SWY - Safeway

[Rabbitisrich]

I´m having mixed feelings about this.

 

The price ex HAWK, PDC and Casa is 32.5 per share, or roughly $7.4B, right? At yearend they had $4.6B of cash on the BS. So, they are effectively paying $2.8B for FCF of $600M (x4.6).

 

I think FCF post-sale of Safeway Canada is something like $450 million. There's almost $5.5 billion in debt and post-retirement obligations. I think it's something like 7.5x EV/EBITDA or 15x EV/FCF. Pretty fair to over valued in my opinion, but they're probably hoping to extract a bunch of costs and synergies. Leveraged loan financing is probably very cheap these days so they can pay up.

 

Also, the FCF provided by management nets CAPEX against cash received from asset sales, which might be meaningful in some ways, but not as a profitability benchmark. Cerebrus is paying up for whatever value they provide.

[FCharlie]

I´m having mixed feelings about this.

 

The price ex HAWK, PDC and Casa is 32.5 per share, or roughly $7.4B, right? At yearend they had $4.6B of cash on the BS. So, they are effectively paying $2.8B for FCF of $600M (x4.6).

 

Except some of that cash is held because of Blackhawk... People haven't redeemed all of their gift cards yet. Christmas/end Q4 SWY is always holding excess cash that shouldn't be considered because it goes right out the door in Q1.

 

That said, I hate this deal. If it were $40/share cash + spin HAWK PDC, I'd be more okay with it.

 

Cerberus is putting up $1.25 billion, they'll use Safeway's own cash that would have been spent on buying back 35% of the outstanding shares and they'll use it to pay off debt, they finance almost everything, and they'll get a nice 50%+ return on their $1.25 billion investment as Safeway is projecting $600 million of FCF this year. Safeway's free cash flow will buy the entire thing for them. A perfect leveraged buy out for them. Sadly, the company could have remained public, and bought their share count down year after year and essentially done the same thing for shareholders. Anyone who looks at AutoZone knows what happens when you buy 80% of your shares outstanding.  Safeway had already repurchased over 50% of their shares since 2006. With the buyback authorization they would be up to almost 65%, sitting on $8 billion of real estate.

 

Would love to see shareholders vote no to this deal.

 

 

 

 

 

 

[thepupil]

Made 330% on leaps that I sold a while back. Would've made 1900% if help til January 2014 and exercised (at 20.00 strike bought for 1.00). Thanks COBAF ( fcharlie in particular) for the idea!

 

But man did I miss out!

[fareastwarriors]

I´m having mixed feelings about this.

 

The price ex HAWK, PDC and Casa is 32.5 per share, or roughly $7.4B, right? At yearend they had $4.6B of cash on the BS. So, they are effectively paying $2.8B for FCF of $600M (x4.6).

 

Except some of that cash is held because of Blackhawk... People haven't redeemed all of their gift cards yet. Christmas/end Q4 SWY is always holding excess cash that shouldn't be considered because it goes right out the door in Q1.

 

That said, I hate this deal. If it were $40/share cash + spin HAWK PDC, I'd be more okay with it.

 

Cerberus is putting up $1.25 billion, they'll use Safeway's own cash that would have been spent on buying back 35% of the outstanding shares and they'll use it to pay off debt, they finance almost everything, and they'll get a nice 50%+ return on their $1.25 billion investment as Safeway is projecting $600 million of FCF this year. Safeway's free cash flow will buy the entire thing for them. A perfect leveraged buy out for them. Sadly, the company could have remained public, and bought their share count down year after year and essentially done the same thing for shareholders. Anyone who looks at AutoZone knows what happens when you buy 80% of your shares outstanding.  Safeway had already repurchased over 50% of their shares since 2006. With the buyback authorization they would be up to almost 65%, sitting on $8 billion of real estate.

 

Would love to see shareholders vote no to this deal.

 

 

Do you think it's a possibility? I haven't seen any holders come out against  this deal yet.

[FCharlie]

 

 

 

Do you think it's a possibility? I haven't seen any holders come out against  this deal yet.

