

 

    limit ACI’s flexibility in planning for, or reacting to, changes in its business and the industry in which it operates;

 

    place ACI at a competitive disadvantage compared to its competitors that have less debt; and

 

    limit ACI’s ability to borrow additional funds.

In addition, ACI cannot assure you that it will be able to refinance any of its debt or that it will be able to refinance its debt on commercially reasonable terms. If ACI were unable to make payments or refinance its debt or obtain new financing under these circumstances, ACI would have to consider other options, such as:

 

    sales of assets;

 

    sales of equity; or

 

    negotiations with ACI’s lenders to restructure the applicable debt.

ACI’s debt instruments may restrict, or market or business conditions may limit, ACI’s ability to use some of its options.

Despite ACI’s significant indebtedness levels, ACI may still be able to incur substantially more debt, which could further exacerbate the risks associated with its substantial leverage.

ACI and its subsidiaries may be able to incur substantial additional indebtedness in the future. The terms of the credit agreements that govern the ACI ABL Facility and the ACI Term Loan Facility (which, together with the ACI ABL Facility, we refer to as the Senior Secured Credit Facilities) and the indentures that govern the NALP Notes (as defined herein), the Safeway Notes and the ACI Unsecured Notes (as defined herein), as well as the indentures governing the 2027 Rite Aid Notes and the 2028 Rite Aid Notes that will remain outstanding after the merger, permit ACI to incur significant additional indebtedness, subject to certain limitations. Additionally, it is expected that the agreements that will govern the Best-Efforts ABL Facility, the ABL Term Loan Facility, and the Floating Rate Indenture (as defined herein) will permit ACI to incur significant additional indebtedness, subject to certain limitations. If new indebtedness is added to ACI’s and ACI’s subsidiaries’ current debt levels, the related risks that ACI and they now face would intensify. See the section entitled “Description of Indebtedness” beginning on page 306 of this proxy statement/prospectus.

To service its indebtedness, the combined company will require a significant amount of cash and its ability to generate cash depends on many factors beyond its control.

The combined company’s ability to make cash payments on and to refinance the combined company indebtedness and to fund planned capital expenditures will depend on its ability to generate significant operating cash flow in the future, as described in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations of ACI—Liquidity and Financial Resources” beginning on page 228 of this proxy statement/prospectus. This ability is, to a significant extent, subject to general economic, financial, competitive, legislative, regulatory and other factors that will be beyond the combined company’s control.

The combined company’s business may not generate sufficient cash flow from operations to enable the combined company to pay its indebtedness or to fund its other liquidity needs. In any such circumstance, the combined company may need to refinance all or a portion of its indebtedness, on or

 

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before maturity. The combined company may not be able to refinance any indebtedness on commercially reasonable terms or at all. If the combined company cannot service its indebtedness, it may have to take actions such as selling assets, seeking additional equity or reducing or delaying capital expenditures, strategic acquisitions and investments. Any such action, if necessary, may not be effected on commercially reasonable terms or at all. The instruments governing the combined company’s indebtedness may restrict the combined company’s ability to sell assets and the combined company’s use of the proceeds from such sales.

If the combined company is unable to generate sufficient cash flow or are otherwise unable to obtain funds necessary to meet required payments of principal, premium, if any, and interest on its indebtedness, or if it otherwise fail to comply with the various covenants in the instruments governing its indebtedness, it could be in default under the terms of the agreements governing such indebtedness. In the event of such default, the holders of such indebtedness could elect to declare all the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest, the lenders under ACI credit agreement, or any replacement revolving credit facility in respect thereof, could elect to terminate their revolving commitments thereunder, cease making further loans and institute foreclosure proceedings against the combined company’s assets, and the combined company could be forced into bankruptcy or liquidation.

ACI’s debt instruments limit its flexibility in operating its business.

ACI’s debt instruments contain various covenants that limit its and its restricted subsidiaries’ ability to engage in specified types of transactions, including, among other things:

 

    incur additional indebtedness or provide guarantees in respect of obligations of other persons, or issue disqualified or preferred stock;

 

    pay dividends on, repurchase or make distributions in respect of ACI’s capital stock or make other restricted payments;

 

    repay, redeem or repurchase debt;

 

    make loans, investments and capital expenditures;

 

    sell or otherwise dispose of certain assets;

 

    incur liens;

 

    engage in sale and leaseback transactions;

 

    restrict dividends, loans or asset transfers from ACI’s subsidiaries;

 

    consolidate, merge, sell or otherwise dispose of all or substantially all of ACI’s assets;

 

    enter into a new or different line of business; and

 

    enter into certain transactions with ACI’s affiliates.

A breach of any of these covenants could result in a default under ACI’s debt instruments. In addition, any debt agreements (including in connection with the Financing) ACI enters into in the future may further limit its ability to enter into certain types of transactions. In addition, the restrictive covenants in the ACI ABL Facility require, and the Best-Efforts ABL Facility and ABL Term Loan Facility are expected to require, ACI, in certain circumstances, to maintain a specific fixed charge coverage ratio. ACI’s ability to meet that financial ratio can be affected by events beyond its control, and ACI cannot assure you that ACI will meet it. A breach of this covenant could result in a default under such facilities. Moreover, the occurrence of a default under the ACI ABL Facility could result in an event of default under ACI’s other indebtedness. Upon the occurrence of an event of default under the ACI ABL Facility or the Best-Efforts ABL Facility, the lenders could elect to declare all amounts

 

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outstanding under such facilities to be immediately due and payable and terminate all commitments to extend further credit. Even if ACI is able to obtain new financing, it may not be on commercially reasonable terms, or terms that are acceptable to ACI. See the section entitled “Description of Indebtedness” beginning on page 306 of this proxy statement/prospectus.

Currently, substantially all of ACI’s assets are pledged as collateral under the Senior Secured Credit Facilities.

As of February 24, 2018, on an actual basis, ACI’s total indebtedness was approximately $11.3 billion, including $5.7 billion outstanding under ACI’s Senior Secured Credit Facilities. As of February 24, 2018, on an actual basis, ACI had $576.8 million of outstanding standby letters of credit under its Senior Secured Credit Facilities. In addition, as of February 24, 2018 and on a pro forma basis for the consummation of the merger and the refinancing transactions contemplated thereby (as further discussed in the section entitled “The Merger—Debt Matters” beginning on page 95 of this proxy statement/prospectus), ACI’s total indebtedness would have been approximately $14.9 billion. Substantially all of ACI’s and ACI’s subsidiaries’ assets are pledged as collateral for this indebtedness. Additionally, as a result of the refinancing transactions contemplated in connection with the merger, the 2027 Rite Aid Notes and the 2028 Rite Aid Notes will receive an equal and ratable lien solely on the assets of Rite Aid (and not on its subsidiaries) that secure the ACI Term Loan Facility. As of February 24, 2018, the ACI ABL Facility would have permitted additional borrowings of up to a maximum of $3.1 billion under the borrowing bases as of that date. If ACI is unable to repay all secured borrowings under its Senior Secured Credit Facilities when due, whether at maturity or if declared due and payable following a default, the administrative agents or the lenders, as applicable, would have the right to proceed against the collateral pledged to secure the indebtedness and may sell the assets pledged as collateral in order to repay those borrowings, which could have a material adverse effect on ACI’s business, financial condition, results of operations or cash flows.

Additionally, subject to certain exceptions, the Best-Efforts ABL Facility, the ABL Term Loan Facility and the Floating Rate Notes will also be secured by ACI’s and ACI’s subsidiaries’ (including Rite Aid and its subsidiaries) assets after the merger. For a description of the collateral securing these facilities, see the section entitled “The Merger—Debt Matters” beginning on page 95 of this proxy statement/prospectus for more information.

Increases in interest rates and/or a downgrade of ACI’s credit ratings could negatively affect its financing costs and its ability to access capital.

ACI has exposure to future interest rates based on the variable rate debt under ACI’s credit facilities and to the extent ACI raises additional debt in the capital markets to meet maturing debt obligations, to fund ACI’s capital expenditures and working capital needs and to finance future acquisitions. Daily working capital requirements are typically financed with operational cash flow and through the use of various committed lines of credit. The interest rate on these borrowing arrangements is generally determined from the inter-bank offering rate at the borrowing date plus a pre-set margin. Although ACI employs risk management techniques to hedge against interest rate volatility, significant and sustained increases in market interest rates could materially increase ACI’s financing costs and negatively impact its reported results.

ACI relies on access to bank and capital markets as sources of liquidity for cash requirements not satisfied by cash flows from operations. A downgrade in ACI’s credit ratings from the internationally recognized credit rating agencies could negatively affect its ability to access the bank and capital markets, especially in a time of uncertainty in either of those markets. A rating downgrade could also impact ACI’s ability to grow its business by substantially increasing the cost of, or limiting access to, capital.

 

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Risks Relating to Rite Aid’s Business

You should read and consider risk factors specific to Rite Aid’s business that will also affect the combined company after the merger. These risks are described in the section entitled “Risk Factors” in Rite Aid’s Annual Report on Form 10-K for the fiscal year ended March 3, 2018, and in other documents incorporated by reference into this proxy statement/prospectus. See the section entitled “Where You Can Find More Information” beginning on page 353 of this proxy statement/prospectus for the location of information incorporated by reference into this proxy statement/prospectus.

 

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

The registration statement on Form S-4 of which this proxy statement/prospectus forms a part, and the documents to which ACI and Rite Aid refer you to in this proxy statement/prospectus as well as oral statements made or to be made by ACI and Rite Aid, include certain “forward-looking statements” within the meaning of the Securities Act and the Exchange Act, both as amended by the Private Securities Litigation Reform Act of 1995, with respect to the businesses, strategies and plans of ACI and Rite Aid, their expectations relating to the merger and their future financial condition and performance. Statements included in or incorporated by reference into this proxy statement/prospectus that are not historical facts, including statements about the beliefs and expectations of the management of each of ACI and Rite Aid, are forward-looking statements. Words such as “believes”, “plans”, “anticipates”, “estimates”, “expects”, “intends”, “aims”, “potential”, “will”, “would”, “could”, “considered”, “likely”, “estimate” and variations of these words and similar future or conditional expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. Statements regarding cost synergies and revenue opportunities (and in each case, the components, amounts and/or percentages thereof) are forward-looking statements. While ACI and Rite Aid believe these expectations, assumptions, estimates and projections are reasonable, such forward-looking statements are only predictions and involve known and unknown risks and uncertainties, many of which are beyond the control of ACI and Rite Aid. By their nature, forward-looking statements involve risk and uncertainty because they relate to events and depend upon future circumstances that may or may not occur. Actual results may differ materially from the current expectations of ACI and Rite Aid depending upon a number of factors affecting their businesses and risks associated with the successful execution of the merger and the integration and performance of their businesses following the merger. These factors include, but are not limited to, risks and uncertainties detailed in Rite Aid’s periodic public filings with the SEC, including those discussed in the section of this proxy statement/prospectus entitled “Risk Factors” beginning on page 50 of this proxy statement/prospectus and in the section entitled “Risk Factors” in Rite Aid’s Annual Report on Form 10-K for the fiscal year ended March 3, 2018, factors contained or incorporated by reference into such documents and in subsequent filings by Rite Aid with the SEC, and the following factors:

 

    the occurrence of any change, effect, event, occurrence, development, matter, state of facts, series of events or circumstances that could give rise to the termination of the merger agreement, including a termination of the merger agreement under circumstances that could require Rite Aid to pay a termination fee and/or expenses to ACI;

 

    access to significant debt financing for the proposed merger on a timely basis and on reasonable terms;

 

    uncertainties related to the timing and likelihood of the completion of the merger, including the risk that the transaction may not close due to one or more closing conditions to the merger not being satisfied or waived, such as regulatory approvals not being obtained, on a timely basis or otherwise, or that a governmental entity prohibited, delayed or refused to grant approval for the consummation of the transaction or required certain conditions, limitations or restrictions in connection with such approvals;

 

    risks relating to the integration of ACI and Rite Aid operations, products and employees into the combined company and the possibility that the anticipated cost synergies, growth opportunities and other benefits of the proposed merger (including the components, amounts and/or percentages thereof) will not be realized in whole or in part, within the expected timeframe, or at all, or that the costs related to such activities will not be greater than anticipated;

 

    the inability to complete the merger due to the failure to obtain Rite Aid stockholder approval of the merger proposal or the failure to satisfy other conditions to the closing of the merger;

 

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    the risk that there may be a material adverse change of Rite Aid or ACI;

 

    the failure of the merger to close for any other reason;

 

    the impact of the proposed transaction on each company’s business pending consummation of the transaction including the risk that the proposed transaction could have adverse effects on the market price of Rite Aid common stock and the risk that the proposed transaction could have an adverse effect on the ability of Rite Aid and ACI to retain customers, hire key personnel and maintain relationships with their suppliers and customers;

 

    the outcome of any legal proceedings instituted against Rite Aid, ACI and/or others relating to the merger;

 

    diversion of the attention of Rite Aid’s and ACI’s respective management from ongoing business concerns;

 

    limitations placed on the ability of ACI and Rite Aid to operate their respective businesses by the merger agreement;

 

    the effect of the announcement of the merger on Rite Aid’s and ACI’s business relationships, employees, customers, suppliers, vendors, other partners, including Rite Aid’s RediClinics, standing with regulators, operating results and businesses generally;

 

    the amount of any costs, fees, expenses, impairments and charges related to the merger;

 

    the competitive nature of the industry in which ACI and Rite Aid conduct their respective businesses;

 

    general business and economic conditions, including the rate of inflation or deflation, consumer spending levels, population, employment and job growth and/or losses in ACI’s and Rite Aid’s markets;

 

    failure of ACI to successfully integrate Safeway or achieve anticipated synergies from the acquisition and integration of Safeway;

 

    failure of ACI to successfully integrate the acquired A&P and Haggen stores;

 

    ACI’s ability to increase identical store sales, expand its own brands, maintain or improve operating margins, revenue and revenue growth rate, control or reduce costs, improve buying practices and control shrink;

 

    ACI’s ability to expand or grow its home delivery network and “Drive Up and Go” pick-up services;

 

    pricing pressures and competitive factors, which could include pricing strategies, store openings, remodels or acquisitions by ACI’s competitors;

 

    labor costs, including benefit plan costs and severance payments, or labor disputes that may arise from time to time and work stoppages that could occur in areas where certain collective bargaining agreements have expired or are on indefinite extensions or are scheduled to expire in the near future;

 

    disruptions in ACI’s manufacturing facilities’ or distribution centers’ operations, disruption of significant supplier relationships, or disruptions to ACI’s produce or product supply chains;

 

    results of any ongoing litigation in which ACI or Rite Aid is involved or any litigation in which ACI or Rite Aid may become involved;

 

    data security, or the failure of ACI’s (or through SuperValu) or Rite Aid’s IT systems;

 

    increased costs as the result of ACI being a public company;

 

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    the effects of government regulation and legislation, including healthcare reform;

 

    ACI’s ability to raise additional capital to finance the growth of its business, including to fund acquisitions;

 

    ACI’s ability to service its debt obligations, and restrictions in its debt agreements;

 

    Rite Aid’s high level of indebtedness and its ability to make interest and principal payments on its debt and satisfy the other covenants contained in its debt agreements;

 

    the impact of private and public third-party payers’ continued reduction in prescription drug reimbursements and their ongoing efforts to limit participation in payor networks, including through mail order;

 

    dividends and stock repurchases;

 

    Rite Aid’s ability to achieve the benefits of its efforts to reduce the costs of its generic and other drugs;

 

    risks related to Rite Aid’s proposed asset sale transactions with WBA, including the possibility that the remaining transactions may not close;

 

    plans for future growth and other business development activities;

 

    changes in tax laws or interpretations that could increase the consolidated tax liabilities of ACI and Rite Aid; and

 

    competitive pressures in all markets in which ACI and Rite Aid operate.

Consequently, all of the forward-looking statements ACI or Rite Aid make in this document are qualified by the information contained in or incorporated by reference into this proxy statement/prospectus, including, but not limited to, (i) the information contained under this heading, (ii) the information discussed in the section entitled “Risk Factors” beginning on page 50 of this proxy statement/prospectus and (iii) the information discussed under the section entitled “Risk Factors” in Rite Aid’s Annual Report on Form 10-K for the fiscal year ended March 3, 2018. See the section entitled “Where You Can Find More Information” beginning on page 353 of this proxy statement/prospectus.

Neither ACI nor Rite Aid is under any obligation, and each expressly disclaim any obligation, to update, alter, or otherwise revise any forward- looking statements, whether written or oral, that may be made from time to time, whether as a result of new information, future events, or otherwise. Persons reading this proxy statement/prospectus are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date hereof.

 

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INFORMATION ABOUT THE SPECIAL MEETING

General

This proxy statement/prospectus is being provided to Rite Aid stockholders as part of a solicitation of proxies by the Rite Aid board of directors for use at the special meeting to be held at the time and place specified below, and at any adjournment or postponement thereof.

Date, Time and Place

Rite Aid will hold the special meeting on August 9, 2018 at the office of Skadden, Arps, Slate, Meagher & Flom LLP, 4 Times Square, New York, NY 10036, at 8:30 a.m., Eastern time.

Purpose of the Special Meeting

At the special meeting, Rite Aid will ask Rite Aid stockholders of record as of the record date to vote on proposals (i) to approve the merger agreement and the transactions contemplated by the merger agreement, including the mergers, (ii) to approve, by a non-binding, advisory vote, compensation that will or may become payable by Rite Aid to its named executive officers in connection with the merger, and (iii) to approve one or more adjournments of the special meeting to a later date or dates, if necessary or appropriate, to solicit additional proxies if there are insufficient votes to adopt the merger agreement at the time of the special meeting.

Recommendation of the Rite Aid Board of Directors

The Rite Aid board of directors, after considering various factors described under the section entitled “The Merger—Recommendation of the Rite Aid Board of Directors; Rite Aid’s Reasons for the Merger” beginning on page 122 of this proxy statement/prospectus, unanimously determined that the merger agreement and the transactions contemplated by the merger agreement, including the mergers, are advisable, fair to and in the best interests of Rite Aid and its stockholders, and approved, adopted and declared advisable the merger agreement and the transactions contemplated by the merger agreement.

The Rite Aid board of directors unanimously recommends that you vote (i) “FOR” the proposal to approve the merger agreement and the transactions contemplated by the merger agreement, including the mergers, (ii) “FOR” the proposal to approve, by a non-binding, advisory vote, compensation that will or may become payable by Rite Aid to its named executive officers in connection with the merger and (iii) “FOR” the proposal to approve one or more adjournments of the special meeting to a later date or dates, if necessary or appropriate, to solicit additional proxies if there are insufficient votes to adopt the merger agreement at the time of the special meeting.

Record Date; Stockholders Entitled to Vote; Quorum

Only stockholders of record as of the close of business on June 22, 2018 are entitled to notice of the special meeting and to vote at the special meeting or at any adjournments or postponements thereof. A list of stockholders entitled to vote at the special meeting will be available in Rite Aid’s offices located at 30 Hunter Lane, Camp Hill, Pennsylvania 17011, during regular business hours for a period of at least ten (10) days before the special meeting and at the place of the special meeting during the special meeting.

As of the record date, there were approximately 1,067,312,183 shares of Rite Aid common stock outstanding and entitled to be voted at the special meeting.

 

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A quorum of stockholders is necessary to hold a special meeting. The holders of a majority of the outstanding shares of Rite Aid common stock entitled to vote at the special meeting, either present in person or represented by proxy, will constitute a quorum at the special meeting. As a result, 533,656,092 shares must be represented by proxy or by stockholders present and entitled to vote at the special meeting to have a quorum.

In the event that a quorum is not present at the special meeting, it is expected that the meeting would be adjourned or postponed to a later date to solicit additional proxies.

Voting by Rite Aid’s Directors and Executive Officers

As of the record date, Rite Aid directors and executive officers beneficially owned and were entitled to vote, in the aggregate, 8,474,826 shares of Rite Aid common stock (excluding any shares of Rite Aid common stock that would be delivered upon exercise or conversion of stock options or other equity-based awards), which represented approximately 0.79% of the outstanding shares of Rite Aid common stock on that date. The directors and executive officers of Rite Aid have informed Rite Aid that they currently intend to vote all of their shares of Rite Aid common stock (i) “FOR” the proposal to approve the merger agreement and the transactions contemplated by the merger agreement, including the mergers, (ii) “FOR” the proposal to approve, by a non-binding, advisory vote, compensation that will or may become payable by Rite Aid to its named executive officers in connection with the merger and (iii) “FOR” the proposal to approve one or more adjournments of the special meeting to a later date or dates, if necessary or appropriate, to solicit additional proxies if there are insufficient votes to adopt the merger agreement at the time of the special meeting.

Required Vote; Failure to Vote, Broker Non-Votes and Abstentions

The affirmative vote of the holders of a majority of the outstanding shares of Rite Aid common stock entitled to vote thereon is required to approve the merger proposal. Adoption of the merger agreement by Rite Aid stockholders is a condition to the closing of the merger.

Assuming a quorum is present, approval of the compensation proposal requires the affirmative vote of a majority of the shares of Rite Aid common stock represented at the special meeting, either in person or by proxy, and entitled to vote thereon. Approval of the adjournment proposal, whether or not a quorum is present, requires the affirmative vote of a majority of the shares of Rite Aid common stock represented at the special meeting, either in person or by proxy, and entitled to vote thereon.

If a Rite Aid stockholder abstains from voting, the abstention will have the same effect as if the stockholder voted “AGAINST” the merger proposal, the compensation proposal and the adjournment proposal.

If you hold your shares in “street name,” the failure to instruct your broker, bank or other nominee on how to vote your shares will count as a vote “AGAINST” the merger proposal, but will have no effect on the compensation proposal or the adjournment proposal.

Broker non-votes are shares held by a broker, bank or other nominee that are present in person or represented by proxy at the special meeting, but with respect to which the broker, bank or other nominee is not instructed by the beneficial owner of such shares on how to vote on a particular proposal and the broker does not have discretionary voting power on such proposal. Because brokers, banks and other nominee holders of record do not have discretionary voting authority with respect to any of the three proposals, if a beneficial owner of shares of Rite Aid common stock held in “street name” does not give voting instructions to the broker, bank or other nominee with respect to any of the

 

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proposals, then those shares will not be present in person or represented by proxy at the special meeting. If there are any broker non-votes, then such broker non-votes will be counted as a vote “AGAINST” the merger proposal, but will have no effect on the compensation proposal or the adjournment proposal.

