What Prompted Fred's Pharmacy To Take The 'Poison Pill' And Adopt A Shareholder Rights Plan?

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.