 

Sadly, No.

 

I can't decide whether I should hold until the proxy comes out so I can vote NO or just dump the stock and buy something else.

 

 

[fareastwarriors]

Deal Gives Safeway Scope to Think Big, Act Locally

 

http://online.wsj.com/news/articles/SB10001424052702304020104579429191114239818?mod=WSJ_hpp_MIDDLENexttoWhatsNewsFifth&mg=reno64-wsj

[luck]

Hi FCharlie-

 

Great work on $SWY.  I think they gave it to Cerberus early as well.  Now trying to figure out whether to take profits or wait a little.

 

A few questions:

 

1.  I know you think the odds off shareholders successfully voting against this are low, but wondering if you see this as a 5%, 10% chance, etc.?

2.  Also, given the hefty penalty, wondering where you put the odds that Kroger will throw in a higher bid in the 21 days?

3.  From what I recall, $SWY was heavily shorted, wondering what your thoughts are on the near term price effects of short covering on the stock?

 

Also, would love to hear what other members think about whether to take profits here or wait awhile.  Thanks in advance.

 

 

[FCharlie]

Hi FCharlie-

 

Great work on $SWY.  I think they gave it to Cerberus early as well.  Now trying to figure out whether to take profits or wait a little.

 

A few questions:

 

1.  I know you think the odds off shareholders successfully voting against this are low, but wondering if you see this as a 5%, 10% chance, etc.?

2.  Also, given the hefty penalty, wondering where you put the odds that Kroger will throw in a higher bid in the 21 days?

3.  From what I recall, $SWY was heavily shorted, wondering what your thoughts are on the near term price effects of short covering on the stock?

 

Also, would love to hear what other members think about whether to take profits here or wait awhile.  Thanks in advance.

 

5% or 10% may be about right. The options market still has some value in the $40 strike if you go out a little bit... Not a lot of premium, but a little.... If there were a zero chance of a higher bid there should be a zero bid on the $40 strike, all other things being constant.

 

I don't expect Kroger to bid. I think Safeway and Albertsons will merge, Cerberus will IPO the merged company in a few years after they gut the company of all it's cash and real estate and make a nice triple digit return for themselves.

 

Volume has been high. I don't think shorts have had any difficulty covering.

 

 

 

 

[fareastwarriors]

Safeway’s Low Deal Valuation Is Best It Can Get

 

 

 

 

Even if Kroger offered $45 to buy the whole company, Safeway would still be getting the lowest profit multiple for a food retail deal of more than $1 billion since 2004, according to data compiled by Bloomberg.

 

 

 

http://www.bloomberg.com/news/2014-03-10/safeway-s-low-deal-valuation-is-best-it-can-get-real-m-a.html

[Sportgamma]

Here´s something I don´t get...

 

The record date for the HAWK spin-off was the 3rd of April and for each SWY share you get about $4 worth of HAWK. So if I buy SWY today, I won´t get any HAWK shares. Still, the price of SWY hasn´t corrected. Why?

[thepupil]

Here´s something I don´t get...

 

The record date for the HAWK spin-off was the 3rd of April and for each SWY share you get about $4 worth of HAWK. So if I buy SWY today, I won´t get any HAWK shares. Still, the price of SWY hasn´t corrected. Why?

 

a spinoff/special divvy record date and a normal dividend record date work differently.

 

http://groupssa.com/understandingdividenddates.html

 

"Here's the big (and confusing) difference:  While the ex-dividend date is indeed set by the exchange, it occurs not before the record date, but after.  In fact, the ex-dividend date is not even before the payment  date!  By rule, the ex-dividend date is one business day after  the payment date.  (In such cases the term deferred ex-date  applies.) ......

 

Note: Although this page is an explanation of how cash dividend dates work, deferred ex-dates are also used, under certain circumstances, with stock dividends, spinoffs and warrant issues.  With those types of distributions the 25% threshold is not a factor, as often times the value of a spinoff or warrant is not known at the time of declaration.  However, any time a deferred ex-date is applicable, no matter if the distribution is in cash or securities, the deferred ex-date rules explained here, including the due bill process, apply....