Voting of Proxies

If your shares are registered in your name with Rite Aid’s transfer agent, Broadridge Financial Solutions, Inc., you may cause your shares to be voted by returning a signed proxy card, or you may vote in person at the special meeting. Additionally, you may submit electronically over the Internet or by phone a proxy authorizing the voting of your shares by following the instructions on your proxy card. You must have the enclosed proxy card available, and follow the instructions on the proxy card, in order to submit a proxy electronically over the Internet or by telephone. Based on your proxy cards or Internet and telephone proxies, the proxy holders will vote your shares according to your directions.

If you plan to attend the special meeting and wish to vote in person, you will be given a ballot at the meeting. If your shares are registered in your name, you are encouraged to vote by proxy even if you plan to attend the special meeting in person. If you attend the special meeting and vote in person, your vote by ballot will revoke any proxy previously submitted.

Voting instructions are included on your proxy card. All shares represented by properly executed proxies received in time for the special meeting will be voted at the special meeting in accordance with the instructions of the stockholder. Properly executed proxies that do not contain voting instructions will be voted (i) “FOR” the proposal to approve the merger agreement and the transactions contemplated by the merger agreement, including the mergers, (ii) “FOR” the proposal to approve, by a non-binding, advisory vote, compensation that will or may become payable by Rite Aid to its named executive officers in connection with the merger and (iii) “FOR” the proposal to approve one or more adjournments of the special meeting to a later date or dates, if necessary or appropriate, to solicit additional proxies if there are insufficient votes to adopt the merger agreement at the time of the special meeting. No proxy that is specifically marked against the merger proposal will be voted in favor of the compensation proposal, unless it is specifically marked “FOR” the approval of the compensation proposal.

If your shares are held in “street name” through a broker, bank or other nominee, you may vote through your broker, bank or other nominee by completing and returning the voting form provided by your broker, bank or other nominee, or by the Internet or telephone through your broker, bank or other nominee if such a service is provided. To vote via the Internet or telephone through your broker, bank or other nominee, you should follow the instructions on the voting form provided by your broker, bank or other nominee. Under applicable stock exchange rules, brokers, banks or other nominees have the discretion to vote your shares on routine matters if you fail to instruct your broker, bank or other nominee on how to vote your shares with respect to such matters. Proposals 1, 2 and 3 in this proxy statement/prospectus are non-routine matters, and brokers, banks and other nominees therefore cannot vote on these proposals without your instructions. If you do not return your broker’s, bank’s or other nominee’s voting form, do not vote via the Internet or telephone through your broker, bank or other nominee, if applicable, or do not attend the special meeting and vote in person with a proxy from your broker, bank or other nominee, such actions will have the same effect as if you voted “AGAINST” the merger proposal but will not have any effect on the compensation proposal or the adjournment proposal.

 

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Revocation of Proxies

If you are a stockholder of record, you may change your vote or revoke your proxy at any time before it is voted at the special meeting by:

 

    Submitting a new proxy electronically over the Internet or by telephone after the date of the earlier submitted proxy;

 

    Delivering a written notice of revocation to Rite Aid’s Secretary;

 

    Signing another proxy card with a later date and returning it to Rite Aid prior to the special meeting; or

 

    Attending the special meeting and voting in person.

Please note that to be effective, your new proxy card, Internet or telephonic voting instructions or written notice of revocation must be received by Rite Aid’s Secretary prior to the special meeting and, in the case of Internet or telephonic voting instructions, must be received before 11:59 p.m., Eastern time on August 8, 2018. If you have submitted a proxy, your appearance at the special meeting, in the absence of voting in person or submitting an additional proxy or revocation, will not have the effect of revoking your prior proxy.

If you hold your shares of common stock in “street name,” you should contact your broker, bank or other nominee for instructions regarding how to change your vote; or contact Rite Aid’s proxy solicitor, Morrow Sodali LLC at (800) 662-5200. You may also vote in person at the special meeting if you obtain a valid legal proxy from your broker, bank or other nominee. Any adjournment of the special meeting for the purpose of soliciting additional proxies will allow Rite Aid stockholders who have already sent in their proxies to revoke them at any time prior to their use at the special meeting, as adjourned.

Solicitation of Proxies

The expense of soliciting proxies in the enclosed form will be borne by Rite Aid. Rite Aid has retained Morrow Sodali LLC, a proxy solicitation firm, to solicit proxies in connection with the special meeting at a cost of approximately $30,000 plus expenses. In addition, Rite Aid may reimburse brokers, banks and other custodians, nominees and fiduciaries representing beneficial owners of shares for their expenses in forwarding soliciting materials to such beneficial owners, and representatives of ACI may solicit proxies in connection with the special meeting at the expense of ACI. Proxies may also be solicited by some of Rite Aid’s directors, officers and employees, personally or by telephone, facsimile or other means of communication. No additional compensation will be paid for such services.

Anticipated Date of Completion of the Merger

While there is no assurance that the merger will close, the parties are working toward completing the merger early in the second half of calendar year 2018. However, the exact timing of completion of the merger cannot be predicted because the completion of the merger is subject to conditions, including, among other things, adoption of the merger agreement by Rite Aid stockholders and the receipt of regulatory approvals.

Proposal No. 1—Approval of the Merger Proposal

(Item 1 on the Rite Aid proxy card)

 

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This proxy statement/prospectus is being furnished to you as a Rite Aid stockholder as part of the solicitation of proxies by the Rite Aid board of directors for use at the special meeting to consider and vote upon the merger proposal.

The merger cannot be completed without the approval of the merger proposal by the affirmative vote of a majority of the outstanding Rite Aid common stock. If you do not vote, the effect will be the same as a vote against approving the merger agreement. The merger agreement is attached as Annex A to this proxy statement/prospectus.

The Rite Aid board of directors has unanimously (i) determined that the merger agreement, the merger and the other transactions contemplated by the merger agreement are fair to and in the best interests of Rite Aid and its stockholders, (ii) approved and declared it advisable that Rite Aid enter into the merger agreement and (iii) adopted the merger agreement and the transactions contemplated thereby, including the mergers.

The Rite Aid board of directors unanimously recommends that Rite Aid stockholders vote “FOR” the merger proposal.

Proposal No. 2—Approval of the Compensation Proposal

(Item 2 on the Rite Aid proxy card)

The Non-Binding Advisory Proposal

Section 14A of the Exchange Act, which was enacted as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, requires that Rite Aid provide Rite Aid stockholders with the opportunity to vote to approve, on an advisory non-binding basis, the payment of certain compensation that will or may become payable by Rite Aid to its named executive officers in connection with the merger. These payments are disclosed in the section entitled “Interests of the Directors and Officers of Rite Aid in the Merger—Golden Parachute Compensation” and the accompanying footnotes beginning on page 303 of this proxy statement/prospectus.

Rite Aid is asking Rite Aid stockholders to indicate their approval of the compensation that will or may become payable by Rite Aid to its named executive officers in connection with the merger. In general, the various plans and arrangements pursuant to which these compensation payments may be made formed part of Rite Aid’s overall compensation program for its named executive officers, and have previously been disclosed to Rite Aid stockholders as part of the Compensation Discussion and Analysis and related sections of Rite Aid’s annual proxy statements, as modified or supplemented by any applicable documents filed with the SEC since the date of such proxy statements. The Compensation Committee of the Rite Aid board of directors, which is composed solely of non-management directors, believes such compensatory arrangements to be reasonable.

The Rite Aid board of directors encourages you to review carefully the named executive officer merger-related compensation information disclosed in this proxy statement/prospectus. The Rite Aid board of directors unanimously recommends that you vote “FOR” the following resolution:

“RESOLVED, that the stockholders of Rite Aid approve, on a nonbinding, advisory basis, the compensation that will or may become payable to Rite Aid’s named executive officers that is based on or otherwise relates to the merger as disclosed pursuant to Item 402(t) of Regulation S-K in the section entitled “Interests of the Directors and Officers of Rite Aid in the Merger—Golden Parachute Compensation” in Rite Aid’s proxy statement/prospectus for the special meeting.”

 

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Stockholders should note that this proposal is not a condition to completion of the merger, and as an advisory vote, the result will not be binding on Rite Aid, the Rite Aid board of directors or ACI. Further, the underlying plans and arrangements are contractual in nature and not, by their terms, subject to stockholder approval. Accordingly, regardless of the outcome of the advisory vote, if the merger is consummated, Rite Aid’s named executive officers will be entitled to receive the compensation that is based on or otherwise relates to the merger in accordance with the terms and conditions applicable to those payments.

Vote Required and Board of Directors Recommendation

Assuming a quorum is present, approval of the compensation proposal requires the affirmative vote of a majority of the shares of Rite Aid common stock represented at the special meeting, either in person or by proxy, and entitled to vote thereon.

The Rite Aid board of directors unanimously recommends that you vote “FOR” the compensation proposal.

Proposal No. 3—Approval of the Adjournment Proposal

(Item 3 on the Rite Aid proxy card)

The Adjournment Proposal

Rite Aid is asking you to approve a proposal to approve one or more adjournments of the special meeting to a later date or dates, if necessary or appropriate, to solicit additional proxies if there are insufficient votes to adopt the merger agreement at the time of the special meeting. If Rite Aid stockholders approve the adjournment proposal, Rite Aid could adjourn the special meeting and any adjourned session of the special meeting and use the additional time to solicit additional proxies, including the solicitation of proxies from stockholders that have previously returned properly executed proxies voting against adoption of the merger agreement. Among other things, approval of the adjournment proposal could mean that, even if Rite Aid had received proxies representing a sufficient number of votes against adoption of the merger agreement such that the merger proposal would be defeated, Rite Aid could adjourn the special meeting without a vote on the adoption of the merger agreement and seek to convince the holders of those shares to change their votes to votes in favor of adoption of the merger agreement. Additionally, Rite Aid may seek to adjourn the special meeting if a quorum is not present at the special meeting.

Vote Required and Board of Directors Recommendation

Approval of the adjournment proposal, whether or not a quorum is present, requires the affirmative vote of a majority of the shares of Rite Aid common stock represented at the special meeting, either in person or by proxy, and entitled to vote thereon.

The Rite Aid board of directors believes that it is in the best interests of Rite Aid and its stockholders to be able to adjourn the special meeting, if necessary or appropriate, for the purpose of soliciting additional proxies in respect of the merger proposal if there are insufficient votes to adopt the merger agreement at the time of the special meeting.

The Rite Aid board of directors unanimously recommends that you vote “FOR” the adjournment proposal.

Other Matters to Come Before the Rite Aid Special Meeting

At this time, Rite Aid knows of no other matters to be submitted at the special meeting.

 

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PARTIES TO THE MERGER

Rite Aid Corporation

30 Hunter Lane

Camp Hill, Pennsylvania 17011

(717) 761-2633

Rite Aid Corporation, a Delaware corporation, was incorporated in 1968 and, after giving effect to the sale of certain stores to WBA is one of the largest retail drugstore chains in the United States based on both revenues and number of stores. As of May 7, 2018, Rite Aid operated 2,533 stores in 19 states across the country. Rite Aid is a pharmacy retail healthcare company that provides its customers and communities with a high level of care and service through various programs it offers through its two reportable business segments, its Retail Pharmacy segment and its Pharmacy Services segment. Rite Aid accomplishes its goal of delivering comprehensive care to its customers through its retail drugstores, RediClinic walk-in retail health clinics and transparent and traditional EnvisionRxOptions and MedTrak PBMs. Rite Aid also offers fully integrated mail-order and specialty pharmacy services through EnvisionPharmacies. Additionally through Envision Insurance Company, EnvisionRxOptions also serves one of the fastest-growing demographics in healthcare: seniors enrolled in Medicare Part D. When combined with Rite Aid’s retail platform, this comprehensive suite of services allows Rite Aid to provide value and choice to customers, patients and payors and allows it to succeed in today’s evolving healthcare marketplace. Rite Aid is headquartered in Camp Hill, Pennsylvania.

Rite Aid common stock is listed on the NYSE under the symbol “RAD.”

Albertsons Companies, Inc.

250 Parkcenter Blvd.

Boise, Idaho 83706

(208) 395-6200

Albertsons Companies, Inc., a Delaware corporation, was formed in 2015 in connection with the planned reorganizational transactions of AB Acquisition. For more information on the ACI Reorganization Transactions, see the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations of ACI—The ACI Reorganization Transactions” beginning on page 212 of this proxy statement/prospectus.

ACI is one of the largest food and drug retailers in the United States, with both a strong local presence and national scale. As of February 24, 2018, ACI operated 2,318 stores across 35 states and the District of Columbia under 20 well-known banners including Albertsons, Safeway, Vons, Jewel-Osco, Shaw’s, Acme, Tom Thumb, Randalls, United Supermarkets, Pavilions, Market Street, Star Market, Haggen and Carrs, as well as meal kit company Plated based in New York City. ACI operated 1,777 pharmacies, 1,275 in-store branded coffee shops and 397 adjacent fuel centers. Over the past five years, ACI has completed a series of acquisitions, beginning in March 2013 with its acquisition of NALP from SuperValu, which included the Albertsons stores that ACI did not already own and stores operating under the Acme, Jewel-Osco, Shaw’s and Star Market banners. In December 2013, ACI acquired United, a regional grocery chain in North and West Texas. In January 2015, ACI acquired Safeway which at the time of acquisition was the second-largest publicly traded food retailer in the United States, in a transaction that significantly increased ACI’s scale and geographic reach. For the fiscal year ended February 24, 2018, ACI achieved annual run-rate synergies related to the acquisition of Safeway of approximately $750 million. ACI also completed the acquisition of 73 stores from A&P for ACI’s Acme banner and 35 stores from Haggen during the fiscal year ended February 27, 2016, and ACI acquired an additional 29 stores from Haggen during the fiscal year ended February 25, 2017, 15 of which operate under the Haggen banner.

 

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Ranch Acquisition Corp.

c/o Albertsons Companies, Inc.

250 Parkcenter Blvd.

Boise, Idaho 83706

(208) 395-6200

Ranch Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of Merger Sub II, was formed solely for the purpose of facilitating the merger and the other transactions contemplated by the merger agreement. We refer to Ranch Acquisition Corp. as Merger Sub I. Merger Sub I has not carried on any activities or operations to date, except for those activities incidental to its formation and undertaken in connection with the transactions contemplated by the merger agreement. Pursuant to the merger agreement, at the closing of the merger, Merger Sub I will be merged with and into Rite Aid, with Rite Aid surviving the merger as a wholly-owned subsidiary of ACI.

Ranch Acquisition II LLC

c/o Albertsons Companies, Inc.

250 Parkcenter Blvd.

Boise, Idaho 83706

(208) 395-6200

Ranch Acquisition II LLC, a Delaware limited liability company and a wholly-owned subsidiary of ACI, was formed solely for the purpose of facilitating the merger and the other transactions contemplated by the merger agreement. We refer to Ranch Acquisition II LLC as Merger Sub II. Merger Sub II has not carried on any activities or operations to date, except for those activities incidental to its formation and undertaken in connection with the transactions contemplated by the merger agreement. Pursuant to the merger agreement, immediately after the merger, Rite Aid, as the corporation surviving the merger, will be merged with and into Merger Sub II, with Merger Sub II surviving the subsequent merger as a wholly-owned subsidiary of ACI and a limited liability company.

 

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THE MERGER

This section describes the merger and the other transactions contemplated by the merger agreement. The description in this section and elsewhere in this proxy statement/prospectus is qualified in its entirety by reference to the complete text of the merger agreement, a copy of which is attached as Annex A and is incorporated by reference into this proxy statement/prospectus. This summary does not purport to be complete and may not contain all of the information about the merger and the other transactions contemplated by the merger agreement that is important to you. You are encouraged to read the merger agreement carefully and in its entirety. This section is not intended to provide you with any factual information about ACI or Rite Aid. Such information can be found elsewhere in this proxy statement/prospectus and in the public filings Rite Aid makes with the SEC, as described in the section entitled “Where You Can Find More Information” beginning on page 353 of this proxy statement/prospectus.

The Merger

The proposed transaction is a series of two mergers whereby Rite Aid will become a subsidiary of ACI pursuant to the merger agreement. If the merger proposal is approved by the requisite number of holders of Rite Aid common stock and the other closing conditions under the merger agreement have been satisfied or waived, Merger Sub I will merge with and into Rite Aid, with Rite Aid surviving the merger as a wholly-owned direct subsidiary of Merger Sub II, and, immediately following the merger, Rite Aid will merge with and into Merger Sub II, with Merger Sub II surviving the subsequent merger as a wholly-owned direct subsidiary of ACI and a limited liability company. As a result of the mergers, Rite Aid will become a wholly-owned direct subsidiary of ACI.

Merger Consideration

At the effective time of the merger, each share of Rite Aid common stock issued and outstanding immediately prior to the effective time of the merger (other than shares of Rite Aid common stock owned, directly or indirectly, by ACI, Merger Sub I or Rite Aid (including shares of Rite Aid common stock held as treasury stock by Rite Aid), and in each case not held on behalf of third parties, immediately prior to the effective time of the merger) will be converted into the right to receive and become exchangeable for 0.1000, which we refer to as the base exchange ratio, of a fully paid and nonassessable share of ACI common stock, without interest, which we refer to as the base consideration, plus, at the election of the holder of Rite Aid common stock, either:

 

    for each share of Rite Aid common stock with respect to which an election to receive cash has been effectively made and not revoked or redeemed, and for each share of Rite Aid common stock with respect to which a Rite Aid stockholder has not made an election to receive cash or stock, an amount in cash equal to $0.1832 per share, without interest, which we refer to as the additional cash consideration (and which, together with the base consideration, we refer to as the cash election consideration); provided, that to the extent the aggregate additional cash consideration to be paid to any holder of shares of Rite Aid common stock for all such holder’s shares of Rite Aid common stock held in a single account would result in such stockholder being entitled to a fraction of a cent in cash with respect to the shares of Rite Aid common stock held in such account, such aggregate amount will be rounded down to the nearest whole cent; or

 

    for each share of Rite Aid common stock with respect to which an election to receive additional ACI common stock has been effectively made and not revoked, 0.0079, which we refer to as the additional stock election exchange ratio (and which, together with the base exchange ratio, we refer to as the stock election exchange ratio), of a fully paid and nonassessable share of ACI common stock, without interest, which we refer to as the additional stock consideration (and which, together with the base consideration, we refer to as the stock election consideration).

 

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For the avoidance of doubt, the cash election consideration consists of both the base consideration, which consists of ACI common stock, and the additional cash consideration, which consists of cash. No fractional shares of ACI common stock will be issued in the merger, and in lieu thereof, holders of Rite Aid common stock who would otherwise have been entitled to a fraction of a share of ACI common stock will be paid upon surrender of shares of Rite Aid common stock (and after taking into account and aggregating the total number of shares of ACI common stock to be issued in exchange for the shares of Rite Aid common stock represented by all certificates, or book-entry shares, as applicable, surrendered by such holder and the shares of ACI common stock received by such holder as a result of both the base exchange ratio and the additional stock election exchange ratio) cash in an amount, without interest and rounded to the nearest cent, representing such holder’s proportionate interest in the net proceeds from the sale by the exchange agent, on behalf of all such holders, of all fractional shares of ACI common stock which would otherwise be issued.

Ownership of the Combined Company

As a result of the merger, upon closing, we anticipate that:

 

    if all Rite Aid stockholders elect to receive the cash election consideration, approximately 72.0% of the outstanding common stock of the combined company will be held by stockholders that were stockholders (or were affiliates of stockholders) of ACI immediately prior to the effectiveness of the merger and approximately 28.0% of the outstanding common stock of the combined company will be held by stockholders that were Rite Aid stockholders immediately prior to the effectiveness of the merger; or

 

    if all Rite Aid stockholders elect to receive the stock election consideration, approximately 70.4% of the outstanding common stock of the combined company will be held by stockholders that were stockholders (or were affiliates of stockholders) of ACI immediately prior to the effectiveness of the merger and approximately 29.6% of the outstanding common stock of the combined company will be held by stockholders that were Rite Aid stockholders immediately prior to the effectiveness of the merger.

Debt Matters

Rite Aid

As of March 3, 2018, Rite Aid had approximately $3,942 million of long-term indebtedness (including capital leases) outstanding, primarily consisting of:

 

    $902 million aggregate principal amount of 2020 Rite Aid Notes;

 

    $810 million aggregate principal amount of 2021 Rite Aid Notes;

 

    $1,800 million aggregate principal amount of 2023 Rite Aid Notes;

 

    $295 million aggregate principal amount of 2027 Rite Aid Notes;

 

    $128 million aggregate principal amount of 2028 Rite Aid Notes; and

 

    $53 million of capital leases.

As of March 3, 2018, Rite Aid has repaid in full the Tranche I term loan and the Tranche II term loan. The Rite Aid revolving credit facility will be repaid in full on or prior to the closing date.

Rite Aid may redeem, repurchase or otherwise satisfy and discharge the Rite Aid Notes at any time prior to the closing date and to the extent that any Rite Aid Notes remain outstanding on the

 

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closing date, such notes will be redeemed or otherwise satisfied and discharged in full. On February 27, 2018, Rite Aid announced that it had commenced an offer to purchase up to $900,000,000 of the outstanding Rite Aid Notes, pursuant to the asset sale provisions of the indentures of the Rite Aid Notes. On March 29, 2018, Rite Aid accepted for payment, pursuant to its offer to purchase, $3,454,000 principal amount of the 2020 Rite Aid Notes, representing 0.38% of the outstanding principal amount of the 2020 Rite Aid Notes, $3,471,000 principal amount of the 2021 Rite Aid Notes, representing 0.43% of the outstanding principal amount of the 2021 Rite Aid Notes, and $41,751,000 principal amount of the 2023 Rite Aid Notes, representing 2.32% of the outstanding principal amount of the 2023 Rite Aid Notes. On April 12, 2018, Rite Aid redeemed all of the 2020 Rite Aid Notes that remained outstanding, pursuant to the terms of the indenture of the 2020 Rite Aid Notes. On April 19, 2018, Rite Aid announced that it had commenced a similar asset sale offer to purchase up to $700,000,000 of the 2021 Rite Aid Notes and the 2023 Rite Aid Notes, pursuant to the respective indentures governing the 2021 Rite Aid Notes and the 2023 Rite Aid Notes. On May 21, 2018, Rite Aid accepted for payment, pursuant to its offer to purchase, $1,360,000 principal amount of the 2021 Rite Aid Notes, representing 0.17% of the outstanding principal amount of the 2021 Rite Aid Notes, and $4,759,000 principal amount of the 2023 Rite Aid Notes, representing 0.27% of the outstanding principal amount of the 2023 Rite Aid Notes. On May 25, 2018, Rite Aid announced that it had issued a notice of redemption for all $805,169,000 aggregate principal amount of the outstanding 2021 Rite Aid Notes on June 25, 2018, pursuant to the terms of the indenture of the 2021 Rite Aid Notes.

