Fred's, Inc. (NASDAQ: FRED), the relatively small
discount retailer and pharmacy chain, saw its market cap soar from $450 million to $1.3 billion on December 20
after the company announced a blockbuster deal in which it will buy more than 800 retail locations from Walgreens Boots Alliance
Inc (NASDAQ: WBA) and Rite Aid Corporation (NYSE:
RAD) for $950 million.
Investors applauded the deal, which implied Fred's would, almost overnight, become the nation's third largest drugstore
chain.
In a surprising twist, the Wall
Street Journal reported on December 23 that small activist investment investor Alden Global Capital amassed a 25 percent stake
in the company.
Poison Pill
The activist investor confirmed the report in a regulatory filing on December 23, but now the company is adopting a shareholder
rights plan, also known as a "poison pill."
Fred's said
in a press release it observed "unusual and substantial activity" in its stock, which prompted the company's board of directors
to unanimously adopt the Rights Plan. Doing so reduces the likelihood that any person or group could gain full control of the
company through open market purchases without appropriately compensation shareholders.
The Rights Plan also establishes that certain default provisions of its credit facilities will not be triggered, causing the
acceleration of certain debt maturities.
Fred's did acknowledge it has held discussions with a "number of shareholders," although it did not mention any names.
Now What?
The Rights Plan will only be triggered if a person or group acquires an ownership stake of 10 percent or more of its common
stock. At that point, the company will issue one right for each share of common stock outstanding and each holder of a right (other
than the acquiring person or group) will be permitted to buy, at the then-current exercise price, additional shares of common stock
having a market value of twice the exercise price of the right.
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