Inside the Alden–Fred’s pharmacy $100 million debacle

 

In the book The Big Short: Inside the Doomsday Machine, author Michael Lewis asks:

“What are the odds that people will make smart decisions about money if they don’t need to make smart decisions — if they can get rich making dumb decisions?”

Less than a year ago, Alden Global Capital, the owner of the Digital First Media newspaper chain, made a losing bet. But like all creative hedge fund investors, Alden has managed to make up for its losses in an unlikely arena: America’s newspapers.

At the time of its gamble, staff at DFM papers across the country were suffering through ever-steeper cutbacks, layoffs and buyouts — with the company’s newsrooms shriveling at twice the national rate. Through it all, Alden demanded the papers keep producing profits. And they did.

Last month, CEO Steve Rossi sent an emailed announcement to workers stating that DFM was “solidly profitable,” that “advertising revenue has been significantly better than that of our publicly traded industry peers,” and the company was on course to achieve its financial goals in 2018.

Despite this apparent good news, more than 300 union DFM news workers have been sent packing due to layoffs, buyouts and position eliminations in 2016 and 2017. Those workers, at an average salary of $60,000 per year, could have kept producing the news for five more years — at a cost of less than the $100 million Alden has lost to date on one bad investment.

That’s a lot of journalism lost to America’s towns and cities, a lot of critical information communities won’t have because a handful of New York investors made a very unwise gamble.

The unwise gamble was the hedge fund’s aggressive acquisition of one quarter of the Tennessee-based Fred’s drugstore chain. According to the Wall Street Journal, Alden paid $158 million. Today, eight months later, Alden’s 9.3 million shares are worth only $56 million — a loss of $102 million.

In the midst of this disastrous investment, the hedge fund has inexplicably added Steve Rossi, a career newspaperman, to the drug chain’s board of directors.

How did this happen? And why is Alden mixing up America’s newspapers with risky investments in pharmacies?

A “country club environment”

Manhattan-based Alden announced it was acquiring shares in Fred’s shortly before Christmas in 2016. Securities and Exchange Commission records show that from Dec. 20 to Dec. 22, it bought more than 5.5 million shares at around $20 a pop.

Fred’s stock had been hovering around $10-$11 for weeks before it suddenly doubled in late December. As the DFM-owned Denver Post reported, “Shares shot up 81 percent… after (Fred’s) announced it would more than double its size by purchasing 865 stores Rite Aid Corp. needs to sell.”

“It appears that Alden’s own aggressive behavior may have contributed to the deal’s collapse.”

In essence, Alden’s bid was a takeover attempt at what appeared to be an opportune moment. Fred’s was about to expand considerably by purchasing hundreds of stores from Rite Aid, which was trying to merge with Walgreen’s and had to divest a large number of its properties to comply with federal antitrust requirements.

But within months, the proposed merger was set to be nixed by the Federal Trade Commission, and it appears that Alden’s own aggressive behavior may have contributed to the deal’s collapse.

Fred’s internal problems became public after its officials resisted Alden’s attempts to take over the board. In March, Alden issued a press release alleging bad business decisions by the pharmacy chain’s board and management.

“We have remained patient and respectful of the company’s heightened sensitivity around any public communications during the pendency of the deal with Rite Aid Corporation,” wrote Alden president Heath Freeman.

But he went on to sharply criticize the chain: “Fred’s abysmal business decision-making and country club environment in the executive suite and boardroom are serving as significant obstacles to maximizing shareholder value.”

“That letter unintentionally tipped the FTC off to problems with Fred’s as a buyer,” the New York Post later reported, quoting an unnamed source.

FTC officials reportedly doubted that Fred’s was capable of acquiring hundreds of divested Rite Aid stores, a key part of the plan to help lessen Walgreen’s dominance.

“The FTC, burned previously by retail merger divestitures that didn’t work out, is concerned that Fred’s doesn’t have the market presence or financial strength to replace the competition that would be lost with the removal of Rite Aid from the pharmacy chain sector,” The Street reported.

“In April, Rossi joined the board. It was an odd move for a man who has spent his career in newspapers.”

Mixing news and pharma

While it awaited news of the merger and Rite Aid sale, Alden proceeded to push its way into Fred’s management. In April, Rossi joined the board. It was an odd move for a man who has spent his career in newspapers, starting in 1987 at the Philadelphia Inquirer and Daily News.

But by June, the FTC was preparing to sue over the Rite Aid-Walgreens merger and concerns that the U.S. would be left with only two major pharmacy chains: Walgreens and CVS.

Days before the FTC’s expected filing, Walgreens and Rite Aid announced their engagement was over. Fred’s stock quickly tanked by 20 percent, and the decline has continued. From a high of $20 a share on Dec. 21, Fred’s stock listed this week at $6.

Last week, Alden added its president Heath Freeman to Fred’s board. As the Memphis Business Journal put it, “A former critic of the Fred’s Inc. board of directors now has a seat at the table.” Freeman is said to be the architect behind DFM’s draconian, record-setting cost-cutting.

Some industry analysts estimate that DFM papers are still earning profits of 20 percent and upwards. Now, through ever more layoffs and cost cuts, DFM newspapers continue to keep profits flowing, helping to ease Alden’s wounds from the Fred’s bust.

 

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