ACI and Rite Aid expect the 2027 Rite Aid Notes and the 2028 Rite Aid Notes to remain outstanding following the closing date. On the closing date, the 2027 Rite Aid Notes and the 2028 Rite Aid Notes will receive an equal and ratable lien solely on the assets of Rite Aid (and not its subsidiaries) that secure the ACI Term Loan Facility.

ACI

As of February 24, 2018, ACI had approximately $11,876 million of long-term indebtedness (including capital leases) outstanding, primarily consisting of:

 

    no secured revolving loans under the ACI ABL Facility (excluding issued but undrawn letters of credit of $576.8 million);

 

    $5,611 million of secured term loans outstanding under the ACI Term Loan Facility;

 

    $2,476 million of ACI Unsecured Notes;

 

    $1,394 million of NALP Notes;

 

    $1,267 million of Safeway Notes; and

 

    $865 million of capital leases.

ACI received a debt commitment letter dated as of February 18, 2018, as amended and restated on March 12, 2018 and as further amended and restated on May 8, 2018, pursuant to which, among other things, the Commitment Parties have committed to provide ACI with (i) $4,667 million of commitments to a new $5,000 million aggregate principal amount best efforts asset-based revolving credit facility; (ii) incremental commitments under the ACI ABL Facility in an aggregate principal amount of $1,000 million in the event that the Best-Efforts ABL Facility does not become effective on the closing date; (iii) a new asset-based term loan facility in an aggregate principal amount of $1,500 million; and (iv) a new secured bridge loan facility in an aggregate principal amount of $500 million less the gross proceeds received by ACI and its subsidiaries of new senior notes issued prior to the closing date, which we refer to as the Senior Secured Bridge Facility, in each case on the terms and subject to the conditions set forth in the debt commitment letter. The proceeds of the

 

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Financing will be used, among other things, to partially refinance certain of Rite Aid’s existing indebtedness that is outstanding as of the closing date, including the Rite Aid Notes and Rite Aid’s revolving credit facility, pay fees and expenses in connection with the Merger and finance cash consideration, if any is elected, in connection with the merger. The Best-Efforts ABL Facility will be utilized by ACI only if the remaining $333 million of commitments are fully allocated to new or existing lenders prior to the date on which the merger is consummated, in which case the incremental commitments described under clause (ii) above will cease to apply.

The Best-Efforts ABL Facility, the incremental commitments under the ACI ABL Facility and the ABL Term Loan Facility will be guaranteed on a joint and several basis by each of ACI’s existing and future direct and indirect wholly-owned domestic subsidiaries that is not a borrower, excluding certain immaterial and other subsidiaries, such as insurance subsidiaries. In addition, the Best-Efforts ABL Facility, the incremental commitments under the ACI ABL Facility and the ABL Term Loan Facility will be secured, subject to certain exceptions, by (i) perfected first priority (subject to permitted liens) security interests and liens on the ABL Priority Collateral (as defined herein) (which includes Rite Aid assets that will constitute ABL Priority Collateral at closing) and (ii) perfected second priority (subject to permitted liens) security interests in and liens on the Term Loan Priority Collateral (as defined herein). For more information about the ACI ABL Facility, the ABL Term Loan Facility, the ABL Priority Collateral and the Term Loan Priority Collateral, see the section entitled “Description of Indebtedness” beginning on page 306 of this proxy statement/prospectus.

The Secured Bridge Facility will be guaranteed on a joint and several basis by each of ACI’s existing and future direct and indirect wholly-owned domestic subsidiaries that are not borrowers, excluding certain immaterial and other subsidiaries, such as insurance subsidiaries. In addition, the Secured Bridge Facility will be secured, subject to certain exceptions, by (i) perfected first priority (subject to permitted liens) security interests and liens on the Term Loan Priority Collateral (which includes Rite Aid assets that will constitute Term Loan Priority Collateral at closing) and (ii) perfected second priority (subject to permitted liens) security interests in and liens on the ABL Priority Collateral (which includes Rite Aid assets that will constitute ABL Priority Collateral at closing). The Secured Bridge Facility will not be secured by any of NALP’s assets and, to the extent applicable, will be subject to a cap regarding Safeway assets with value not to exceed 10% of Safeway consolidated net tangible assets (as determined on the date of such lien incurrence).

Any loans under the Senior Secured Bridge Facility not paid in full on or before the first anniversary of the closing of the merger will be automatically converted into a senior secured term loan, which we refer to as a Senior Term Loan, with a maturity of eight years after the closing of the merger. At any time on or after the date of such conversion, the applicable lenders may choose to exchange Senior Term Loans in whole or in part for senior exchange notes, which we refer to as Senior Exchange Notes. The principal amount of Senior Exchange Notes issued will equal the principal amount of Senior Term Loans exchanged. The Senior Exchange Notes will mature eight years after the closing of the merger and will remain private.

The Commitment Parties’ commitment to provide the Financing is subject to certain conditions, including consummation of the merger in accordance with the merger agreement substantially concurrently with the initial borrowing under the Financing; the negotiation and execution of definitive documentation in respect of the Financing consistent with the debt commitment letter (including certain customary closing deliverables); delivery of certain historical and pro forma financial information in respect of ACI and Rite Aid and their respective subsidiaries; the absence of a Company Material Adverse Effect (as defined in the merger agreement); the accuracy of certain specified representations and warranties in the merger agreement and in the definitive documentation in respect of the Financing; completion of a customary marketing period in connection with a notes offering to replace certain portions of the Financing; completion of a third party appraisal and field examination in respect

 

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of the assets of Rite Aid and its subsidiaries; minimum excess availability under the applicable asset-based revolving credit facility of not less than $2,000,000,000 (including up to $500,000,000 of cash on hand); and certain other customary closing conditions.

The merger agreement provides that Rite Aid may redeem, repurchase or otherwise satisfy and discharge the Rite Aid Notes at any time prior to the closing date and to the extent that any Rite Aid Notes remain outstanding on the closing date, such notes other than the 2027 Rite Aid Notes and the 2028 Rite Aid Notes will be redeemed or otherwise satisfied and discharged in full. On February 27, 2018, Rite Aid announced that it had commenced an offer to purchase up to $900,000,000 of the outstanding Rite Aid Notes, pursuant to the asset sale provisions of the indentures of the Rite Aid Notes. On March 29, 2018, Rite Aid accepted for payment, pursuant to its offer to purchase, $3,454,000 principal amount of the 2020 Rite Aid Notes, representing 0.38% of the outstanding principal amount of the 2020 Rite Aid Notes, $3,471,000 principal amount of the 2021 Rite Aid Notes, representing 0.43% of the outstanding principal amount of the 2021 Rite Aid Notes, and $41,751,000 principal amount of the 2023 Rite Aid Notes, representing 2.32% of the outstanding principal amount of the 2023 Rite Aid Notes. On April 12, 2018, Rite Aid redeemed all of the 2020 Rite Aid Notes that remained outstanding pursuant to the terms of the indenture of the 2020 Rite Aid Notes. On April 19, 2018, Rite Aid announced that it had commenced a similar asset sale offer to purchase up to $700,000,000 of the 2021 Rite Aid Notes and the 2023 Rite Aid Notes, pursuant to the respective indentures governing the 2021 Rite Aid Notes and the 2023 Rite Aid Notes. On May 21, 2018, Rite Aid accepted for payment, pursuant to its offer to purchase, $1,360,000 principal amount of the 2021 Rite Aid Notes, representing 0.17% of the outstanding principal amount of the 2021 Rite Aid Notes, and $4,759,000 principal amount of the 2023 Rite Aid Notes, representing 0.27% of the outstanding principal amount of the 2023 Rite Aid Notes. On May 25, 2018, Rite Aid announced that it had issued a notice of redemption for all $805,169,000 aggregate principal amount of the outstanding 2021 Rite Aid Notes on June 25, 2018, pursuant to the terms of the indenture of the 2021 Rite Aid Notes. In addition, the merger agreement also provides that all amounts outstanding under Rite Aid’s revolving credit facility, if any, will be repaid on or prior to the closing date and all commitments thereunder will be terminated. ACI and Rite Aid expect that the 2027 Rite Aid Notes and the 2028 Rite Aid Notes will remain outstanding following the closing date. On the closing date, the 2027 Rite Aid Notes and the 2028 Rite Aid Notes will receive an equal and ratable lien solely on the assets of Rite Aid (and not its subsidiaries) that secure the ACI Term Loan Facility.

On June 6, 2018, ACI priced its private offering of $750.0 million in aggregate principal amount of the Floating Rate Notes at an issue price of 99.5%. The proceeds to be received pursuant to such offering, in addition to ACI’s cash on hand and borrowings under the ACI ABL Facility and ABL Term Loan Facility, will be used (i) to pay a portion of the cash portion, if any, of the merger consideration in connection with the merger, (ii) to repay certain indebtedness of Rite Aid outstanding on the date the merger is completed, (iii) to pay fees and expenses in connection with the merger and the offering of the Floating Rate Notes and (iv) for general corporate purposes. In the event the merger is not completed, ACI will required to use such proceeds to redeem the Floating Rate Notes. The Floating Rate Notes are expected to be issued on or about June 25, 2018, subject to customary closing conditions. The Floating Rate Notes will bear interest at LIBOR (with a floor of 0%) plus 3.75% per annum. The Floating Rate Notes will mature on January 15, 2024 and interest on the Floating Rate Notes will be payable quarterly in arrears on January 15, April 15, July 15 and October 15, commencing on October 15, 2018. The Floating Rate Notes will be secured by the same collateral that would have secured the Secured Bridge Facility. Upon the issuance of the Floating Rate Notes, the commitments with respect to the Secured Bridge Facility will terminate pursuant to the terms of the debt commitment letter.

The closing of the merger is not subject to any debt financing condition or contingency.

 

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Background of the Merger

Reconciliations of Non-GAAP Measures have not been provided in the Background of the Merger section of this proxy statement/prospectus because such reconciliations could not be produced without unreasonable effort.

The Rite Aid board of directors regularly reviews and assesses Rite Aid’s performance, risks, opportunities and strategy at board meetings. Additionally, the Rite Aid board of directors and Rite Aid management regularly review and evaluate the possibility of pursuing various strategic alternatives and relationships as part of Rite Aid’s ongoing efforts to strengthen its businesses and maximize value for its stockholders, taking into account economic, regulatory, competitive and other conditions. From time to time, at Rite Aid’s request, Citi, a financial advisor to Rite Aid, has assisted Rite Aid management and the Rite Aid board of directors in evaluating various potential strategic alternatives available to Rite Aid. Additionally, Rite Aid management provides regular financial updates to the Rite Aid board of directors. Since 2014, Rite Aid has pursued several strategic alternatives, including the acquisition of EnvisionRxOptions, the attempted merger with WBA which was ultimately terminated and the subsequent asset sale transaction with WBA.

Throughout 2014 and 2015, the Rite Aid board of directors met from time to time to discuss any approaches directed to Rite Aid, as well as outreaches made by Rite Aid, concerning potential strategic transactions. During this period, Rite Aid had discussions relating to an acquisition of, or business combination involving, Rite Aid with approximately 10 parties in total, which included, among others, retailers that operate pharmacies, retailers that operate grocery stores, pharmacy benefit management companies, which we refer to as PBMs, as well as other companies in the healthcare space. During this period, Rite Aid management kept the Rite Aid board of directors apprised of the status of these discussions.

In the first half of 2014 through the summer of 2014, Mr. Standley and other members of Rite Aid management, together with representatives of Citi, had preliminary discussions with representatives of ACI regarding a potential business combination transaction involving Rite Aid and ACI.

On August 15, 2014, Rite Aid and ACI executed a confidentiality agreement obligating Rite Aid to protect confidential information of ACI in connection with discussions regarding a potential business combination transaction. Subsequently, Rite Aid began conducting a due diligence review of ACI.

On September 30, 2014, the Rite Aid board of directors met in-person at a regular meeting, which was attended by members of Rite Aid management and representatives of Citi. Rite Aid management and Citi provided their respective views on the current state of, and prospects for, the retail drugstore sector, as well as potential strategic alternatives available to Rite Aid, including remaining an independent company, potential business combinations and sale and acquisition transactions, including, among others, the potential acquisition of EnvisionRxOptions and potential business combination transactions with ACI and Party A. At this meeting, Citi informed the Rite Aid board of directors as to the general nature of Citi’s material relationships with ACI and Cerberus. Following this discussion, the Rite Aid board of directors directed Rite Aid management to continue exploratory discussions with parties that potentially may be interested in pursuing a strategic transaction with Rite Aid, including ACI.

As directed by the Rite Aid board of directors at the September 30, 2014 meeting, Mr. Standley and other members of Rite Aid management continued discussions with representatives of ACI regarding a potential strategic transaction with ACI. Mr. Standley also called a senior executive of Party A to explore a potential strategic transaction with Party A. Party A declined to consider exploration of a potential strategic transaction between Party A and Rite Aid.

On October 9, 2014, Rite Aid submitted a letter of interest to ACI setting forth certain preliminary terms for exploring a possible business combination transaction.

 

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On October 14, 2014, Rite Aid and ACI executed a confidentiality agreement, in addition to the one previously executed on August 15, 2014, obligating ACI to protect the confidential information of Rite Aid in connection with discussions regarding the potential business combination transaction.

Beginning on October 22, 2014, representatives of Jones Day, antitrust counsel to Rite Aid, together with antitrust counsel to ACI and third-party economic experts, began their review and discussions regarding possible regulatory matters relating to a potential business combination transaction involving Rite Aid and ACI. These discussions continued during the months of November and December 2014.

On October 23, 2014, representatives of Rite Aid and ACI and their respective advisors had a telephonic meeting to discuss organizational matters relating to a potential business combination transaction between Rite Aid and ACI.

Throughout this time, Rite Aid management had discussions with, and considered a transaction with, EnvisionRxOptions, and continued to discuss other strategic alternatives with third parties and kept the Rite Aid board of directors apprised of such discussions.

At a special telephonic meeting of the Rite Aid board of directors on December 5, 2014, which was attended by members of Rite Aid management and representatives of Citi, Mr. Standley informed the Rite Aid board of directors that ACI had not formally responded to Rite Aid’s letter of interest submitted on October 9, 2014. Also at that meeting, the Rite Aid board of directors authorized Rite Aid management to communicate Rite Aid’s continued interest in acquiring EnvisionRxOptions.

During the first week of January 2015, representatives of ACI approached Mr. Standley to express ACI’s interest in re-engaging in discussions to explore a potential business combination transaction with Rite Aid. In response, Mr. Standley communicated that Rite Aid was in the process of considering another transaction (which was the acquisition of EnvisionRxOptions) but that he would review ACI’s proposal with the Rite Aid board of directors.

In early 2015, Rite Aid management, Citi and Moelis & Company LLC, which we refer to as Moelis, which had been retained by Rite Aid in light of ACI’s expression of interest in re-engaging in discussions and Citi’s then-ongoing services to ACI and Cerberus, reviewed with the Rite Aid board of directors management’s ongoing exploration of third-party interest in pursuing a potential business combination transaction, including with ACI, WBA and EnvisionRxOptions. At the direction of the Rite Aid board of directors, Mr. Standley contacted WBA to discuss a potential business combination transaction involving Rite Aid and WBA.

On January 9, 2015, the Rite Aid board of directors held a special telephonic meeting which was attended by members of Rite Aid management and representatives of Citi, Skadden and Moelis. Management and Rite Aid’s advisors reviewed with the Rite Aid board of directors management’s view that the Rite Aid board of directors should consider, given the status of discussions with each party at that time, whether to suspend discussions with EnvisionRxOptions to further explore a potential business combination transaction with ACI. Mr. Standley updated the Rite Aid board of directors regarding ACI’s renewed interest in exploring a possible business combination transaction with Rite Aid. Management, Citi and Moelis discussed with the Rite Aid board of directors preliminary financial matters relating to a potential transaction with ACI, and Rite Aid management’s business and strategic rationale for, and the value creation potential for Rite Aid stockholders of, a potential transaction with ACI as compared to an acquisition of EnvisionRxOptions. The representatives of Skadden then discussed in detail with the directors their fiduciary duties in considering alternative transactions, including evaluating the benefits and risks to Rite Aid and its stockholders of each transaction and the merits of each transaction as compared to other potential strategic alternatives for Rite Aid. The Rite Aid board of directors, Rite Aid management and advisors engaged in a discussion about potential

 

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transactions with ACI and EnvisionRxOptions, including, among other things, the business, strategic and potential value creation rationales for each transaction, regulatory aspects associated with each transaction, the assessment of the potential interest of third parties in acquiring Rite Aid and the potential strategic implications of a transaction with ACI. After discussion, the Rite Aid board of directors directed Rite Aid management to re-engage in discussions with ACI to explore further the potential for a transaction with ACI and, at that time, suspend its consideration of the EnvisionRxOptions transaction. The Rite Aid board of directors also directed Rite Aid management to continue to explore other potential strategic alternatives.

Between January 12 and January 16, 2015, representatives of Rite Aid and ACI and their respective advisors held several telephonic meetings to discuss further the potential synergies that might be realized in a business combination transaction involving ACI and Rite Aid.

On January 15, 2015, representatives of Rite Aid and ACI and their respective advisors held an in-person meeting to discuss the strategic rationale, opportunities and risks, including antitrust and financing risks, in a potential merger of ACI and Rite Aid, including, among other things, cost and revenue synergies that could be achieved by the potential combined company. During this meeting, representatives of ACI indicated that ACI was reconsidering whether it was interested at that time in continuing with discussions regarding a potential business combination transaction between the parties.

On January 17, 2015, ACI’s representatives informed Rite Aid that ACI was no longer in a position to pursue a transaction with Rite Aid at that time and would not be able to re-engage in discussions with Rite Aid regarding a potential business combination transaction for at least several months. ACI consummated the acquisition of Safeway on January 30, 2015.

On January 19, 2015, the Rite Aid board of directors held a special telephonic meeting which was attended by members of Rite Aid management and representatives of Citi, Moelis and Skadden to discuss ACI’s decision not to pursue a transaction with Rite Aid at that time as well as other potential transactions. Mr. Standley reported to the Rite Aid board of directors on his meeting with WBA regarding a potential business combination transaction, including that WBA would require an agreement from Rite Aid to negotiate exclusively with WBA as a condition to continuing discussions. The Rite Aid board of directors discussed at length with management, Moelis and Citi potential strategic alternatives for Rite Aid and certain financial matters, including management’s financial and strategic rationales, the relative merits and benefits and risks for Rite Aid and its stockholders, and the value creation potential for Rite Aid stockholders, of potential transactions with ACI, EnvisionRxOptions, WBA or Party B and of remaining independent. Mr. Standley advised the Rite Aid board of directors of a proposed telephonic meeting scheduled the next day with Party B’s Chief Executive Officer, at the request of the Chief Executive Officer of Party B. The Rite Aid board of directors also discussed whether to re-engage with EnvisionRxOptions with respect to a potential strategic transaction and the impact that an acquisition of EnvisionRxOptions could have on a potential transaction with ACI, WBA or another potential acquiror of Rite Aid. The Rite Aid board of directors determined that it would be in the best interests of Rite Aid stockholders to pursue a transaction with EnvisionRxOptions and authorized Rite Aid management to re-engage in discussions with EnvisionRxOptions regarding a potential transaction with EnvisionRxOptions, which discussions continued during the remainder of January and early February 2015.

Also on January 19, 2015, representatives of Jones Day and third-party economic experts were instructed to cease their review on a preliminary basis of possible regulatory matters related to a potential business combination transaction involving ACI and Rite Aid.

 

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On January 20, 2015, Mr. Standley had a telephonic meeting with Party B’s Chief Executive Officer. During this meeting, the Chief Executive Officer of Party B indicated Party B was not interested in pursuing a business combination transaction with Rite Aid.

In January and February 2015, Rite Aid management continued discussions with EnvisionRxOptions and WBA, keeping the Rite Aid board of directors up to date on such discussions.

On February 9, 2015, the Rite Aid board of directors held a special telephonic meeting to discuss potential transactions with EnvisionRxOptions and WBA. Members of Rite Aid management and representatives of Citi and Skadden also attended. During this meeting, Mr. Standley reviewed with the Rite Aid board of directors his previous discussions with WBA regarding a potential acquisition of Rite Aid by WBA, including the impact that an acquisition of EnvisionRxOptions could have on a potential transaction with WBA or another possible acquiror of Rite Aid. Among other matters, representatives of Skadden discussed in detail with the directors their fiduciary duties in considering alternative transactions, including with EnvisionRxOptions and WBA. The Rite Aid board of directors further discussed having a thorough review process to assess the benefits and risks to Rite Aid and its stockholders of the potential transactions, the merits of the transactions as compared to other potential strategic alternatives for Rite Aid, including a potential sale of control or merger transaction, the level of potential interest of third parties in a sale or business combination transaction with Rite Aid, and the impact of pursuing an acquisition of EnvisionRxOptions on such a potential sale or business combination transaction.

Also at its February 9, 2015 meeting, the Rite Aid board of directors, Rite Aid management and advisors discussed the significant cost and revenue synergies for Rite Aid and potential value creation for its stockholders that could result from a transaction with EnvisionRxOptions and that, based on Rite Aid’s previous discussions with other parties, there was no certainty that Rite Aid could enter into an alternative strategic transaction with WBA or another party. After further consideration, the Rite Aid board of directors unanimously agreed that Rite Aid should proceed with negotiating the final terms of a merger agreement with EnvisionRxOptions and authorized entry into the merger agreement on terms substantially similar to those presented.