 

In cases of a deferred ex-date, the only  function of the record date is to determine on which shares the dividend is paid.  Because of that -- and this is a critical point -- it is the ex-dividend date that determines who qualifies for the dividend, not  the record date."

[fareastwarriors]

Safeway Gets Second FTC Request for Merger Info

 

Notice Extends Closing Date for Combination With Albertsons

 

 

http://online.wsj.com/news/articles/SB10001424052702304058204579493873883287740?mod=WSJ_hp_LEFTWhatsNewsCollection&mg=reno64-wsj

[Sportgamma]

“Company A,” which was previously identified as Kroger Co. by The Wall Street Journal, was willing to pay up to $42 a share for Safeway, pending further due diligence, according to the proxy statement. That was more than Cerberus offered, but concerns over antitrust risk led Safeway to strike a deal with the private-equity firm instead, the document shows.

 

http://blogs.wsj.com/moneybeat/2014/04/21/takeaways-from-the-safewaycerberus-proxy/?mod=yahoo_hs

[bizaro86]

Anyone have any thoughts on the value of the contingent value rights? I thought the terms of the real estate one were especially unfriendly, where at the end of two years anything not sold reverts back to the company. Still, you'd be paying ~1.59 for something with an estimated value of $3.65. Based on the very limited financial information in the presentation linked above, that $3.65 seems to be not far off what those businesses should be worth. Would appreciate thoughts from anyone still holding or considering the arbitrage here.

[writser]

An interesting trade idea:

 

http://www.seekingalpha.com/article/2809635-a-not-so-obvious-way-to-make-money-with-safeway

http://www.alphavulture.com/2015/01/27/safeway-merger-arb-get-the-casa-ley-cvr-on-the-cheap/

 

Summary: Safeway issued a press release yesterday stating that they expect its sale to materialize within 5 business days. At this point you can buy Safeway for $35.18, get back $34.88 in cash within a few weeks. You end up paying approximately $0.30 for two non-tradeable CVR's the company is valuing at $1.07 - $1.47.

 

I bought a decent clip of SWY as well as a few $34 puts for $.05 to hedge my position in case something goes horribly wrong. I'm no expert on merger arbitrage but even if the chances of this deal falling through are 25% this is quite a good trade.

 

Worst case scenario: deal is cancelled and I lose ~$1.2 per share, roughly 3%.

Best case scenario: I get back my cash in a few weeks and bought a small position in CVR's that are worth $1.50 for $0.30.

[Hielko]

I think that the probability of the deal falling through is less than 0.1%: think it's just some paperwork that now needs to be done to close it since they have FTC approval, shareholder approval and everything else that could be a problem.

[writser]

I agree but the good thing is that the thesis does not depend on that assumption. Probably buying puts is a waste of money but I don't like tail risks on a big arb position that I bought without extensive research. I'll gladly spend a couple of basis points to rule them out.

[writser]

Deal closed. I paid $35.16, will get back $34.92 in cash within few days (hopefully), and end up owning $1.05 worth of CVR's with a cost basis of $0.24. For $.05 / share you could've bought $34 puts in case something would go wrong (I did this partially). I'm suprised this idea didn't gain more traction on this board - imho the easiest / safest opportunity i've seen in a while. Especially if you have a decent broker (IB) you could've bought Safeway on 25% margin, paying only 1.6% interest for a couple of weeks to lever up your position.

 

I allocated ~25% of my portfolio to this - which was actually conservative but I only had like two days to figure out some margin issues (*) and had limited knowledge of the buyout itself. This timeframe was also a bit too tight to transfer more assets to my IB account to increase buying power.

 

Things could still go wrong with the CVR's but so far everything is working out.

 

(*) I didn't want to face a huge margin call in case IB risk management would somehow increase margin requirements while waiting for the cashout. I have lots of illiquid positions and an auto-liquidation would have been a disaster. In hindsight things would've worked fine. Next time I would structure the setup of my accounts slightly different and would allocate a bigger chunk of my portfolio to similar opportunities.