Rite Aid and EnvisionRxOptions entered into a merger agreement on February 10, 2015 pursuant to which Rite Aid would acquire EnvisionRxOptions.

On July 8, 2015, a representative of ACI contacted Mr. Standley to inform him of ACI’s interest in potentially re-engaging with Rite Aid in discussions regarding a potential business combination transaction involving ACI and Rite Aid.

As a result of the discussion on July 8, 2015, with the Rite Aid board of directors informed of the recent developments regarding ACI’s potential interest in re-engaging with Rite Aid, during the period between July 9 and July 15, 2015, representatives of Rite Aid, Citi and ACI resumed discussions regarding a potential business combination transaction.

On July 15, 2015, representatives of ACI met with members of Rite Aid management and a representative of Citi and orally communicated a preliminary, non-binding indication of interest to Rite Aid.

On July 17, 2015, Rite Aid and ACI, with the assistance of Citi and ACI’s financial advisor, commenced a review of potential synergies, the pro forma capital structure, the feasibility and impact of a proposed equity issuance on the combined company, and the potential utilization of Rite Aid’s NOLs by the combined company in connection with a potential business combination transaction involving Rite Aid and ACI. This review continued through early August 2015.

 

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During the summer of 2015, Rite Aid management also continued discussions with WBA, ACI and other parties, including Parties C, D, E and F, and renewed contact with Party B, keeping the Rite Aid board of directors apprised of any developments.

On August 2, 2015, the Rite Aid board of directors held a special telephonic meeting to discuss with members of Rite Aid management and representatives from Citi and Skadden, among other things, the status of discussions with ACI and WBA, other potential strategic alternatives, other parties that might potentially be interested in an acquisition of or business combination transaction with Rite Aid, previous discussions with such parties that had declined to pursue a transaction with Rite Aid, the strategic, business and potential stockholder value creation rationale for and terms of the ACI and WBA transactions and relative benefits and risks for Rite Aid and its stockholders, and Citi’s preliminary financial perspectives concerning these potential transactions. The representatives of Skadden reviewed with the Rite Aid board of directors certain legal matters with respect to the current proposals including, among other things, the directors’ fiduciary duties, consideration of WBA’s request for a period of exclusive negotiations and the amount and triggers for the payment to WBA of a termination fee in the event Rite Aid accepted a superior acquisition proposal and terminated the definitive merger agreement. Citi again discussed with the Rite Aid board of directors the nature of its material relationships with ACI and Cerberus. In light of the completion in January 2015 of ACI’s Safeway acquisition for which Citi acted as ACI’s financial advisor, the Rite Aid board of directors concluded that there was no need to retain a second financial advisor at this time. A discussion then followed regarding the possibility of discussions with other potentially interested parties. The Rite Aid board of directors determined that Rite Aid should continue discussions with ACI and WBA, renew contacts with certain other potential transactional parties and approach another potential transactional party to determine its possible interest in pursuing an acquisition of or business combination with Rite Aid.

Throughout August 2015, Rite Aid continued discussions with WBA. In addition the Rite Aid board of directors directed Citi to ascertain if certain other parties had interest in a potential acquisition of or business combination with Rite Aid.

On August 10, 2015, ACI orally communicated to Citi a revised preliminary, non-binding indication of interest regarding a possible business combination with Rite Aid.

On August 12, 2015, at Rite Aid’s direction, a representative of Citi informed a representative of ACI on behalf of the Rite Aid board of directors that Rite Aid was in the process of considering another transaction and would provide an update to ACI during the week of August 17, 2015 regarding whether Rite Aid remained interested in proceeding with the negotiation of a possible transaction with ACI. The Rite Aid board of directors met multiple times throughout August 2015 to discuss Rite Aid managements’ discussions with WBA, ACI and other parties. The Rite Aid board of directors considered other parties with which Rite Aid had discussions regarding a potential business combination, and determined that a transaction with WBA would provide the best value reasonably available at that time to Rite Aid stockholders. In reaching such determination, the Rite Aid board of directors considered a variety of factors, including, among other things, Rite Aid’s business and financial condition at that time, trends in the retail drugstore industry at that time, Rite Aid’s leveraged balance sheet, the perceived challenges and risks of continuing as a standalone public company at that time, Rite Aid’s discussions with multiple potential strategic partners and acquirors over the course of several years, including ACI, and the Board’s belief that WBA was offering the best price reasonably attainable for Rite Aid’s stockholders at that time. For more information on Rite Aid’s reasons for the attempted merger with WBA, see the section entitled “The Merger—Recommendation of Our Board of Directors and Reasons for the Merger” beginning on page 51 of the definitive proxy statement that Rite Aid filed with the SEC on December 21, 2015.

 

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On August 16, 2015, as directed by the Rite Aid board of directors, a representative of Citi informed a representative of ACI that Rite Aid was in the process of considering an alternative transaction and would provide an update to ACI at a later date as to whether Rite Aid was interested in exploring a possible business combination transaction with ACI.

On August 18, 2015, at Rite Aid’s direction, a representative of Citi further informed a representative of ACI that Rite Aid would be proceeding with negotiations involving another party (which other party was WBA).

From August to September 2015, Rite Aid and WBA conducted due diligence and continued to negotiate the terms of a potential transaction.

During the third week of September 2015, given Rite Aid management’s concern that it was possible WBA may no longer be prepared to pursue a transaction with Rite Aid on acceptable terms, at Rite Aid’s direction, a representative of Citi contacted a representative of ACI regarding the possibility of exploring a potential business combination transaction. In response, ACI indicated that it was pursuing an alternative strategic direction and would not be in a position to discuss a potential transaction with Rite Aid until after completion of its alternative plan.

Following additional negotiations and meetings of the Rite Aid board of directors, Rite Aid and WBA executed a merger agreement, which we refer to as the original merger agreement with WBA, on October 27, 2015, pursuant to which Rite Aid would have been acquired by WBA.

Following the date of the execution of the original merger agreement with WBA, Rite Aid generally was prohibited from soliciting alternative acquisition proposals, or engaging in negotiations or discussions with third parties concerning alternative acquisition proposals under the terms of the original merger agreement with WBA. Until the time that stockholder approval was obtained to adopt the original merger agreement with WBA, in response to unsolicited acquisition proposals, Rite Aid would have been permitted to furnish certain information and engage in discussions or negotiations with a third party regarding such alternative acquisition proposal that could have been superior to the merger with WBA, subject to certain procedures set forth in the original merger agreement with WBA. However, Rite Aid did not receive any alternative acquisition proposals.

On February 4, 2016, Rite Aid stockholders approved the original merger agreement with WBA at the special meeting of stockholders. Following the approval and adoption of the original merger agreement with WBA by Rite Aid’s stockholders, pursuant to the terms of the original merger agreement with WBA, Rite Aid was no longer permitted to engage in discussions or negotiations with third parties regarding any alternative acquisition proposals.

Rite Aid and WBA continued to work to obtain antitrust approval of the original merger agreement with WBA over the course of the year. Rite Aid did not receive any inbound communications from any third parties relating to the possibility of a strategic transaction during this period, and Rite Aid would have been precluded from discussing strategic transactions or accepting any proposals after the receipt of stockholder approval pursuant to the terms of the original merger agreement with WBA. In January 2017, Rite Aid and WBA negotiated a merger agreement amendment which, among other things, reduced the per share merger consideration, extended the end date of the original merger agreement and amended WBA’s antitrust obligations under the original merger agreement to require WBA to accept the divestiture of additional stores. Rite Aid and WBA agreed that the merger agreement amendment would re-open the “fiduciary out” provisions that would allow Rite Aid to respond to unsolicited acquisition proposals and potentially enter into a superior proposal between the date of the merger agreement amendment and the date of the stockholders’ approval of the amended merger agreement, because Rite Aid’s stockholders would be required to vote again to adopt the amended merger agreement. Rite Aid, Skadden and Citi previously had discussed these “fiduciary out”

 

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provisions and Citi had conveyed that it believed it was unlikely that another viable buyer would make a superior offer to acquire Rite Aid at that time, taking into consideration, among other things, Rite Aid’s outreach to potential buyers prior to signing the original merger agreement with WBA and the fact that no proposal for an alternative transaction had been made after signing the original merger agreement with WBA. Nonetheless, the Rite Aid board of directors and Rite Aid’s advisors believed that, in endeavoring to maximize value for Rite Aid’s stockholders, it was important as part of the amendment to allow third parties to make a superior proposal to acquire Rite Aid before the stockholders’ approval of the amended merger agreement. WBA agreed that the “fiduciary out” provisions would be re-opened between signing the amendment and the stockholders’ approval of the amended merger agreement on substantially the same terms as in the original merger agreement with WBA.

Rite Aid and WBA finalized and executed the merger agreement amendment on January 29, 2017.

On January 30, 2017, a representative of Citi received an unsolicited phone call from a representative of Cerberus inquiring as to whether Rite Aid was in a position to entertain a merger proposal from ACI. In accordance with Rite Aid’s directives, the Citi representative referred the caller to Rite Aid’s publicly filed merger agreement amendment. No terms or conditions of a proposal were provided, and no documents were sent by ACI to Rite Aid or any of its representatives. Several days later, the representative of Citi received another unsolicited phone call from the same representative of Cerberus who indicated that ACI did not intend to submit a proposal and was not interested in pursuing a transaction with Rite Aid at that time, without stating its reasoning. For the next several months, Rite Aid, WBA, Jones Day and Weil, Gotshal & Manges LLP, as antitrust legal counsel to WBA, continued to work with the FTC Staff to try to resolve the FTC Staff’s questions about the proposed merger transaction involving Rite Aid and WBA. Accounting for the possibility that Rite Aid might not obtain FTC clearance to consummate the merger, with the authorization of the Rite Aid board of directors, Rite Aid management began to consider other potential business plans, including an alternative asset sale to WBA and began negotiating the terms of an asset sale in the event that the merger could not be consummated. After receiving feedback from the FTC that led Rite Aid to believe that the parties would not obtain FTC clearance to consummate the merger with WBA, on June 28, 2017, Rite Aid, with the authorization of the Rite Aid board of directors, and WBA terminated the original merger agreement with WBA, as amended, and simultaneously entered into the asset purchase agreement, which we refer to as the original asset purchase agreement with WBA. In authorizing the termination of the original merger agreement, as amended, and entry into the original asset purchase agreement, the Rite Aid board of directors considered, among other things, certain challenges and benefits of operating as a stand-alone company, including that Rite Aid was highly leveraged and would be able to pay down debt with the proceeds of the asset sale, that Rite Aid had generated substantial net operating losses that could be used to offset the gain from the original asset sale transaction, and that despite its smaller size, Rite Aid would be more viable than absent the transaction with WBA and would have the option to purchase generic drugs that would be sourced through an affiliate of WBA at a cost substantially equivalent to Walgreen’s for a period of 10 years. Citi advised the Rite Aid board of directors that it believed it was unlikely that another viable buyer would make a superior offer at that time to acquire Rite Aid or to acquire the assets to be sold pursuant to the original asset purchase agreement, taking into consideration, among other things, Rite Aid’s prior discussions with other parties and then current market, financial and business dynamics impacting Rite Aid. In connection with the termination, WBA paid Rite Aid a $325 million termination fee. Pursuant to the original asset purchase agreement with WBA and subject to the conditions set forth therein, Rite Aid agreed to sell to WBA 2,186 stores, related distribution assets and inventory for an all-cash purchase price of $5.175 billion, on a cash-free, debt-free basis, plus assumption of certain liabilities of Rite Aid and its affiliates. Rite Aid also negotiated the option to purchase generic drugs that are sourced through an affiliate of WBA at a cost substantially equivalent to Walgreen’s for a period of 10 years. Pursuant to the terms of the original asset purchase agreement with WBA, Rite Aid was generally restricted from soliciting a proposal from a third party for the sale of the assets to be sold to WBA or the entire company for 60

 

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days after entering into the agreement, but was permitted to respond to unsolicited acquisition proposals.

On July 13, 2017, as subsequently disclosed by Citi to the Rite Aid board of directors and management on November 16, 2017, certain members of the Citi coverage team for ACI who meet periodically with ACI to discuss potential strategic matters and who at the time were not part of the Rite Aid transaction team (but who subsequently joined the Rite Aid transaction team), met with members of ACI management to provide a routine investment banking update to ACI with an overview of certain strategic, business and financial considerations in the retail sector, which included, among other things, a discussion of the then recently announced acquisition of Whole Foods Market Inc. by Amazon.com Inc. In connection with such overview, such Citi-ACI coverage team members provided ACI with certain discussion materials regarding potential strategic alternatives for ACI, including, among other potential transactions, a preliminary hypothetical reverse IPO merger transaction with potential identified counterparties, including Rite Aid, although such a transaction with Rite Aid was not discussed at the meeting among such Citi-ACI coverage team members and ACI or thereafter (except on behalf of Rite Aid as a Rite Aid transaction team member). The preliminary hypothetical reverse merger involving Rite Aid that was referenced in the discussion materials reflected, using certain assumptions based on publicly available information, an implied pro forma ownership of approximately 33.8% for Rite Aid’s stockholders. In addition to the above, representatives of Citi confirmed for the Rite Aid board of directors and Rite Aid management that no representatives of Citi on the Rite Aid transaction team at the time had any input on or knowledge of such discussion materials, and that, at the time of such discussion with ACI, the members of the Citi-ACI coverage team who attended the meeting with ACI management had not yet become part of the Rite Aid transaction team, were not at that time involved in discussions with Rite Aid regarding strategic matters or potential transactions and did not represent (or purport to represent) Rite Aid at such meeting. Citi did not represent ACI on strategic business combination transactions after Rite Aid and ACI restarted discussions concerning a potential transaction in August 2017 and did not at any time represent ACI on the transactions contemplated by the merger agreement.

The implied illustrative pro forma ownership described above was based on different assumptions and financial information than was employed during the subsequent merger negotiations with ACI and reflected circumstances at that time when Rite Aid’s original announced sale of assets to WBA as of June 2017 for $5.175 billion was higher than the final announced sale of assets to WBA as of September 2017 for $4.375 billion. The implied illustrative pro forma ownership assumed an equity value for ACI based on an adjusted EBITDA multiple for ACI of 5.5x taking into consideration then current selected grocery industry sector peer multiples and an assumed adjusted EBITDA of $3 billion. Rite Aid’s implied equity value pro forma for the sale of assets to WBA was based on Rite Aid’s then current market adjusted EBITDA multiple and an assumed pro forma adjusted EBITDA and net debt which were reduced by the impact of the sale of assets to WBA as originally announced in June 2017 (which was for more stores and a higher purchase price than the final announced asset sale in September 2017). This implied an illustrative equity value for Rite Aid at the time of approximately $3 billion (which was higher than Rite Aid’s market capitalization on July 13, 2017, at which point Rite Aid’s market capitalization was approximately $2.4 billion, and was higher than when Rite Aid and ACI entered into the merger agreement on February 18, 2018, at which point Rite Aid’s market capitalization was approximately $2.3 billion).

On August 31, 2017, Mr. Robert Miller, Chairman and Chief Executive Officer of ACI, called a representative of Citi and discussed scheduling a meeting with Rite Aid regarding a potential strategic transaction involving ACI and Rite Aid.

Also on August 31, 2017, a representative of Party F called a representative of Citi to discuss a potential acquisition of EnvisionRxOptions. Rite Aid and Party F executed a confidentiality agreement on that date.

 

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On September 15, 2017, a representative of ACI called a representative of Rite Aid and discussed entering into a confidentiality agreement for purposes of protecting confidential information of each party and the confidentiality of discussions between Rite Aid and ACI. ACI sent Rite Aid a draft confidentiality agreement, which the parties negotiated from September 15, 2017 to September 18, 2017.

On September 18, 2017, Rite Aid and ACI executed a confidentiality agreement obligating each party to protect confidential information of the other party and the confidentiality of their discussions. Subsequently, Rite Aid and ACI began conducting due diligence reviews of the other company’s business.

Also on September 18, 2017, the Rite Aid board of directors held a special telephonic meeting which was attended by members of Rite Aid management and representatives of Citi, Skadden and Jones Day. With the authorization of the Rite Aid board of directors, Rite Aid entered into an amended and restated asset purchase agreement with WBA, which amended and restated in its entirety the original asset purchase agreement with WBA, and which we refer to as the WBA asset purchase agreement. Pursuant to the WBA asset purchase agreement and subject to the conditions set forth therein, Rite Aid agreed to sell to WBA 1,932 stores (reduced from 2,186 stores in the original asset purchase agreement with WBA, after discussions between Rite Aid and WBA and the FTC) and certain distribution and other specified assets related thereto for an all-cash purchase price of $4.375 billion (reduced from $5.175 billion in the original asset purchase agreement with WBA), on a cash-free, debt-free basis, plus the assumption of certain liabilities of Rite Aid and its affiliates.The revised purchase price was determined after negotiations with WBA with the assistance of Rite Aid’s management and advisors and taking into account, among other things, the reduced number of stores being sold to WBA, the revisions to the original asset purchase agreement with WBA, including the reallocation of certain assets and liabilities resulting from the different set of stores being sold, and the financial performance and other characteristics of the different set of stores being sold. On September 19, 2017, Rite Aid announced that the waiting period under the HSR Act expired with respect to the sale of assets to WBA pursuant to the WBA asset purchase agreement.

On September 19, 2017, the Rite Aid board of directors held a regular meeting at Rite Aid’s office in Harrisburg, Pennsylvania, which was attended by members of Rite Aid management and representatives of Citi, to discuss, among other matters, potential strategic alternatives for Rite Aid, giving effect to the consummation of the asset purchase transaction with WBA, including potential strategic transactions involving ACI, other third parties, an additional transaction with WBA and additional asset sales. Rite Aid management and the Rite Aid board of directors reflected on the discussions with ACI during 2014 and 2015, and based on those earlier discussions understood that ACI needed to address CEO succession, given the age of ACI’s CEO, and that ACI likely would be interested in having Mr. Standley serve as Chief Executive Officer of the combined company in any potential strategic transaction. The Rite Aid board of directors and Mr. Standley agreed that Mr. Standley would not pursue any discussions regarding, or negotiate any terms of, any potential employment arrangement prior to agreement with ACI on all economic and other material terms of any potential strategic transaction. The Rite Aid board of directors authorized Rite Aid management to explore such potential strategic transactions and engage in discussions with potential counterparties, including ACI.

Beginning in late September 2017 after entering into the confidentiality agreement, Rite Aid and ACI began conducting preliminary financial due diligence to assess potential synergies in a transaction involving a merger of Rite Aid and ACI.

On September 21, 2017, representatives of Rite Aid, Citi, ACI and Cerberus met at Cerberus’ office in New York to discuss a potential transaction involving Rite Aid and ACI.

 

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On September 29, 2017, representatives of Party F again discussed with representatives of Citi a potential transaction involving EnvisionRxOptions and Party F.

On October 12, 2017, representatives of Rite Aid and ACI management held a meeting at ACI’s office in Boise, Idaho where management of each company made presentations to the other concerning its business and discussed potential synergies and began working together to develop a financial model of the combined company if a transaction were pursued. On October 18, 2017, representatives of Rite Aid, ACI, Cerberus and Citi met at Cerberus’ office in New York to discuss EnvisionRxOptions, each company’s expected financial results for their respective then current fiscal year and potential synergies. In addition, the ACI board of directors held a telephonic board call on that date at which ACI management and Cerberus representatives on the ACI board updated the ACI directors concerning the due diligence process and preliminary views concerning potential synergies.

On October 30, 2017, Rite Aid management provided an update to the Rite Aid board of directors on the meetings in Boise and New York. Rite Aid management indicated that the parties would continue preliminary diligence and a quantification of synergies for the next two weeks with a goal of meeting to discuss a possible deal structure that could be presented to the Rite Aid board of directors for further consideration in the coming weeks. Additionally, Rite Aid management provided an update to the Rite Aid board of directors about Party F and its interest in EnvisionRxOptions. The Rite Aid board of directors discussed that a sale of EnvisionRxOptions would not be in Rite Aid’s interests because, among other things, Rite Aid intended to diversify its business to mitigate the adverse impact of reimbursement rate pressure and selling EnvisionRxOptions would have the opposite effect and Rite Aid considered EnvisionRxOptions to be a critical asset in advancing its strategy of driving additional growth in its pharmaceutical business.

Also on October 30, 2017, the ACI board of directors held a telephonic meeting at which ACI management and Cerberus representatives on the ACI board updated the ACI directors concerning the expected process for the coming weeks.

On November 13, 2017, the Rite Aid board of directors held a special telephonic meeting which was attended by members of Rite Aid management and representatives of Citi, Skadden and Jones Day. Rite Aid management and representatives from Citi updated the Rite Aid board of directors on discussions with ACI and Cerberus, including the meetings held in October and a meeting scheduled for the following day in New York. Mr. Standley discussed that ACI’s geographic footprint complemented the footprint of Rite Aid (adjusted for the WBA asset sale) well, and that Rite Aid management was in the process of assessing the value of ACI. Mr. Standley also described challenges in ACI’s industry, including, among others, that ACI was facing a trend of deflation in the grocery industry sector and a competitive market. Citi provided a preliminary overview of potential cost synergies as estimated by management, industry trends in the grocery business and an implied pro forma hypothetical ownership structure in the event that Rite Aid and ACI merged, giving effect to the consummation of the WBA asset purchase transaction. This preliminary overview reflected implied pro forma hypothetical ownership ranges based on (i) Rite Aid’s closing stock price of $1.57 per share on November 10, 2017, (ii) adjusted EBITDA multiples for ACI of 5.0x to 5.5x based on then current selected grocery industry sector peer multiples (which multiples increased over the course of negotiations with ACI) and (iii) ACI adjusted EBITDA of approximately $2.7 billion (in a base case provided by ACI management) and approximately $2.5 billion (in a sensitized case calculated for illustrative purposes). This preliminary overview indicated an implied pro forma hypothetical ownership of approximately 28-42% of the combined company for Rite Aid stockholders. Citi also provided an illustrative overview of Rite Aid’s implied pro forma hypothetical ownership of the combined company of 21-44% based on discounted cash flows of each of Rite Aid and ACI (based on Rite Aid management’s preliminary forecasts for Rite Aid and the base case and sensitized estimates for ACI). Citi indicated that these implied pro forma hypothetical ownership percentages depended on ACI’s actual financial

 

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results and further due diligence on potential synergies. The Rite Aid board of directors and Rite Aid management discussed that, based on preliminary information then known, Rite Aid should start negotiations towards the high end of the implied ranges reflected in this illustrative overview with a pro forma ownership of 35-40% for its stockholders, with the understanding that the higher end of the proposed range would be difficult to obtain but a proposal at that range would be useful in negotiations. The Rite Aid board of directors authorized Rite Aid management to continue conducting due diligence on ACI and to continue discussions with ACI regarding a potential combination.

On November 14, 2017, Rite Aid, including Mr. Frank A. Savage (a member of the Rite Aid board of directors), ACI, Cerberus, Citi and ACI’s financial advisors, Credit Suisse Securities (USA) LLC, which we refer to as Credit Suisse, and Goldman Sachs & Co, LLC., which we refer to as Goldman Sachs, met in New York to discuss the economic terms for a stock-for-stock merger transaction. ACI made an initial non-binding proposal, giving effect to the consummation of the asset purchase transaction with WBA, which we refer to as the First November 14 ACI Proposal, for a stock-for-stock merger transaction that would result in pre-merger Rite Aid stockholders owning in the aggregate 25% of the combined company and pre-merger ACI stockholders owning in the aggregate 75% of the combined company. This proposal by ACI contemplated the possibility that, immediately following the transaction, pre-merger ACI stockholders would subscribe to a $1 billion rights offering by the combined company at a price equivalent to $1.75 per Rite Aid share. Pre-merger ACI stockholders would agree to terminate the stockholders arrangements among them prior to closing such that pre-merger ACI stockholders would not act as a group post-merger. Mr. Standley and Mr. Savage indicated that Rite Aid did not agree with the methodology that ACI and its advisors used to value the combined company, and Rite Aid believed that a transaction providing for 25% ownership would not be acceptable. As previously authorized by the Rite Aid board of directors, Mr. Standley and Mr. Savage then proposed an exchange ratio that would result in pre-merger Rite Aid stockholders owning in the aggregate 35-40% of the combined company. ACI and its advisors indicated they would conduct additional analysis on the exchange ratio.

Following these discussions and also on November 14, 2017, ACI revised the First November 14 ACI Proposal and made a non-binding proposal with a revised exchange ratio, giving effect to the consummation of the asset purchase transaction with WBA, that would result in pre-merger Rite Aid stockholders owning in the aggregate 30% of the combined company and pre-merger ACI stockholders owning in the aggregate 70% of the combined company, which we refer to as the Second November 14 ACI Proposal. This proposal by ACI contemplated the possibility that, immediately following the transaction, pre-merger ACI stockholders would purchase up to $500 million of the combined company’s equity at a price equivalent to $2.00 per Rite Aid share, which would dilute pre-merger Rite Aid stockholders’ ownership of the combined company below a 30% ownership level immediately upon the consummation of the transaction. Rite Aid management indicated that they would discuss the Second November 14 ACI Proposal with the Rite Aid board of directors. On the same date, at the request of Cerberus senior management and Mr. Miller, and as previously had been discussed with the Rite Aid board of directors, Mr. Standley met with the Cerberus Investment Committee and the ACI board of directors to discuss the potential transaction and answer questions about Rite Aid’s business. Following Mr. Standley’s departure from the ACI board of directors meeting, ACI management and the Cerberus representatives on the ACI board of directors updated the ACI board of directors concerning the negotiation of the exchange ratio, and Goldman Sachs and Credit Suisse provided their respective views concerning the potential market perception of the anticipated cost synergies and revenue opportunities.

As was known to the Rite Aid board of directors at the time of Mr. Savage’s involvement in these discussions, Mr. Savage has been a Senior Advisor to investment banking firm Lazard Ltd. (“Lazard”) since January 1, 2014. Prior to assuming the part-time Senior Advisor role at Lazard, Mr. Savage served in various senior positions with Lazard, including Vice Chairman of U.S. Investment Banking at

 

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Lazard from 2009 to December 31, 2013, Co-Head of Lazard’s Restructuring Group from June 1999 to December 31, 2013 and a member of Lazard’s Deputy Chairman Committee from 2006 to December 2013. Mr. Savage was appointed to the board of directors of Supervalu Inc. (from which ACI acquired New Albertson’s Inc. in 2013), as an independent director designee of an investment consortium led by Cerberus. Mr. Savage has continued to serve on the board of Supervalu but has not been a designee of such investment consortium since his original appointment. Mr. Savage also had served on the board of directors of Freedom Group, Inc. (a former Cerberus portfolio company now known as The Remington Outdoor Company) from August 8, 2007 to February 11, 2013. The Rite Aid board of directors viewed Mr. Savage’s prior business background as a former senior officer of Lazard, resulting in his familiarity with Cerberus, as an asset in connection with the negotiations.

On November 16, 2017, the Rite Aid board of directors held a special telephonic meeting, which was attended by Rite Aid management and representatives of Citi, Skadden and Jones Day, to discuss the Second November 14 ACI Proposal and other updates about a potential transaction with ACI. Citi summarized the financial terms of, and discussed certain other preliminary financial information pertaining to, the First November 14 ACI Proposal and the Second November 14 ACI Proposal. After further discussion, the Rite Aid board of directors determined that, based on the information available at that time and based on the status of negotiations between the parties at that time, it could support a proposal that would result in Rite Aid stockholders owning a range of 33% to 35% of the combined company with an equity infusion of $500 million from ACI stockholders (which equity infusion would dilute Rite Aid stockholders’ ownership percentage), subject to the completion of additional diligence and the resolution of other transaction terms. Such 33% to 35% range was within the range of illustrative implied pro forma ownership percentages discussed at the November 13, 2017 meeting of the Rite Aid board of directors. Rite Aid again considered that the higher end of the proposed range would be difficult to obtain but a proposal at that range would be useful in negotiations. The Rite Aid board of directors considered whether Rite Aid should continue discussions in the absence of an agreement on the pro forma ownership for Rite Aid’s stockholders and decided that Rite Aid and ACI should continue to conduct their due diligence review of each other’s businesses in order to determine an appropriate exchange ratio. The Rite Aid board of directors instructed management to convey these positions to ACI. Also at this meeting, Citi provided the Rite Aid board of directors with updated disclosure regarding Citi’s material relationships with Rite Aid, ACI and Cerberus, including the July 13, 2017 meeting between certain Citi coverage team members and ACI. The Rite Aid board of directors requested and, in accordance with such request, Citi gathered additional information regarding such matters. On December 9, 2017, Rite Aid’s management provided an update to the Rite Aid board of directors, including providing to the Rite Aid board of directors a more detailed description prepared by Citi of the July 13, 2017 meeting and Citi’s material relationships with ACI and Cerberus. The Rite Aid board of directors considered this information (including the information described herein regarding the July 13 meeting) and, based on this information and a consideration of all relevant factors, believed that the Citi representatives on the Rite Aid transaction team had acted, and would continue to act, in the best interests of Rite Aid.

Also on November 16, 2017, a representative of Rite Aid met with a representative of Party G in New York to discuss potential strategic transactions involving Party G and Rite Aid. At this meeting, the representative of Party G indicated that Party G was only interested in a transaction to acquire EnvisionRxOptions.

On November 17, 2017, Mr. Savage and Mr. Standley had a call with Mr. Lenard Tessler, Vice Chairman and Senior Managing Director of Cerberus and a member of the ACI board of directors. Mr. Savage and Mr. Standley conveyed that the Rite Aid board of directors would not support a transaction at the exchange ratios and on the other terms proposed by ACI in the Second November 14 ACI Proposal. As instructed by the Rite Aid board of directors, Mr. Savage and Mr. Standley informed Mr. Tessler that, subject to resolving other transaction terms, the Rite Aid board

 

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of directors could support a transaction that would result in Rite Aid stockholders owning a range of 33% to 35% of the combined company with an equity infusion of $500 million from ACI stockholders. Mr. Tessler stated that Cerberus (which had a blocking vote with respect to the approval of a potential strategic transaction with ACI) would not support a transaction on those terms. After further discussion, the parties agreed that, while there was no agreement on the exchange ratio at that time, the proposed exchange ratios were close enough that the parties should finalize their due diligence and seek to resolve other open items, and then Rite Aid and ACI could determine if they could narrow the proposed exchange ratios and ultimately agree upon a mutually acceptable exchange ratio. On November 19, 2017, Rite Aid management provided an update to the Rite Aid board of directors regarding this conversation.

On November 20, 2017, Rite Aid management met with Party H regarding strategic business alternatives and opportunities. Party H indicated it would discuss further and would follow up with Rite Aid if there was any interest in a potential strategic transaction. Party H did not follow up with Rite Aid.

On November 21, 2017, Skadden had a call with Schulte Roth & Zabel LLP, counsel to ACI, which we refer to as Schulte, to discuss documentation needed for the transaction, the due diligence process and the potential structure, principles and timing considerations of the transaction, including, among other things, that Rite Aid required that pre-merger ACI stockholders would not be permitted to act as a group post-merger. Also on November 21, 2017, a consulting firm was retained by Rite Aid to conduct financial due diligence on ACI’s business, began conducting financial due diligence on ACI.

On November 29, 2017, Schulte delivered an initial draft merger agreement to Skadden. The exchange ratio remained an open point and other significant open items in the draft merger agreement from Rite Aid’s view included, among others, ACI’s positions with respect to the covenant regarding its required efforts to obtain antitrust approvals, the absence of a reverse termination fee payable by ACI to Rite Aid if the deal failed to close due to the failure to obtain antitrust approvals, the amount of the termination fee payable to ACI, ACI’s request for expense reimbursement if Rite Aid’s stockholders did not approve the transaction, and restrictive interim operating covenants and representations and warranties.

On November 29 and November 30, 2017, representatives of Rite Aid, ACI and Cerberus met at Skadden’s office in New York to conduct business and financial due diligence on each of Rite Aid and ACI. Representatives of Citi, Credit Suisse and Goldman Sachs also attended this meeting. The parties did not discuss the terms of a transaction at this meeting. Business, financial and legal due diligence continued from December 2017 through early February 2018.

On December 6, 2017, representatives of Rite Aid and Party F met to discuss potential strategic transactions involving Party F and Rite Aid. At this meeting, representatives of Party F indicated that they were only interested in a transaction to acquire EnvisionRxOptions and were not interesting in any broader transaction or commercial arrangement, including a transaction to acquire Rite Aid.

Also on December 6, 2017, the ACI board of directors held a telephonic board meeting in which ACI management and representatives of Cerberus and Schulte participated. The ACI board of directors reviewed recent trends in ACI’s business, the status of due diligence, including the work undertaken by McKinsey & Company, which we refer to as McKinsey, which had been retained by ACI to assist in conducting diligence on, and quantification of, synergies, and a potential synergies assessment. Schulte reviewed the terms of the merger agreement that had been sent to Skadden and the proposed lock-up and other arrangements contemplated for the pre-merger ACI stockholders in the transaction.

 

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On December 11, 2017, Skadden sent to Schulte a revised draft of the merger agreement, which did not take a position on the exchange ratio but reflected Rite Aid’s position on the issues it had raised regarding Schulte’s initial draft.

On December 12, 2017, Rite Aid management provided an update to the Rite Aid board of directors regarding the progress that Rite Aid and ACI had made on due diligence and the issues relating to and the status of the draft merger agreement that Skadden had sent to Schulte the previous day.

On December 13, 2017, ACI management and Schulte provided an update to the ACI board regarding the status of due diligence and outstanding points relating to the draft merger agreement that Skadden sent to Schulte on December 11, 2017.

On December 15, 2017, representatives of Rite Aid, ACI, Cerberus, Citi, Goldman Sachs, Credit Suisse and McKinsey met at Rite Aid’s office in Harrisburg, Pennsylvania to discuss and conduct due diligence on EnvisionRxOptions and the PBM industry.

On December 19, 2017, Schulte sent to Skadden initial term sheets for a registration rights agreement and lock-up agreement to be signed by the stockholders of ACI, as previously had been discussed with the Rite Aid board of directors. The drafts provided for, among other things, a restriction on ACI’s stockholders’ ability to sell their shares of ACI common stock for at least 18 months following the closing of the merger.

Also on December 19, 2017, Citi received an email from Party I indicating that Party I was interested in exploring either a take private transaction involving Rite Aid or an acquisition of Rite Aid’s subsidiary EnvisionRxOptions. After discussing this message with Rite Aid, and in accordance with Rite Aid’s instructions, a representative of Citi responded on Rite Aid’s behalf and spoke with Party I later that day about a potential transaction. Rite Aid scheduled a meeting with Party I for early January 2018 to discuss a potential strategic transaction. On December 20, 2017, ACI management provided an update to the ACI board of directors concerning the proposed merger with Rite Aid.

On December 23, 2017, Rite Aid management provided an update to the Rite Aid board of directors that Rite Aid and ACI were continuing to make progress on due diligence and anticipated completing a majority of the due diligence in the following weeks. Rite Aid management also informed the Rite Aid board of directors that ACI was reviewing the latest draft of the merger agreement and the parties expected to resume negotiations on the merger agreement in early January 2018.

On December 29, 2017, a representative of Rite Aid had a discussion with a representative of Party F. Party F made it clear that it was only interested in an acquisition of EnvisionRxOptions and was not otherwise interested in a strategic transaction or commercial arrangement involving Rite Aid.

On January 3, 2018, the Rite Aid board of directors held a special telephonic meeting which was attended by members of Rite Aid management and representatives of Citi, Skadden and Jones Day. Rite Aid management provided the Rite Aid board of directors with an update on recent conversations with Party F and on the status of discussions with ACI. Rite Aid management and the Rite Aid board of directors discussed ACI’s financial performance and other aspects of ACI’s business and the results of due diligence to date. The Rite Aid board of directors also discussed the adoption of a tax benefits preservation plan, including that such plan could protect certain of Rite Aid’s tax attributes, particularly Rite Aid’s significant amount of net operating losses that could be used, among other things, to offset the gain generated from the asset sale to WBA. With the authorization of the Rite Aid board of directors, Rite Aid entered into the Tax Benefits Preservation Plan, which we refer to as the tax benefits preservation plan, dated January 3, 2018, with Broadridge Corporate Issuer Solutions, as rights agent. The Rite Aid board of directors also considered that the Rite Aid board of directors could

 

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exempt any potential acquiror in its sole discretion from the restrictions in the tax benefits preservation plan and that the Rite Aid board of directors had the discretion to terminate the plan at any time.

On January 4, 2018, the ACI board of directors held a telephonic board meeting in which ACI management and representatives of Cerberus, ACI’s financial advisors and Schulte participated. ACI management and the Cerberus representatives on the ACI board of directors reviewed Rite Aid’s recent financial results, their assessment of the impact that the pendency of the WBA merger transaction had had on Rite Aid’s performance and other aspects of RiteAid’s business. The ACI board discussed the results of due diligence to date, including the anticipated cost synergies and revenue opportunities if the merger transaction was pursued. The ACI board of directors also considered the risks of the potential transaction.

On January 10, 2018, representatives of Rite Aid and Party I met in San Francisco. Party I indicated that it was only interested in an acquisition of EnvisionRxOptions at that time.

Later in the day on January 10, 2018, at the request of Rite Aid management, Mr. Miller and Mr. Justin Ewing, Executive Vice President, Corporate Development & Real Estate of ACI, presented ACI’s business plan and their views of the grocery industry sector to the Rite Aid board of directors at a board meeting in California. Mr. Standley informed the Rite Aid board of directors that, on or about January 4, 2018, ACI and Cerberus had approached him about serving as the Chief Executive Officer of the combined company after the closing of the merger. Mr. Standley indicated that he had not accepted, that there had been no negotiation of any terms of a potential employment arrangement with the combined company and that he had informed ACI and Cerberus that he would not pursue any discussions regarding, or negotiate any terms of, a potential employment arrangement prior to the negotiation of all economic and other material terms of the merger agreement. Following an executive session of the independent directors to discuss these matters, the Rite Aid board of directors agreed that there should be no negotiations of an employment arrangement between Mr. Standley and ACI prior to negotiation of all economic and other material terms of the merger agreement.

On January 11, 2018, representatives of Rite Aid, ACI and Cerberus met at ACI’s office in Boise, Idaho to conduct diligence on the businesses of Rite Aid and ACI and to review and analyze potential transaction synergies. On January 12, 2018, the ACI board of directors held a telephonic board meeting at which the results of the January 11, 2018 meeting in Boise were discussed.

On January 16, 2018, Schulte sent a revised draft of the merger agreement to Skadden. In addition to the open issue of the exchange ratio, significant issues, in Rite Aid’s view, included, among others, ACI’s limited obligation to accept divestitures if required by the antitrust authorities in approving a transaction, ACI’s control of the governmental approval review process, the amount of the termination fee payable by ACI to Rite Aid under certain circumstances, including if the merger agreement were terminated due to the failure to obtain antitrust approval, and the amount of the reverse termination fee payable by Rite Aid to ACI under certain circumstances, including if Rite Aid entered into a superior proposal, and ACI’s request for expense reimbursement from Rite Aid if Rite Aid’s stockholders did not approve the transaction.

On January 17 and January 18, 2018, representatives of Rite Aid, ACI, Cerberus and McKinsey met at Cerberus’ office in New York to discuss potential transaction synergies and each company’s historical and projected financial results.

On January 18, 2018, Citi received a phone call from Party J inquiring about a potential strategic transaction involving Rite Aid without providing any specific information. Citi responded that if Party J had a proposal, then Citi would relay such proposal to Rite Aid. Party J never provided a proposal, any additional information or followed up with Citi or Rite Aid.

 

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On January 22, 2018, Schulte sent to Skadden initial drafts of a registration rights agreement and lock-up agreement to be signed by the stockholders of ACI.

On January 24, 2018, representatives of Rite Aid, ACI, Cerberus, Citi, Credit Suisse, Goldman Sachs, McKinsey and Bank of America Merrill Lynch, an additional financial advisor to ACI that also is providing committed financing for the proposed transaction together with Credit Suisse and Goldman Sachs, met at Cerberus’ office in New York to discuss the proposed financing of the transaction with prospective lenders.

On January 24, 2018, the Rite Aid board of directors held a special telephonic meeting, which was attended by members of Rite Aid management and representatives of Citi, Skadden and Jones Day, to discuss, among other things, updates on the status of Rite Aid’s and ACI’s ongoing financial and business due diligence. Members of Rite Aid management and representatives of Citi updated the Rite Aid board of directors on the status of due diligence and discussions regarding the implied pro forma ownership of the combined company. Mr. Standley reminded the Rite Aid board of directors that, on or about January 4, 2018, ACI and Cerberus had approached him about serving as the Chief Executive Officer of the combined company after the closing of the merger. Mr. Standley confirmed, as previously had been discussed with the board, that there had been no negotiation of any terms of a potential employment arrangement for Mr. Standley with ACI or Cerberus for the combined company and, as agreed between the Rite Aid board of directors and Mr. Standley, Mr. Standley would not pursue any discussions, and there would be no negotiation, of any terms of a potential employment arrangement for him prior to the negotiation of all economic and other material terms of the merger agreement. However, to avoid even the appearance of any potential conflict of interest, Mr. Standley and the Rite Aid board of directors determined to establish a committee of directors (exclusive of Mr. Standley), which we refer to as the negotiating committee, to negotiate, for the Rite Aid board of directors’ consideration, the exchange ratio and other financial terms of the transaction with ACI. The Rite Aid board of directors held an executive session of the independent directors to discuss these matters. The Rite Aid board of directors then established the negotiating committee at this meeting, which consisted of directors Michael N. Regan, David R. Jessick and Mr. Savage.

On January 31, 2018 and February 1, 2018, at the request of Cerberus and Mr. Miller, members of Rite Aid management attended Cerberus’ investment committee meeting and the ACI board of directors meeting, respectively, at Cerberus’ office in New York. Rite Aid, ACI and Cerberus discussed the potential combined company’s business plan and merits of the combination. The parties did not discuss any transaction terms at these meetings. Following Mr. Standley’s departure from the ACI board of directors meeting, the ACI directors discussed the merits of the proposed transaction and authorized the Cerberus representatives on the ACI board of directors to negotiate the exchange ratio with Rite Aid and its advisors, subject to subsequent approval by the ACI board of directors.

Also on January 31, 2018, Schulte sent to Skadden further revised drafts of a registration rights agreement and lock-up agreement to be signed by the stockholders of ACI.

On February 2, 2018, Schulte and Skadden held calls to negotiate provisions of the merger agreement and the registration rights agreement. On February 4, 2018, Schulte sent to Skadden a chart outlining ACI’s positions on open points in the merger agreement.

Also on February 4, 2018, representatives of Goldman Sachs had a call with representatives of Citi during which the representatives of Goldman Sachs indicated that ACI had updated its financial perspectives taking into account then current market factors and due diligence findings, which, in ACI’s view, supported a pro forma ownership for Rite Aid stockholders of less than ACI’s previous proposal of 30%. According to the representatives of Goldman Sachs, ACI’s further financial review supported a higher stand-alone value for ACI and focused on discounted cash flows in determining an exchange

 

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ratio. Based on its discussions with Rite Aid management, Citi indicated that such a proposal from ACI would not be productive and challenged ACI’s approach for determining the exchange ratio. Citi also requested that Goldman Sachs provide materials regarding ACI’s methodology and updated Rite Aid management as to this discussion.