 

Albertsons and Safeway Complete Merger Transaction

 

[..]

 

Safeway shareholders will receive $34.92 per share in cash, consisting of (i) $32.50 in initial cash consideration, (ii) $2.412 in consideration relating to the previously announced sale of the assets of Safeway's real-estate development subsidiary Property Development Centers, LLC ("PDC") and (iii) $0.008 in consideration relating to a dividend of approximately $2 million (after deduction for taxes at an assumed rate) that Safeway received in December 2014 on its 49% interest in Mexico-based food and general merchandise retailer Casa Ley, S.A. de C.V. ("Casa Ley").  In addition, shareholders will receive contingent value rights entitling them to pro rata proceeds relating to deferred consideration from the sale of PDC and any proceeds from the sale of Safeway's 49% interest in Casa Ley.

 

Both contingent value rights will be non-transferable and non-tradable.  For tax reporting purposes, Safeway intends to report that the fair market values of the contingent value rights at the time of the merger for PDC and Casa Ley are $0.0488 and $1.0149, respectively, per share, based on third party valuations.

 

 

[rijk]

cash portion is $34.92, so cost basis cvrs is $0.23 at $35.15 purchase price, against cvrs worth $1.06

 

we might need to wait three years to know the actual return, but i think it's safe to say that a decent return looks likely......

 

regards

rijk

 

http://www.prnewswire.com/news-releases/albertsons-and-safeway-complete-merger-transaction-300028412.html

[thepupil]

I was a little early to this, but kept making it bigger and bigger and hedging more and more cheaply. As of yesterday, I was 110% long overhedged SWY lol.

 

http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/current-work-outsspecial-situations/msg191690/#msg191690

[Hielko]

I was a little early to this, but kept making it bigger and bigger and hedging more and more cheaply. As of yesterday, I was 110% long overhedged SWY lol.

 

http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/current-work-outsspecial-situations/msg191690/#msg191690

That's a pretty big bet! Did you have that much cash lying around or a portfolio with low margin requirements? I bought a ~40% stake (also hedged) this week which coincided with me having one of my largest idle cash positions since a long time.

[thepupil]

I spoke w/ the margin department at IB and they walked me through how a corporate action like this is handled (I wanted to make sure I wouldn't be force liquidated even though the position is hedged 3X). I didn't have much cash on hand and dialed up the position in a big way once FTC final approval happened. the margin requirement was very low until when the corporate action happens. My account showed negative excess liquidity but was not liquidated because they put it on manual review when there is a corp action (which is what I wanted to make sure of).

 

One tail scenario that bothered me was if SWY  broke and went down pre-market and, before my options MTM would not have kicked in for margin requirements, so I didn't size up that big until the very last day (when the merger had a 99.9% chance of closing).

 

I probably wouldn't do it that big again. Even though I knew what i was doing and why it was there, seeing negative excess liquidity in the account was nerve racking. Even though I felt like I checked most of the boxes of making sure I could build a BIG position in the CVR without endangering myself, the mental anguish was just a little much.

 

For my dad's account i just fully funded the position with cash...much smoother sailing and easy 2 day trade where you get 99% of your money back and left with a juicy residual position.

 

[writser]

You have balls of steel. Very well done! Even with my 'small' 25% allocation the thought that IB would somehow liquidate my micro cap holdings was scary - however remote the chances of that happening. For you it must have been gut-wrenching :) . Next time I would probably do such a trade in a separate, liquid asset only account.

[writser]

Today I received the payment for the Casa Ley CVR. A payment of approximately $0.934 / share hit my account. Last year I received $0.017 / share for the PDC CVR and another $0.03 / share is possibly still coming. A little bit less than expected, mostly due to depreciation of the Mexican peso. Still, this was a ridiculously great opportunity. The projected IRR was awesome as you received almost your entire outlay back in a few days and you could mitigate most of the risk with a $34 put. Surprised this idea didn't get more traction on this board. Again my compliments for thepupil, especially with regards to position sizing :) . Well done.