On February 5, 2018, the Rite Aid board of directors held a special telephonic meeting, which was attended by members of Rite Aid management and representatives of Citi, Skadden and Jones Day, to discuss, among other things, the latest updates on discussions with ACI, the status of financial, business and legal due diligence, and key outstanding items in the draft merger agreement, the draft registration rights agreement and the draft lock-up agreement. Members of Rite Aid management and representatives of Rite Aid’s advisors discussed financial, business and legal due diligence findings with the Rite Aid board of directors, which findings were provided to the Rite Aid board of directors in advance of the meeting. In particular, Rite Aid management confirmed that Rite Aid was more comfortable that ACI would be able to meet its financial projections for the following fiscal year because Rite Aid’s due diligence indicated that ACI was closer to meeting its projections for the then current fiscal year than Rite Aid originally had anticipated. Members of Rite Aid management and representatives of Skadden also updated the Rite Aid board of directors on the material outstanding points in the draft merger agreement, including, among others, ACI’s limited obligation to accept antitrust divestitures in connection with ACI’s control of the governmental approval review process, the amount of the termination fee payable by ACI to Rite Aid under certain circumstances, including if the merger agreement were terminated due to the failure to obtain antitrust approval, and the amount of the reverse termination fee payable by Rite Aid to ACI under certain circumstances, including if Rite Aid entered into a superior proposal, and ACI’s request for expense reimbursement if Rite Aid’s stockholders did not approve the transaction.

At this board meeting, Citi also updated the Rite Aid board of directors regarding certain financial matters. Citi provided an updated overview of industry trends in the grocery business and an implied pro forma hypothetical ownership structure in the event that Rite Aid and ACI merged, giving effect to the consummation of the WBA asset purchase transaction. This updated overview reflected implied pro forma hypothetical ownership ranges based on (i) Rite Aid’s closing stock price of $2.06 per share on February 2, 2018, (ii) adjusted EBITDA multiples for ACI of 6.0x to 7.0x based on then current selected grocery industry sector peer multiples (which multiples had increased since the November 13, 2017 Rite Aid board of directors meeting) and (iii) ACI adjusted EBITDA for the fiscal year ending February 28, 2019 of approximately $2.7 billion (in a base case provided by ACI management) and approximately $2.5 billion (in a sensitized case calculated for illustrative purposes). This updated overview indicated an implied pro forma hypothetical ownership of approximately 22-36% of the combined company for Rite Aid stockholders. Citi also provided an illustrative overview of Rite Aid’s implied pro forma hypothetical ownership of the combined company of 20-30% based on discounted cash flows of each of Rite Aid and ACI (based on Rite Aid management’s preliminary forecasts for Rite Aid and the base case and sensitized estimates for ACI). Citi indicated that these implied pro forma hypothetical ownership percentages depended on further due diligence on ACI’s financial results and on potential synergies. Members of Rite Aid management and Rite Aid’s advisors then discussed the pre-merger ownership of ACI and pro forma ownership of the combined company. Rite Aid management and Rite Aid’s advisors also discussed that if ACI’s pre-merger stockholders decided to sell their shares after the closing of the merger, there was a need to have an orderly disposition of the shares. After extensive discussion, the Rite Aid board of directors authorized the negotiating committee to negotiate an exchange ratio that would result in Rite Aid stockholders owning 30-35% of the combined company’s stock, which was at the high end to above the range of the implied pro forma hypothetical ownership for Rite Aid stockholders as described above. Rite Aid again considered that the higher end of the proposed range would be difficult to obtain but a proposal at that range would be useful in negotiations.

 

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Also on February 5, 2018, Goldman Sachs and Credit Suisse provided materials to Citi regarding ACI’s methodology and basis for revising its proposed exchange ratio. These materials suggested an exchange ratio that would result in Rite Aid stockholders owning 25% in the aggregate of the combined company after the closing based on discounted cash flows, a present value of future share price and then current EBITDA multiples for selected companies, which multiples for the grocery industry sector had increased over the course of negotiations with ACI.

On February 6, 2018, Rite Aid (including the directors on the negotiating committee) and Cerberus, together with representatives of Citi, Credit Suisse and Goldman Sachs, held meetings at Skadden’s New York office to negotiate the exchange ratio and pro forma ownership of the combined company. The negotiating committee consulted Rite Aid management and Citi, but the negotiating discussions were conducted directly between Cerberus and the negotiating committee without management or financial advisors present.

Prior to the meeting between the negotiating committee and Cerberus, representatives of Citi, Goldman Sachs and Credit Suisse met to discuss the exchange ratio. Goldman Sachs and Credit Suisse noted at the meeting that Rite Aid was operating in a difficult macro-environment and that Rite Aid common stock reflected an option value tied to potential strategic activity, as demonstrated by a lack of a meaningful trading multiple discount to purportedly much stronger retail pharmacy peers. Rite Aid and its advisors countered this perspective of macro-environment trends by arguing that Rite Aid’s earnings results had stabilized and Rite Aid was further deleveraged from applying the WBA sale proceeds. At this meeting, in accordance with Rite Aid’s directives, Citi discussed with Goldman Sachs and Credit Suisse, among other things, an illustrative pro forma ownership for Rite Aid stockholders of approximately 29% to 41% implied based on (i) Rite Aid’s closing stock price of $2.00 per share on February 5, 2018, (ii) adjusted EBITDA multiple for ACI of 6.0x based on then current selected grocery industry sector peer multiples and (iii) ACI projected adjusted EBITDA for the fiscal year ending February 28, 2019 of approximately $2.7 billion (in a base case provided by ACI management) and historical adjusted EBITDA of approximately $2.35 billion (based on information provided by ACI management). Citi indicated that changes in ACI’s assumed adjusted EBITDA multiples and/or utilizing historical (versus projected) financial results for ACI could support a significantly higher exchange ratio in favor of Rite Aid’s stockholders.

Following the meeting among ACI’s and Rite Aid’s respective financial advisors, the negotiating committee proposed to Cerberus an exchange ratio that would result in Rite Aid stockholders owning 35% in the aggregate of the combined company after the closing. Cerberus indicated it could not accept a deal at that exchange ratio and did not agree with Rite Aid’s methodology for determining the exchange ratio, including because, in Cerberus’ view, Rite Aid’s stock price at that time reflected a potential deal premium given market expectations that Rite Aid was an acquisition target and that Rite Aid’s stock was therefore effectively trading as an option on a transaction. Cerberus (which had a blocking vote with respect to the approval of a potential strategic transaction with ACI) indicated that it would terminate discussions if Rite Aid was not willing to entertain a lower exchange ratio because Cerberus would not accept a deal that would result in Rite Aid stockholders owning 35% in the aggregate of the combined company after the closing. Cerberus did not provide a specific counterproposal. After discussions regarding, among other things, the financial overview discussed with the Rite Aid board of directors at previous board meetings, potential transaction synergies and the prospects of the combined company, the negotiating committee proposed an exchange ratio that would result in Rite Aid stockholders owning 30% in the aggregate of the combined company at the closing. Cerberus again indicated it could not accept a deal at that exchange ratio, and did not provide a specific counterproposal. The negotiating committee indicated that if Cerberus could not accept an exchange ratio that would result in Rite Aid stockholders owning 30% of the combined company, then the negotiating committee had no authority to continue negotiations on the exchange ratio. Mr. Stephen Feinberg, Chief Executive Officer of Cerberus, then requested a one-on-one meeting with

 

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Mr. Savage. In that meeting, both sides reiterated their positions and agreed that there was no need for further discussions if neither side was willing to compromise on their position. The parties then departed the meeting without an agreement on the exchange ratio or the other remaining issues in the draft merger agreement.

On February 7, 2018, the negotiating committee updated the Rite Aid board of directors regarding the discussions with Cerberus the previous day. Also on February 7, 2018, Citi received a call from Credit Suisse and Goldman Sachs to discuss the exchange ratio negotiations. In accordance with the directives of the negotiating committee, Citi responded that Rite Aid could not accept a deal that would result in Rite Aid stockholders owning below 30% of the combined company (including that the Rite Aid board of directors had only authorized the negotiating committee to negotiate a deal at 30% or higher). Later that day, ACI provided a counterproposal that Rite Aid stockholders would receive (i) stock consideration that would result in Rite Aid stockholders owning 28% of the combined company in the aggregate and (ii) $200 million in cash, which we refer to as the February 7 ACI Proposal. ACI also proposed that the initial combined company board would consist of four directors appointed by Rite Aid, four directors (including the chairman) appointed by ACI and one additional director appointed by ACI subject to Rite Aid’s right to consent to such director. The negotiating committee responded that it would convey the February 7 ACI Proposal to the full Rite Aid board of directors, but that it was not authorized to negotiate a deal within those parameters without approval of the full Rite Aid board of directors.

On February 8, 2018, the Rite Aid board of directors held a special telephonic meeting, which was attended by members of Rite Aid management and representatives of Citi, Skadden and Jones Day, to discuss the February 7 ACI Proposal. The negotiating committee, members of Rite Aid management and Citi updated the Rite Aid board of directors on the negotiations, and Citi reviewed the potential financial impact of the proposed $200 million cash consideration on the implied pro forma ownership of the combined company given various assumptions regarding the financial performance of the combined company, indicating that Rite Aid stockholders’ 28% aggregate ownership of the combined company plus the $200 million cash consideration provided substantially equivalent value to Rite Aid stockholders as the prior 30% exchange ratio position as this was effectively the equivalent of the Rite Aid stockholders owning approximately 29.6% in the aggregate of the combined company based on a market multiples approach consistent with prior financial perspectives previously discussed with the Rite Aid board of directors. The Rite Aid board of directors discussed that both Rite Aid and ACI wanted to maximize the stock consideration received by their respective stockholders to increase their ability to participate in the potential upside of the combined company. The Rite Aid board of directors authorized the negotiating committee, Rite Aid management and Rite Aid’s advisors to negotiate the other terms of the transaction on the assumption that the Rite Aid board of directors may be willing to substantially accept terms similar to those in the February 7 ACI Proposal. The Rite Aid board of directors accepted ACI’s proposal on the composition of the initial combined company board of directors, subject to resolving the other remaining deal points in a manner acceptable to Rite Aid.

The ACI board of directors also held a special telephonic meeting on February 8, 2018 which was attended by members of ACI management and representatives of Schulte to discuss the ongoing negotiations concerning the exchange ratio. On February 9, 2018, the negotiating committee and ACI and their respective advisors held several calls to negotiate the terms of the February 7 ACI Proposal. Rite Aid (including the directors on the negotiating committee), ACI and their respective advisors also held several calls to negotiate the other remaining open points in the draft merger agreement, including the board composition of the combined company, ACI’s obligations to accept antitrust divestitures in connection with the governmental approval review process, the amount of the termination fee payable by ACI to Rite Aid under certain circumstances, including if the merger agreement were terminated due to the failure to obtain antitrust approval, and amount of the reverse termination fee payable by Rite Aid to ACI under certain circumstances, including if Rite Aid entered into a superior proposal, and ACI’s request for expense reimbursement from Rite Aid if Rite Aid’s stockholders did not approve the

 

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transaction. The negotiating committee and Rite Aid’s advisors requested that, instead of the $200 million in cash payable to Rite Aid stockholders, such stockholders would be provided the right to elect at their option to receive either (i) a portion of the merger consideration in cash in an amount that would be substantially equivalent to a $200 million cash payment to Rite Aid stockholders in the aggregate if all Rite Aid stockholders elected to receive the additional cash consideration or (ii) additional stock consideration in an amount that would be in lieu of the $200 million cash payment to Rite Aid stockholders in the aggregate if all Rite Aid stockholders elected to receive the additional stock consideration (which amount would result in Rite Aid stockholders owning approximately 29.6% in the aggregate of the combined company if all stockholders elected to receive the additional stock consideration). The negotiating committee considered this election mechanic important to allow Rite Aid stockholders to increase their stock consideration in order to participate in the potential upside of the combined company if they chose to do so. ACI accepted this proposal.

Rite Aid and ACI determined the merger consideration, including the base exchange ratio and additional stock election exchange ratio, following extensive negotiations based on, among other things, each party’s assessment of (i) Rite Aid’s and ACI’s business and operations, strategy, current and historical financial condition and results of operations, and business plan and projected performance, (ii) economic conditions in the industries in which Rite Aid and ACI operate, (iii) Rite Aid’s future prospects, including the Rite Aid Forecast, (iv) ACI’s future prospects, including the ACI Forecast, (v) the terms of the merger agreement and (vi) the results of extensive due diligence conducted by Rite Aid and ACI on each company’s business over the course of several months. It was not possible to determine the price at which the combined company would trade following consummation of the merger. However, Rite Aid and ACI took into account certain factors that the companies expected the market to take into account in determining the potential value of the combined company after the mergers. Specifically, Rite Aid valued the ACI common stock issuable to Rite Aid stockholders in the transaction in light of, among other things, all of the foregoing factors, in addition to (x) the trading multiples of selected public companies in the industries in which Rite Aid and ACI operate, (y) the financial forecasts for Rite Aid and ACI and (z) the potential synergies, revenue opportunities and other benefits to the combined company that could result from the mergers. For additional information regarding the factors that the parties considered in determining the merger consideration and valuing the transaction, see the sections entitled “The Merger—Financial Forecast” beginning on page 138 of this proxy statement/prospectus, “The Merger—Recommendation of the Rite Aid Board of Directors; Rite Aid’s Reasons for the Merger” beginning on page 122 of this proxy statement/ prospectus, “The Merger—ACI’s Reasons for the Merger” beginning on page 141 of this proxy statement/prospectus and “Summary—Opportunities for Enhanced Growth” beginning on page 37 of this proxy statement/prospectus.

On February 12, 2018, Skadden sent a revised draft of the merger agreement to Schulte reflecting Rite Aid and ACI’s negotiations over the past several days. Also on that date, the ACI board of directors held a telephonic board meeting at which ACI management and representatives of Schulte participated. At the meeting, the results of negotiations since the last ACI board of directors’ meeting were discussed, including the merger consideration and corporate governance matters for the combined company. A Cerberus representative on the ACI board of directors also reviewed the expected terms of the financing commitments that ACI intended to receive to refinance certain of Rite Aid’s outstanding debt. Rite Aid, ACI and their respective advisors continued to negotiate the disclosure schedules and other transaction agreements over the course of the next several days.

On February 13, 2018, the negotiating committee, members of Rite Aid management and representatives of Citi and Skadden held a call to update the negotiating committee on the latest developments in discussions with ACI and their advisors. In particular, the negotiating committee provided guidance on the negotiation of corporate governance matters of the combined company, including the rights of Rite Aid, ACI and Cerberus to nominate directors to the combined company.

 

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On February 14 and February 15, 2018, Rite Aid, ACI and Cerberus, together with representatives of Citi, Credit Suisse, Goldman Sachs, Skadden and Schulte, met at Cerberus’ office in New York to discuss an investor presentation and communications plan for the proposed transaction. Also on February 14, 2018, the parties exchanged term sheets reflecting their respective positions on the registration rights agreement and lock-up agreement.

On February 14, 2018, Skadden and Schulte negotiated certain terms of the merger agreement and related documents, at the direction and with the input of the negotiating committee and ACI, respectively. During the course of negotiations, the negotiating committee, members of Rite Aid management, Citi and Skadden held calls to discuss the proposed terms of the merger agreement and related documents.

On February 15, 2018, Schulte sent Skadden a revised draft of the merger agreement. Skadden sent a further revised draft of the merger agreement to Schulte later the same day.

On February 16, 2018, Schulte sent a further revised draft of the merger agreement to Skadden and a draft of the no action agreement, which would restrict pre-merger ACI stockholders from taking certain actions as a group after the closing of the merger, as previously had been discussed with the Rite Aid board of directors. Also on February 16, 2018, Skadden sent Schulte a draft of the standstill agreement, which would restrict Cerberus from, among other things, acquiring or agreeing to acquire beneficial ownership of any additional shares of ACI common stock or Rite Aid common stock and which restricted certain other actions of Cerberus relating to ACI following consummation of the merger Rite Aid, ACI and their respective advisors continued to negotiate the disclosure schedules and other transaction agreements as well. ACI also requested that certain ACI stockholders receive board observer rights at the combined company after the closing.

On February 16, 2018, the ACI board of directors held a telephonic meeting which was attended by members of ACI’s management and representatives of Schulte to discuss the status of negotiations, and review of the merger agreement, including the merger consideration, the lock-up agreement, registration rights agreement, no-action agreement and standstill agreement, summaries of which documents previously had been provided to the ACI directors. A Cerberus representative on the ACI board of directors reviewed the debt commitments for the proposed financing for the merger. Following discussion, the ACI board of directors voted unanimously to approve the merger agreement, the mergers and the other transactions and the stockholders of ACI delivered their written consents to the merger agreement and the mergers.

Also on February 16, 2018, the Rite Aid board of directors held a meeting at Skadden’s New York office, which was attended by members of Rite Aid management and representatives of Citi, Skadden and Jones Day, to discuss the status of negotiations with ACI and to review the merger agreement, the lock-up agreement, registration rights agreement, no action agreement and standstill agreement. At the meeting, Citi provided the Rite Aid board of directors with updated disclosure regarding Citi’s material relationships with Rite Aid, ACI and Cerberus. Representatives of Skadden thoroughly reviewed with the Rite Aid board of directors its fiduciary duties, including its duties of care, loyalty, good faith and disclosure to Rite Aid and its stockholders, in considering the transaction.

Citi then reviewed its preliminary financial analysis of the merger consideration with the Rite Aid board of directors and indicated that, assuming there were no material changes in the information considered, it was prepared to provide an opinion to the Rite Aid board of directors if requested to do so by the Rite Aid board of directors. The representatives of Skadden then reviewed with the Rite Aid board of directors the terms of the transaction and open points. Management and the Rite Aid board of directors then discussed Rite Aid’s business, strategic, financial and stockholder value creation rationale for the transaction, including certain considerations discussed in the section entitled “The Merger—Recommendation of the Rite Aid Board; Rite Aid’s Reasons for the Merger” beginning on

 

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page 122 of this proxy statement/prospectus. As part of this discussion, Citi indicated that based on, among other things, its knowledge of the industry and market generally and Rite Aid’s discussions with other potential buyers, it believed it was unlikely that another viable buyer would make a superior offer to acquire Rite Aid at that time.

Following an executive session of the independent directors, the Rite Aid board of directors expressed its unanimous support for completing negotiations of the transaction and determined to reconvene the following night after further negotiations.

On February 17, 2018, Skadden sent a revised draft of the merger agreement to Schulte. Rite Aid, ACI and their advisors also exchanged drafts of other transaction documents.

On the evening of February 17, 2018, the Rite Aid board of directors held a special telephonic meeting, which was attended by members of Rite Aid management and representatives of Citi, Skadden and Jones Day. At the meeting, representatives of Skadden updated the Rite Aid board of directors on the parties’ progress finalizing the transaction documents and confirmed that there were no significant issues that had arisen with respect to the merger agreement since the meeting the previous night and that the transaction documents were substantially finalized, except that ACI had requested that certain ACI Institutional Holders have observation rights on the combined company’s board of directors. The Rite Aid board of directors authorized Rite Aid management to continue negotiating the board observer issue, conditioned upon the imposition of a standstill agreement and other limitations on the ACI Institutional Holders that had requested observer rights. These ACI Institutional Holders did not accept these conditions and Skadden ultimately negotiated with Schulte that no ACI stockholders would have board observer rights.

Citi then reviewed its financial analysis of the merger consideration with the Rite Aid board of directors and rendered an oral opinion, confirmed by delivery of a written opinion dated February 17, 2018, to the Rite Aid board of directors to the effect that, as of that date and based on and subject to various assumptions made, procedures followed, matters considered and limitations and qualifications on the review undertaken described in such opinion, (i) the base exchange ratio plus the additional cash consideration or (ii) the stock election exchange ratio, as applicable, provided for in the merger agreement was fair, from a financial point of view, to holders of Rite Aid common stock (other than, to the extent applicable, ACI, Merger Sub I, Merger Sub II and their respective affiliates).

The Rite Aid board of directors then unanimously determined that the merger agreement and the transactions contemplated by the merger agreement, including the mergers, are advisable, fair to and in the best interests of Rite Aid and its stockholders, and adopted, approved and declared advisable the merger agreement and the transactions contemplated by the merger agreement, and resolved, subject to the terms of the merger agreement, to recommend that Rite Aid stockholders approve the merger agreement and the transactions contemplated thereby.

Rite Aid and ACI finalized the merger agreement and ancillary documents and executed the merger agreement and Rite Aid, ACI and Cerberus finalized and executed the standstill agreement. Before market open on February 20, 2018, the next trading day after entering into the merger agreement, Rite Aid and ACI issued a joint press release publicly announcing the execution of the merger agreement.

In connection with the preparation of this proxy statement/prospectus, it was determined that Rite Aid management’s operating cash flow calculations had not included an addback of LIFO charges of approximately $30 million annually, resulting in a reduction (which in the view of Rite Aid management was immaterial) in Rite Aid’s projected cash flow from operations. On March 25, 2018, the Rite Aid board of directors held a telephonic meeting, which was attended by members of Rite Aid management and representatives of Skadden and Citi. At this meeting, among other matters, Rite Aid management

 

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reviewed with the Rite Aid board of directors a revision to Rite Aid management’s cash flow forecasts to reflect the addback for this annual LIFO charge. Citi confirmed that the results of the financial analyses performed in connection with its opinion rendered to the Rite Aid board of directors on February 17, 2018, recalculated solely to reflect such annual LIFO charge addback would not have changed the conclusion reached in such opinion when rendered, based on and subject in all other respects to the matters considered and the assumptions, limitations and qualifications set forth in such opinion, noting that the implied equity value per share ranges for Rite Aid and implied exchange ratio ranges derived from the selected public companies analysis and discounted cash flow analysis on which such opinion was based, solely taking into account such addback, would have been approximately $0.88-$1.93 per share and 0.0474x-0.0825x in the case of the selected public companies analysis (vs. approximately $0.87-$1.92 per share and 0.0471x-0.0823x) and approximately $1.92-$3.08 per share and 0.0654x-0.0856x in the case of the discounted cash flow analysis (vs. approximately $1.83-$2.96 per share and 0.0614x-0.0823x). The Rite Aid board of directors concluded that the revision to Rite Aid management’s forecasts to reflect the annual LIFO charge addback would not have changed its determination that the merger agreement was in the best interests of the Rite Aid stockholders at the time of such determination.

Subsequent to the initial filing of the preliminary proxy statement/prospectus, Mr. Savage informed the Rite Aid board of directors that, although he at all times acted in the best interests of the Rite Aid shareholders and has received no remuneration and will not receive any remuneration from Cerberus or its affiliates (except for director fees that he had previously received from Freedom Group on whose board he previously sat from 2007 through 2013), in connection with his status as Senior Advisor at Lazard since 2014, he has received compensation from Lazard in the form of an annual salary of $250,000 and an annual bonus payment (which annual bonus payment Lazard refers to as a supplemental or special payment), with the bonus payment based on his contributions to Lazard, and that for the years 2015, 2016 and 2017 the bonus payments were $1,000,000, $750,000 and $500,000, respectively. Mr. Savage informed the board of directors that he understands that the following information, among other considerations, is taken into account in Lazard’s determination of the amount of his annual bonus payment: the contributions made by Mr. Savage to Lazard, as well as by a long-term former business partner of Mr. Savage at Lazard who is also a Senior Advisor to Lazard; the amount of fees received by Lazard from engagements facilitated by Mr. Savage and his former business partner; as well as Mr. Savage’s contributions to the mentoring of Lazard employees and to firm culture. Mr. Savage informed the board of directors that there never has been any specification by either Lazard or Mr. Savage regarding what portion of such bonus payments might be attributable to the assistance by Mr. Savage or his former business partner at Lazard in the origination of business engagements between Lazard and Cerberus and its affiliates; however, for each of the years 2015, 2016 and 2017, revenues related to engagements with Cerberus or its affiliates constituted less than 10% of the total revenues generated by Lazard that might be attributable to any fees received by Lazard from engagements facilitated by Mr. Savage or his business partner. Prior to the execution of the merger agreement, Cerberus had no knowledge that Mr. Savage, in his capacity as Senior Advisor to Lazard, has been receiving (and may receive in the future) compensation from Lazard based on Mr. Savage’s assistance in originating business engagements between Cerberus and Lazard.

Subsequent to the initial filing of the preliminary proxy statement/prospectus, Mr. Savage also informed the Rite Aid board of directors that in connection with his role as Senior Advisor to Lazard, Mr. Savage and Cerberus would periodically communicate about potential business opportunities involving the possible engagement of Lazard by Cerberus and its affiliates, and that these communications continued through 2017 and 2018; however, none of these potential business opportunities that were communicated in 2017 or 2018 resulted in any engagement (or expected engagement) of Lazard, or were otherwise pursued. In addition, Mr. Savage informed the Rite Aid board of directors that on November 17, 2017, an affiliate of Remington Outdoor Company, a long-term

 

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Lazard client and a former portfolio company of Cerberus, engaged Lazard to assist in connection with a potential restructuring of the company. The Rite Aid board of directors understands that this engagement has not been taken into account in any bonus paid to Mr. Savage to date, but given the fees generated and expected to be generated by Lazard with respect to this restructuring and based on the bonuses paid to Mr. Savage in prior years, Mr. Savage would expect this matter to be taken into account in any bonus paid to him by Lazard for 2018, consistent with prior years’ bonuses.

Subsequent to the initial filing of the preliminary proxy statement/prospectus, Mr. Savage informed the Rite Aid board of directors that, prior to and after the execution of the merger agreement, he has conveyed to Cerberus his desire to be a member of the board of directors of the combined company.

On May 14, 2018, the Rite Aid board of directors held a telephonic meeting, which was attended by representatives of Skadden. Previous telephonic meetings had been held on May 6, 2018 and May 13, 2018, with representatives of Skadden in attendance, to inform the board of directors of the information learned about, and to discuss, these matters. A representative of Citi also attended a portion of the May 13 meeting. Mr. Savage recused himself from the May 13 and May 14 board meetings as well as the relevant portion of the May 6 board meeting. The Rite Aid board of directors unanimously (with Mr. Savage recused) concluded at the May 14 board meeting that the information learned regarding Mr. Savage, including, among other things, his actual and potential future payments from Lazard, would not have changed the board’s determination that the merger agreement was in the best interests of the Rite Aid stockholders at the time of such determination. The board’s conclusion was based on the reasons discussed in this proxy statement explaining why it supported the merger agreement as of February 18, 2018 in the section entitled “The Merger—Recommendation of the Rite Aid board of directors; Rite Aid’s Reasons for the Merger” beginning on page 122 of this proxy statement/ prospectus, and took into account the nature of the new information regarding Mr. Savage (including, among other things, the prior and unquantified anticipated payments from Lazard and the extent of Lazard’s work for Cerberus and its affiliates) as well as the facts relating to the negotiating committee, including, among other things: that the negotiating committee was comprised of three individuals, consisting of two independent directors in addition to Mr. Savage; that it negotiated within a framework established, reviewed and monitored by the board of directors; that the full board of directors actively directed and oversaw the negotiations; that the negotiating committee on a continuing basis reported to and sought authorization from the board of directors, which in turn received advice from Citi and Rite Aid management regarding valuation issues; and that the full board of directors, and not the negotiating committee, was required to approve the transaction with ACI.

Recommendation of the Rite Aid Board of Directors; Rite Aid’s Reasons for the Mergers

Recommendation of the Rite Aid Board of Directors to Approve the Merger Agreement and the Transactions Contemplated Thereby

At a meeting held on February 17, 2018, the Rite Aid board of directors, after considering various factors described below, unanimously determined that the merger agreement and the transactions contemplated by the merger agreement, including the mergers, are advisable, fair to and in the best interests of Rite Aid and its stockholders, and adopted, approved and declared advisable the merger agreement and the transactions contemplated by the merger agreement.

The Rite Aid board of directors unanimously recommends that you vote “FOR” the proposal to approve the merger agreement and the transactions contemplated by the merger agreement, including the mergers.

 

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Reasons for the Mergers

In evaluating the merger agreement and the transactions contemplated thereby, the Rite Aid board of directors consulted with Rite Aid’s management and legal and financial advisors and, in reaching its determinations, the Rite Aid board of directors considered a variety of factors with respect to the mergers and the other transactions contemplated by the merger agreement, including the factors listed below (not necessarily in order of relative importance).

 

    Rite Aid’s Current Condition.    Rite Aid’s business and operations, strategy, current and historical financial condition and results of operations, and business plan and projected performance, including Rite Aid’s recent EBITDA trends and historical trading prices with respect to shares of Rite Aid common stock.

 

    Economic Conditions.    The current environment in the retail drugstore industry, including the trend of consolidation in the healthcare industry, increased competition and the downward trend in third-party reimbursement levels for prescription drugs, and the likely effect of these factors on Rite Aid’s financial performance and Rite Aid’s ability to compete in the market in the absence of the mergers.

 

    Rite Aid’s Future Prospects.

 

    Rite Aid’s forecasts for revenue and earnings over the next five (5) years.

 

    The challenges and risks of continuing as a stand-alone public company and the assessment that no other internally developed alternatives were reasonably likely to create greater value for Rite Aid’s stockholders than the mergers, taking into account business, competitive, industry and market risks.

 

    Despite Rite Aid’s continued use of the proceeds received under the WBA asset purchase agreement to reduce its debt and the resulting reduction in its leverage, Rite Aid is still more highly leveraged than certain of its competitors, limiting its ability to compete effectively with competitors, including retail drugstore companies, healthcare companies and multinational pharmacy retailers and distributors, that have more diversified business models and/or greater financial resources to invest in the expansion of their businesses and absorb the impact of reimbursement rate decreases.

 

    Accretion and Synergies.

 

    The Rite Aid board of directors’ understanding of the respective businesses, operations, financial condition, earnings, strategy and prospects of Rite Aid and ACI, taking into consideration the results of Rite Aid’s due diligence review of ACI and its assets, liabilities, earnings and financial condition, as well as Rite Aid’s and ACI’s historical and projected financial performance, including the expectation the combined company would have the ability to generate higher pro forma Adjusted EBITDA than Rite Aid as a stand-alone company, achieve cost synergies and realize revenue opportunities.

 

    The potential synergies and other benefits to the combined company that could result from the mergers, including an enhanced competitive and financial position, increased diversity and depth in Rite Aid’s product lines and geographic scope and the potential to realize $375 million of cost synergies and $3.6 billion of identified revenue opportunities by February 26, 2022.

 

    The opportunity for Rite Aid stockholders to realize the potential benefit of ACI’s forecasted improved financial performance since Rite Aid stockholders will own approximately 28.0% to 29.6% of the combined company, depending on the results of the cash elections.

 

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    Revenue Opportunities.    The below factors relate to the $3.6 billion of potential revenue opportunities that the Rite Aid board considered:

 

    The expected ability to expand Rite Aid’s pharmacy coverage and gain volume in limited pharmacy networks on the West Coast and the Northeast, driving script growth and improved food and drug revenue;

 

    The expected ability to invest in EnvisionRxOptions and use additional lives to drive customers into Rite Aid pharmacies and ACI stores;

 

    The opportunity to attract more pharmacy customers into ACI stores by rebranding a majority of the ACI pharmacies as Rite Aid pharmacies;

 

    The plan for Rite Aid and ACI to combine their loyalty programs, including the data sets of such loyalty programs, to increase customer traffic in stores and create new revenue opportunities for the combined company;

 

    The opportunity to enhance the front end offerings in Rite Aid stores using ACI’s own brands in food and consumables, including organic and natural products; and

 

    The opportunity to enhance the e-commerce offerings of the combined company and expand existing delivery programs to provide customers with greater convenience.

 

    Cost Synergies.    The below factors relate to the $375 million potential cost synergies that the Rite Aid board considered:

 

    The expected ability to reduce the combined company’s acquisition cost on third party branded and own brand merchandise as well as brand and generic pharmaceutical drugs;

 

    The opportunity to increase penetration of higher margin own brand products as a result of the combined company’s broader portfolio of own brand products;

 

    The opportunity to leverage ACI’s fresh, natural and organics category expertise and to sell ACI manufactured products (including dairy and bread) in Rite Aid stores;

 

    The opportunity to reduce costs related to other services and other goods not for resale;

 

    The opportunity to realize cost synergies through the optimization of the consolidated supply chain; and

 

    The opportunity to reduce costs by, among other things, consolidating corporate administrative functions.

 

    Business Rationale.

 

    The combination of the number three drug store player with regional coverage and a full-service pharmacy benefit manager and the number two grocery player with national coverage and leading supply chain capabilities is expected to result in a differentiated competitor across the food, health and wellness industries, with the expected ability of the combined company to provide differentiated experiences for customers across these industries.

 

    The expanded geographic coverage of the combined entity with an expected network of approximately 4,900 stores with 4,345 pharmacies and pro forma annual revenues for the fiscal year ended February 25, 2017 of approximately $82.3 billion is much greater than Rite Aid’s current network and annual revenues.

 

    The opportunity to reduce exposure to pharmacy reimbursement rates as a proportion of revenues due to diversifying the business.

 

   

The increase in financial strength of the combined company compared to Rite Aid, including as a result of the diversification of product and revenue streams that are expected to drive

 

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strong cash flow for future investment, including that the combined company’s pro forma net leverage ratio is expected to be 4.1x at transaction close (including year one cost synergies).

 

    The ability to achieve lower cost and increased efficiency across stores leveraging ACI’s supply chain and manufacturing in order to drive profitability.

 

    The fact that ACI’s pharmacy customers are on average the highest spenders in ACI’s grocery business, providing the opportunity to leverage the expanded pharmacy business of the combined company to drive growth in the grocery business.

 

    Rite Aid management’s belief, based on Rite Aid’s diligence on ACI’s business, that there is evidence to suggest that ACI is in the early stages of enjoying the benefits of its turnaround strategy, with increasing sales and profitability, and that Rite Aid stockholders would be able to share in this upside by becoming stockholders of the combined company.

 

    Thorough Review of a Potential Business Combination.    The Rite Aid board of directors’ belief that it engaged in a thorough review of a potential business combination and whether to enter into the merger agreement, including that:

 

    the Rite Aid board of directors reviewed potential strategic alternatives available to Rite Aid and considered operating as a stand-alone company;

 

    during the pendency of the merger agreement with WBA, following the announcement of the termination of the merger agreement with WBA and during the pendency of the asset purchase agreement with WBA, there was limited interest in Rite Aid from potential strategic partners and acquirors, that discussions Rite Aid had with potential counterparties did not seem more favorable than a transaction with ACI and that Rite Aid did not receive any proposal from any party other than ACI that was prepared to pursue a business combination on attractive terms with Rite Aid;

 

    at a meeting of the Rite Aid board of directors held on February 16, 2018, Citi indicated that based on, among other things, its knowledge of the industry and market generally and Rite Aid’s discussions with other potential buyers, it believed it was unlikely that another viable buyer would make a superior offer to acquire Rite Aid at that time; and

 

    based on its review and the process conducted, the Rite Aid board of directors’ belief that the merger consideration was the best price reasonably available for Rite Aid’s stockholders under the circumstances, that no other alternative transactions would create greater value for Rite Aid’s stockholders than the transaction with ACI and that operating Rite Aid as a stand-alone company would not create greater value for Rite Aid’s stockholders than the transaction with ACI.

 

    Merger Consideration.

 

    The fact that Rite Aid stockholders will own approximately 28.0% to 29.6% of the combined company, depending on the results of the cash elections, and as stockholders of ACI will have the opportunity to participate in the future earnings and expected growth of the combined company and any future appreciation in the value of the combined company’s common stock should they decide to retain the shares of ACI common stock received in the merger.

 

    The fact that Rite Aid stockholders may elect to receive a portion of the merger consideration in cash, giving Rite Aid stockholders an opportunity to realize value at closing for a portion of their investment in Rite Aid common stock.

 

   

The fact that the merger and the subsequent merger are intended to be treated as a single integrated transaction that is expected to qualify as a “reorganization” for applicable U.S. federal income tax purposes and that the Rite Aid stockholders’ receipt ACI stock in the

 

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merger is not expected to be taxable to them for applicable U.S. federal income tax purposes.

 

    Opinion of Rite Aid’s Financial Advisor.    The opinion, dated February 17, 2018, of Citi to the Rite Aid board of directors as to the fairness, from a financial point of view and as of the date of the opinion, of (i) the base exchange ratio plus the additional cash consideration or (ii) the stock election exchange ratio, as applicable, provided for in the merger agreement, which opinion was based on and subject to various assumptions made, procedures followed, matters considered and limitations and qualifications on the review undertaken as more fully described in the section entitled “The Merger—Opinion of Rite Aid’s Financial Advisor” beginning on page 129 of this proxy statement/prospectus.

 

    Likelihood of Consummation.    Rite Aid management’s and the Rite Aid board of directors’ belief that the mergers and related transactions with ACI have a reasonable chance of being completed successfully taking into account, among other things, their knowledge of ACI’s financial condition and ability to fund any cash consideration, all amounts payable in connection with any change of control offers required to be made and all other payments required in connection with the transaction, including associated fees and expenses, and the level of commitment by ACI to obtain applicable consents and approvals under antitrust and similar laws and to assume the risks related to certain conditions and requirements that may be imposed by regulators in connection with securing such approvals up to a specified threshold.

 

    Arms-length Negotiations.    Rite Aid’s view that the merger agreement was the product of arm’s-length negotiations, including negotiations of financial terms by an independent committee of non-management members of the Rite Aid board of directors, and that the merger agreement contained terms and conditions that were, in the Rite Aid board of directors’ view, favorable to Rite Aid and its stockholders.

 

    Best Alternative for Maximizing Stockholder Value.    The belief of the Rite Aid board of directors that at the time of its approval of the mergers, the merger consideration provided the best value reasonably available to Rite Aid stockholders, taking into consideration, among other factors, the limited interest in Rite Aid expressed by, and discussions with, other potential parties and the views of Rite Aid’s management and financial advisor that it was unlikely that another buyer would pay in excess of the merger consideration, and the fact that if there was such a buyer that presented a superior proposal prior to the stockholder vote to approve the mergers, Rite Aid would have certain rights in accordance with the terms of the merger agreement, as further described below.

 

    Independent Consideration.    The fact that the merger agreement was unanimously approved by the Rite Aid board of directors, which is comprised of a majority of independent directors who are not affiliated with ACI and are not employees of Rite Aid or any of its subsidiaries, and which received advice from Rite Aid’s senior management and outside legal and financial advisors in evaluating and negotiating the terms of the mergers.

Terms of the Merger Agreement.    The Rite Aid board of directors also specifically considered the terms of the merger agreement, in addition to the terms relating to the merger consideration, including the following:

 

    The Rite Aid board of directors’ view that the terms of the merger agreement, including Rite Aid’s obligation to pay a termination fee of $65 million, if the merger agreement is terminated under certain circumstances, as well as the right of ACI to match any competing acquisition proposal that the Rite Aid board of directors determines in good faith constitutes a superior proposal, are reasonable and would not deter interested third parties from making a superior proposal;

 

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    Rite Aid’s ability, under circumstances described in the merger agreement, to provide information to and engage in discussions or negotiations with a third party that makes an unsolicited bona fide acquisition proposal if the Rite Aid board of directors, prior to taking any such actions, determines in good faith that such acquisition proposal either constitutes a superior proposal or is reasonably likely to constitute a superior proposal;

 

    That if Rite Aid were to receive, prior to the approval of the mergers by the Rite Aid stockholders, an acquisition proposal from a third party that provided superior value to Rite Aid and its stockholders, so long as Rite Aid followed certain procedures, Rite Aid and its board of directors would be able to consider such superior value and the Rite Aid board of directors may change its recommendation that Rite Aid stockholders vote in favor of the merger proposal and/or terminate the merger agreement to enter into an alternative acquisition agreement providing for a superior proposal, provided that Rite Aid concurrently pays a $65 million termination fee to ACI;

 

    The ability of the Rite Aid board of directors, subject to certain conditions, to change its recommendation supporting the mergers in response to any event, development, circumstance, change, effect, condition or occurrence (other than an acquisition proposal) that was not known by the Rite Aid board of directors, or, if known, the consequences of which were not known or reasonably foreseeable, as of the date of merger agreement, if the Rite Aid board of directors determines that failure to take such action would be reasonably likely to be inconsistent with its fiduciary duties under applicable law;

 

    The $65 million termination fee payable by ACI to Rite Aid if the transaction is terminated because the “end date” is reached and all conditions to the closing of the merger other than antitrust approval are satisfied, or if there is a legal restraint from an antitrust authority prohibiting the transaction’s consummation (unless ACI confirms in writing that ACI is willing to agree to the sale, divestiture or disposition of assets of Rite Aid in excess of the threshold set forth in the merger agreement in order to obtain any required antitrust consents and Rite Aid determines not to agree to such a sale, divestiture or disposition);

 

    The lack of a financing contingency to ACI’s obligation to complete the merger;

 

    The fact that Cerberus has entered into a standstill agreement that will limit its ability to acquire additional ACI common stock or to take certain other actions so long as Cerberus is represented on ACI’s board of directors;

 

    The fact that ACI is obligated to cause each ACI Holder to enter into a lock-up agreement at or prior to closing restricting transfers of such holder’s shares of ACI common stock held at the time of the closing of the merger, subject to certain exceptions; beginning six months after the closing of the merger, ACI Holders will be permitted to sell up to one-third (which amount may be increased in certain circumstances) of the initial number of such restricted shares in a registered offering pursuant to the registration rights agreement, and beginning 12 months after the closing of the merger, ACI Holders will be permitted to sell up to two-thirds (which amount may be increased in certain circumstances) of the initial number of such restricted shares, minus the amounts sold in months 6-12, in a registered offering pursuant to the registration rights agreement; beginning 18 months after the closing of the merger, the restrictions of the lock-up will expire except that ACI Holders that beneficially own at least 5% of the outstanding shares of ACI common stock must continue to sell shares in registered offerings pursuant to the registration rights agreement;

 

    The fact that ACI is obligated to cause Cerberus and the other ACI Institutional Investors (excluding Colony NorthStar, Inc.) to enter into an agreement at or prior to closing restricting their ability to coordinate the exercise of voting rights or to form a “group” within the meaning of Section 13(d)(3) of the Exchange Act with one another or Colony NorthStar, Inc.; and

 

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    Rite Aid’s ability to specifically enforce ACI’s obligations under the merger agreement, including ACI’s obligations to consummate the merger, and Rite Aid’s ability to seek damages upon any breach by ACI of the merger agreement.

The Rite Aid board of directors weighed the foregoing against a number of potentially negative factors, including:

 

    Possible Failure to Achieve Benefits of the Merger

 

    Challenging trends for retail grocery and retail pharmacy with pressure on prescription margins and the potential threat of competitors in the grocery and pharmacy industries.

 

    The risk that the significant synergies and other benefits expected to result from the transaction may not be fully realized, or will be realized at greater cost than planned.

 

    The challenges inherent in combining the businesses, operations and workforces of Rite Aid and ACI, including the potential for unforeseen difficulties in integrating operations and systems and the possible distraction of management attention for an extended period.

 

    The fact that ACI common stock is not currently publicly traded and the belief that it is difficult to assess how the combined company’s stock will trade, including the difficulty in assessing how ACI’s financial results will impact the trading price of the combined company’s stock.

 

    Regulatory Risk.    The risk that regulatory, governmental and competition authorities might seek to impose conditions on or otherwise prevent or delay the merger, or impose restrictions or requirements on the operation of the business of the combined company after the completion of the merger.

 

    Regulatory Approvals.    The risk that the completion of the merger would require expiration or termination of the applicable waiting periods under the HSR Act and the amount of time that might be required to obtain such expiration or termination, including that it may not be obtained at all, and the risk that the FTC, the Ohio Department of Insurance or other regulatory agencies may not approve the merger.

 

    Costs and Expenses Associated with the Merger.    The significant costs involved in connection with entering into and completing the mergers and the substantial time and effort of management required to complete the mergers, which may divert management’s attention from other business matters during the pendency of the mergers or otherwise disrupt Rite Aid’s business operations, and the challenge in absorbing the effect of any failure to complete the mergers, including stockholder and market reactions.

 

    Ownership of Combined Company.    Current ACI stockholders will own more than 50% of the combined company, and Cerberus will be the largest stockholder of the combined company.

 

    Pendency of Consummation.

 

    Rite Aid stockholders could be asked to vote on approval of the merger agreement well in advance of the completion of the transaction, depending on when the transaction actually closes.

 

    While Rite Aid expects the merger to be consummated if the proposal to adopt the merger agreement is approved by Rite Aid’s stockholders, there can be no assurance that all conditions to the parties’ obligations to consummate the merger will be satisfied.

 

    The merger could be delayed or not completed.

 

    The pendency of the merger could adversely affect Rite Aid’s relationships with its customers, regulators, employees, suppliers and agents or Rite Aid’s other commercial relationships.

 

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    ACI’s financial profile could change between the date of the merger agreement and the completion of the merger, which could impact the value of the combined company’s common stock that Rite Aid stockholders will receive as merger consideration.

 

    Interim Operating Covenants.    The restrictions on Rite Aid’s conduct of business prior to completion of the merger under the standard covenants in the merger agreement, which could prevent Rite Aid from undertaking business opportunities that may arise or taking other actions with respect to its operations during the pendency of the merger.

 

    Non-solicitation Provision.    The fact that, pursuant to the merger agreement and subject to certain conditions, Rite Aid is prohibited from soliciting other acquisition proposals.

 

    Termination Fee.    The fact that, upon termination of the merger agreement under certain circumstances, including the failure of the Rite Aid stockholders to approve the merger under certain circumstances, Rite Aid will be required to pay to ACI a termination fee of $65 million in cash.

 

    Expense Reimbursement.    The fact that, if the merger agreement is terminated in certain limited circumstances, Rite Aid could be required to reimburse ACI for up to $10 million of ACI’s documented out-of-pocket expenses (which would be credited against the termination fee if paid).

 

    Participation in Future Gains of the Stand-alone Company.    The fact that Rite Aid’s stockholders would forego the opportunity to realize the potential long-term value of a successful execution of Rite Aid’s current strategy as an independent stand-alone company.

 

    Divestitures.    The fact that ACI is not required to accept divestiture and other remedies imposed by governmental authorities other than the sale, divestiture or disposition of any assets of Rite Aid that do not exceed $45 million in retail four-wall EBITDA if necessary or advisable in order to obtain any required antitrust consents.

 

    Interests of Rite Aid Directors and Officers.    The fact that directors and officers of Rite Aid may have interests different from and in addition to Rite Aid stockholders.

The Rite Aid board of directors believed that, overall, the potential benefits of the mergers to Rite Aid’s stockholders outweighed the risks and uncertainties of the mergers.

The foregoing discussion of factors considered by the Rite Aid board of directors is not intended to be exhaustive, but the Rite Aid board of directors believes that it includes the material factors considered by the Rite Aid board of directors. These factors are not listed in any particular order of priority. In light of the variety of factors considered in connection with its evaluation of the mergers, the Rite Aid board of directors did not find it practicable to, and did not, quantify or otherwise assign relative weights to the specific factors considered in reaching its determinations and recommendations. Moreover, each member of the Rite Aid board of directors present applied his or her own personal business judgment to the process and may have given different weight to different factors. The Rite Aid board of directors did not undertake to make any specific determination as to whether any factor, or any particular aspect of any factor, supported or did not support its ultimate determination. The Rite Aid board of directors based its recommendation on the totality of the information presented.

Opinion of Rite Aid’s Financial Advisor

Rite Aid has engaged Citi as its financial advisor in connection with the mergers. In connection with this engagement, Rite Aid requested that Citi evaluate the fairness, from a financial point of view, of (i) the base exchange ratio plus the additional cash consideration or (ii) the stock election exchange ratio, as applicable, provided for in the merger agreement. On February 17, 2018, at a meeting of the Rite Aid board of directors held to evaluate the mergers, Citi rendered an oral opinion, confirmed by

 

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delivery of a written opinion dated February 17, 2018, to the Rite Aid board of directors to the effect that, as of such date and based on and subject to various assumptions made, procedures followed, matters considered and limitations and qualifications on the review undertaken described in such opinion, (i) the base exchange ratio plus the additional cash consideration or (ii) the stock election exchange ratio, as applicable, provided for in the merger agreement was fair, from a financial point of view, to holders of Rite Aid common stock (other than, to the extent applicable, ACI, Merger Sub I, Merger Sub II and their respective affiliates).

The full text of Citi’s written opinion, dated February 17, 2018, to the Rite Aid board of directors, which describes the assumptions made, procedures followed, matters considered and limitations and qualifications on the review undertaken, is attached as Annex B to this proxy statement/prospectus and is incorporated herein by reference. The description of Citi’s opinion set forth below is qualified in its entirety by reference to the full text of Citi’s opinion. Citi’s opinion was provided for the information of the Rite Aid board of directors (in its capacity as such) in connection with its evaluation of (i) the base exchange ratio plus the additional cash consideration or (ii) the stock election exchange ratio, as applicable, from a financial point of view and did not address any other terms, aspects or implications of the mergers. Citi expressed no view as to, and its opinion did not address, the underlying business decision of Rite Aid to effect or enter into the mergers, the relative merits of the mergers as compared to any alternative business strategies that might exist for Rite Aid or the effect of any other transaction which Rite Aid might engage in or consider. Citi’s opinion is not intended to be and does not constitute a recommendation to any securityholder as to any election made by such securityholder or how such securityholder should vote or act on any matters relating to the proposed mergers or otherwise.

In arriving at its opinion, Citi:

 

    reviewed a draft, dated February 15, 2018, of the merger agreement;

 

    held discussions with certain senior officers, directors and other representatives of Rite Aid and certain senior officers and other representatives of ACI concerning the businesses, operations and prospects of Rite Aid and ACI;

 

    reviewed certain publicly available and other business and financial information, including certain financial forecasts and other information and data relating to Rite Aid provided to or discussed with Citi by the management of Rite Aid and certain financial forecasts and other information and data relating to ACI provided to or discussed with Citi by the management of ACI and as extrapolated by the management of Rite Aid;

 

    reviewed certain information and data relating to the potential strategic implications and financial and operational benefits (including the amount, timing and achievability thereof) expected by the managements of Rite Aid and ACI to result from the mergers;

 

    reviewed the financial terms of the mergers as set forth in the merger agreement in relation to, among other things, the financial condition and certain historical and projected financial and operating data of Rite Aid and ACI, and the capitalization of Rite Aid and ACI;

 

    analyzed certain financial, stock market and other publicly available information relating to the businesses of certain other companies whose operations Citi considered relevant in evaluating those of Rite Aid and ACI;

 

    reviewed, for informational reference, certain sensitivities to the financial forecasts and other information and data relating to Rite Aid and ACI referred to above, which sensitivities reflected higher and lower potential future financial performance for Rite Aid and lower potential future financial performance for ACI, as provided to or discussed with Citi by the management of Rite Aid (which sensitivities we collectively refer to in this section as the Rite Aid/ACI sensitivities);

 

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    reviewed, for informational reference, certain potential pro forma financial effects of the mergers relative to Rite Aid on a stand-alone basis utilizing the financial forecasts and other information and data (other than the Rite Aid/ACI sensitivities) referred to above; and

 

    conducted such other analyses and examinations and considered such other information and financial, economic and market criteria as Citi deemed appropriate in arriving at its opinion.

In rendering its opinion, Citi assumed and relied, without independent verification, upon the accuracy and completeness of all financial and other information and data publicly available or provided to or otherwise reviewed by or discussed with Citi and upon the assurances of the managements and other representatives of Rite Aid and ACI that they were not aware of any relevant information that was omitted or that remained undisclosed to Citi. As Rite Aid was aware, based on the assessments of the management of Rite Aid and at Rite Aid’s direction, Citi utilized and relied upon, for purposes of Citi’s opinion, the financial forecasts and other information and data relating to ACI referred to above without giving effect to the Rite Aid/ACI sensitivities. With respect to the financial forecasts and other information and data relating to Rite Aid and ACI (including, without limitation, extrapolations therefrom and as to tax attributes of Rite Aid and ACI) that Citi was directed to utilize and rely upon for purposes of its opinion, Citi was advised by the managements of Rite Aid and ACI, as the case may be, and Citi assumed, with Rite Aid’s consent, that such financial forecasts and other information and data were reasonably prepared on bases reflecting the best currently available estimates and judgments of the respective managements of Rite Aid and ACI as to, and were a reasonable basis upon which to evaluate, the future financial performance of Rite Aid and ACI, the pro forma financial effects of the mergers and the other matters covered thereby. Citi expressed no opinion as to any financial forecasts and other information or data (or underlying assumptions on which any such financial forecasts and other information or data were based) provided to or otherwise reviewed by or discussed with Citi.

Citi relied, at Rite Aid’s direction, upon the assessments of the managements of Rite Aid and ACI, as the case may be, as to, among other things, (i) matters relating to the pending sale by Rite Aid to WBA of certain assets of Rite Aid, which we refer to as the Rite Aid-WBA Transaction, including the timing and likelihood of all closings and Rite Aid’s receipt of the full amount of the net proceeds contemplated, and matters relating to certain prior sale and acquisition transactions of ACI, including, as applicable, the assets, liabilities and financial and other terms involved, the timing and likelihood of closing and ACI’s ability to realize the full amount of expected synergies, (ii) the potential impact on Rite Aid and ACI of certain market, competitive, cyclical, seasonal and other trends and developments in and prospects for, and governmental, regulatory and legislative matters relating to or otherwise affecting, the traditional food retail, pharmacy retail, pharmacy services and mass retail industries, including with respect to the pricing and availability of food products and other commodities, which are subject to significant volatility and, if different than as assumed by the managements of Rite Aid and ACI, could have a meaningful impact on Citi’s analyses and opinion, (iii) existing and future contracts and relationships, agreements and arrangements with, and the ability to attract, retain and/or replace, key employees, suppliers, vendors, third-party payors, partners and other commercial relationships of Rite Aid and ACI, (iv) matters relating to ACI’s pension and benefit plans, including with respect to related liabilities and expenses, the expected return on plan assets and the required amounts and timing for funding of such pension and benefit plans, (v) matters relating to certain internal corporate restructurings to be undertaken by, and the capitalization of, ACI, and certain equity award and other securities issuances of Rite Aid and ACI contemplated to be effected prior to consummation of the mergers, and (vi) certain corporate governance matters (including stockholder agreements, obligations or other arrangements) relating to the pro forma combined company and the ability to integrate the operations of Rite Aid and ACI. Citi assumed, with Rite Aid’s consent, that there would be no developments with respect to any such matters that would have an adverse effect on Rite Aid, ACI or the mergers (including the contemplated benefits thereof) or that otherwise would be meaningful in any respect to Citi’s analyses or opinion.

 

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Citi did not make, and it was not provided with, an independent evaluation or appraisal of the assets or liabilities (contingent, accrued, derivative, off-balance sheet or otherwise) of Rite Aid, ACI or any other entity and Citi did not make any physical inspection of the properties or assets of Rite Aid, ACI or any other entity. Citi did not evaluate the solvency or fair value of Rite Aid, ACI or any other entity under any state, federal or other laws relating to bankruptcy, insolvency or similar matters. Citi expressed no view or opinion as to the potential impact on Rite Aid, ACI or any other entity of any pending or potential litigation, claims or governmental, regulatory or other proceedings, enforcement actions or investigations. Citi assumed, with Rite Aid’s consent, that the mergers would be consummated in accordance with the terms of the merger agreement and in compliance with all applicable laws, documents and other requirements, without waiver, modification or amendment of any material term, condition or agreement, and that, in the course of obtaining the necessary governmental, regulatory or third-party approvals, consents, releases, waivers and agreements for the mergers, no delay, limitation, restriction, condition or other action, including any divestiture requirements, amendments or modifications, would be imposed or exist that would have an adverse effect on Rite Aid, ACI or the mergers (including the contemplated benefits thereof) or that otherwise would be meaningful in any respect to Citi’s analyses or opinion. Citi also assumed, with Rite Aid’s consent, that the mergers, taken together, would qualify as a reorganization within the meaning of Section 368(a) of the Code for U.S. federal income tax purposes. Citi did not express any view or opinion as to the actual value of ACI common stock or other securities when issued in connection with the merger or the prices at which ACI common stock, Rite Aid common stock or any other securities would trade or otherwise be transferable at any time, including following the announcement or consummation of the mergers. Representatives of Rite Aid advised Citi, and Citi further assumed, that the final terms of the merger agreement would not vary materially from those set forth in the draft reviewed by Citi. Citi did not express any view or opinion with respect to accounting, tax, regulatory, legal or similar matters, including, without limitation, tax consequences resulting from the mergers or otherwise, or changes in, or the impact of, health care or tax laws, regulations and governmental and legislative policies on Rite Aid, ACI or the mergers (including the contemplated benefits thereof), and Citi relied, with Rite Aid’s consent, upon the assessments of representatives of Rite Aid as to such matters.

Citi’s opinion related to the relative values of Rite Aid and ACI. Citi evaluated the base exchange ratio and additional cash consideration, at Rite Aid’s direction, assuming all holders of shares of Rite Aid common stock made a cash election in respect of all such shares and that such base exchange ratio and additional cash consideration collectively were reflective, in the event solely of a cash election, of the fully diluted pro forma equity ownership in the combined company upon consummation of the merger of former holders of Rite Aid common stock. Citi evaluated the stock election exchange ratio, at Rite Aid’s direction, assuming all holders of shares of Rite Aid common stock made a stock election in respect of all such shares and that the stock election exchange ratio was reflective, in the event solely of a stock election, of the fully diluted pro forma equity ownership in the combined company upon consummation of the merger of former holders of Rite Aid common stock.

Citi’s opinion addressed only the fairness, from a financial point of view and as of the date of such opinion, of the (i) base exchange ratio plus the additional cash consideration or (ii) stock election exchange ratio, as the case may be, to the extent expressly specified in the opinion, without taking into account any premium or discount for control, voting, liquidity or otherwise and without regard to individual circumstances of specific holders with respect to any rights or aspects which may distinguish such holders or the securities of Rite Aid or ACI held by such holders. Citi’s opinion did not in any way address any other consideration to be received in connection with the mergers or proportionate allocation or relative fairness. Citi’s opinion did not address any other terms, aspects or implications of the mergers, including, without limitation, the form or structure of the mergers or any registration rights, lock-up or standstill agreement or other agreement, arrangement or understanding to be entered into in connection with or contemplated by the mergers or otherwise. In connection with its engagement, Citi

 

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was not requested to, and Citi did not, undertake a third-party solicitation process on behalf of Rite Aid with respect to the acquisition of all or a part of Rite Aid. Citi expressed no view as to, and its opinion did not address, the underlying business decision of Rite Aid to effect or enter into the mergers, the relative merits of the mergers as compared to any alternative business strategies that might exist for Rite Aid or the effect of any other transaction which Rite Aid might engage in or consider. Citi also expressed no view as to, and its opinion did not address, the fairness (financial or otherwise) of the amount or nature or any other aspect of any compensation or other consideration to any officers, directors or employees of any parties to the mergers, or any class of such persons, relative to the base exchange ratio and additional cash consideration or stock election exchange ratio, as the case may be, or otherwise. Citi’s opinion was necessarily based upon information available, and financial, stock market and other conditions and circumstances existing and disclosed, to Citi as of the date of Citi’s opinion. Although subsequent developments may affect Citi’s opinion, Citi has no obligation to update, revise or reaffirm its opinion. As the Rite Aid board of directors was aware, the credit, financial and stock markets, and the industries in which Rite Aid and ACI operate, have experienced and continue to experience volatility and Citi expressed no view or opinion as to any potential effects of such volatility on Rite Aid, ACI or the mergers (including the contemplated benefits thereof). The issuance of Citi’s opinion was authorized by Citi’s fairness opinion committee.

In preparing its opinion, Citi performed a variety of financial and comparative analyses, including those described below. The summary of the analyses below is not a complete description of the analyses underlying, and factors considered in connection with, Citi’s opinion. The preparation of a financial opinion is a complex analytical process involving various determinations as to the most appropriate and relevant methods of financial analysis and the application of those methods to the particular circumstances and, therefore, a financial opinion is not readily susceptible to summary description. Citi arrived at its ultimate opinion based on the results of all analyses and factors assessed as a whole, and it did not draw, in isolation, conclusions from or with regard to any one factor or method of analysis. Accordingly, Citi believes that such analyses and factors must be considered as a whole and that selecting portions of its analyses and factors or focusing on information presented in tabular format, without considering all analyses and factors or the narrative description of the analyses, could create a misleading or incomplete view of the processes underlying such analyses and its opinion.

In its analyses, Citi considered industry performance, general business, economic, market and financial conditions and other matters existing as of the date of its opinion, many of which are beyond the control of Rite Aid and ACI. No company or business reviewed is identical or directly comparable to Rite Aid, ACI or their respective businesses and an evaluation of these analyses is not entirely mathematical; rather, the analyses involve complex considerations and judgments concerning financial and operating characteristics and other factors that could affect the public trading, acquisition or other values of the companies or businesses reviewed or the results from any particular analysis.

The estimates contained in Citi’s analyses and the implied reference ranges resulting from any particular analysis are not necessarily indicative of actual values or predictive of future results or values, which may be significantly more or less favorable than those suggested by such analyses. In addition, analyses relating to the value of companies, businesses or securities do not purport to be appraisals or to reflect the prices at which companies, businesses or securities actually may be sold or acquired. Accordingly, the estimates used in, and the results derived from, Citi’s analyses are inherently subject to substantial uncertainty.

Citi was not requested to, and it did not, recommend or determine the specific consideration payable in the mergers. The type and amount of consideration payable in the mergers were determined through negotiations between Rite Aid and ACI and the decision to enter into the merger agreement was solely that of the Rite Aid board of directors. Citi’s opinion was only one of many factors considered by the Rite Aid board of directors in its evaluation of the mergers, and should not be

 

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viewed as determinative of the views of the Rite Aid board of directors or Rite Aid management with respect to the mergers or the consideration payable or exchange ratios provided for in the mergers.

Financial Analyses

The summary of the financial analyses described below under this heading “—Financial Analyses” is a summary of the material financial analyses prepared and reviewed with the Rite Aid board of directors in connection with Citi’s opinion, dated February 17, 2018. The summary set forth below does not purport to be a complete description of the financial analyses performed by, and underlying the opinion of, Citi nor does the order of the financial analyses described represent the relative importance or weight given to those financial analyses by Citi. Certain financial analyses summarized below include information presented in tabular format. In order to fully understand the financial analyses, the tables must be read together with the text of each summary as the tables alone do not constitute a complete description of the financial analyses. Considering the data in the tables below without considering the full narrative description of the financial analyses, including the methodologies and assumptions underlying the financial analyses, could create a misleading or incomplete view of such financial analyses. Future results may differ from those described and such differences may be material. For purposes of the financial analyses described below, (i) the term “adjusted EBITDA” generally means earnings before interest, taxes, depreciation and amortization, excluding non-cash and one-time non-recurring items, as applicable, and with respect to Rite Aid, the term “adjusted EBITDA” means net income (loss) excluding the impact of income taxes, interest expense, depreciation and amortization, LIFO adjustments, charges or credits for facility closing and impairment, inventory write-downs related to store closings, debt retirements, the merger termination fee paid to Rite Aid by WBA pursuant to the WBA asset purchase agreement, and other items (including stock-based compensation expense, merger and acquisition-related costs, severance and costs related to distribution center closures, gain or loss on sale of assets, and revenue deferrals related to Rite Aid’s customer loyalty program) and including corporate administration expense net of applicable transition services agreement fees related to the Rite Aid-WBA Transaction, and (ii) references to “Rite Aid forecasts” mean financial forecasts and other information and data relating to Rite Aid provided to or discussed with Citi by the management of Rite Aid, and references to “ACI forecasts” mean financial forecasts and other information and data relating to ACI provided to or discussed with Citi by the management of ACI and as extrapolated by Rite Aid management. In calculating implied exchange ratio reference ranges as reflected in the financial analyses described below, Citi (a) divided the low-ends of the approximate implied per share equity value reference ranges derived for Rite Aid from such analyses by the low-ends of the approximate implied per share equity value reference ranges derived for ACI from such analyses in order to calculate the low-ends of such implied exchange ratio reference ranges and (b) divided the high-ends of the approximate implied per share equity value reference ranges derived for Rite Aid from such analyses by the high-ends of the approximate implied per share equity value reference ranges derived for ACI from such analyses in order to calculate the high-ends of such implied exchange ratio reference ranges.

Selected Public Companies Analyses.    Citi performed separate selected public companies analyses of Rite Aid and ACI in which Citi reviewed certain publicly available financial and other information relating to ACI and certain publicly available financial and stock market information relating to Rite Aid and the selected publicly traded companies listed below.

Rite Aid.    Citi reviewed publicly available financial and stock market information relating to Rite Aid and the following six selected publicly traded companies that Citi considered relevant, consisting of two pharmacy retail companies, which we refer to as the selected pharmacy retail companies, and four traditional grocery companies, which we refer to as the selected traditional grocery companies and,

 

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together with the selected pharmacy retail companies, which we collectively refer to as the Rite Aid selected companies:

 

Selected Pharmacy Retail Companies

  

Selected Traditional Grocery Companies

•   CVS Health Corporation

  

•   Ingles Markets, Incorporated

•   Walgreens Boots Alliance, Inc.

  

•   Koninklijke Ahold Delhaize N.V.

  

•   The Kroger Co.

  

•   Supervalu Inc.

Citi reviewed, among other information, enterprise values, calculated as fully-diluted equity values based on closing stock prices on February 15, 2018 plus total debt, preferred stock and minority interests (as applicable) and less cash and cash equivalents and investments in unconsolidated affiliates (as applicable), as a multiple of fiscal year 2019 (ending in February 2019) estimated adjusted EBITDA. Financial data of the Rite Aid selected companies were based on publicly available Wall Street research analysts’ estimates and public filings. Financial data of Rite Aid was based on the Rite Aid forecasts.

The overall low to high fiscal year 2019 estimated adjusted EBITDA multiples observed for the Rite Aid selected companies were 5.1x to 8.5x, with overall low to high fiscal year 2019 estimated adjusted EBITDA multiples observed for the selected pharmacy retail companies and the selected traditional grocery companies of 7.6x to 8.5x (with a mean and a median of 8.0x) and 5.1x to 7.0x (with a mean and a median of 6.2x), respectively. Citi then applied a selected range of fiscal year 2019 estimated adjusted EBITDA multiples derived from the Rite Aid selected companies of 6.2x to 8.0x to corresponding data of Rite Aid. This analysis indicated an approximate implied per share equity value reference range for Rite Aid of $0.87 to $1.92.

ACI.</