Safeway Inc. (NYSE:SWY), the second largest US supermarket chain, is on the verge of being sold to the private-equity firm that owns Albertsons, the fifth largest – but the largest supermarket chain, Kroger, now may step in to complicate matters.

Albertsons

Antitrust issues?

Kroger is now considering a bid to purchase Safeway Inc. (NYSE:SWY), its larger competitor, according to a report in the Wall Street Journal. The report ultimately expects Safeway to be sold to Cerberus Capital Management LP, which owns Albertsons, due to anti-trust concerns with two direct competitors that would control the vast majority of the markets in which they serve being under the same roof.

Pushing up the stock price

In all likelihood what the competition will do is potentially raise the price of the stock, benefiting Albertsons shareholders. Readers will recall in the February 19 ValueWalk report we noted the significance of activist hedge funds in this situation. We said the acquisition shouldn’t come as a surprise to certain activist hedge fund traders, some of whom had been pushing the firm to unlock shareholder value through divestiture of assets.

Jana Partners is one such hedge fund with a stake in Safeway Inc. (NYSE:SWY), as has been reported in ValueWalk.  Jana was in talks with Safeway management and reported in one regulatory filing that it “has had and may continue to have discussions with the issuer’s management regarding a review of strategic alternatives.”  This could extend to the activist shareholders encouraging talks with Kroger, which could push the stock price higher.

Albertsons’ declining revenue an issue; hedge fund pressure to sell

Cerberus is offering nearly $40 per share for Safeway Inc. (NYSE:SWY), making the $9 billion deal one of the larger supermarket mergers in many years, according to the report. Albertsons has been under pressure to enhance shareholder value amidst a declining revenue stream.  The Pleasanton, Calif.-based grocery store operator, which has over 1,300 locations, had seen revenue falling and its business units running into trouble.  In the fourth quarter of 2013, for instance, Safeway Inc. SWY earned 35 cents per share, or $100 million, from continuing operations and excluding onetime charges it earned 53 cents per share.  While the earnings were above Wall Street consensus estimates of 47 cents per share, compare this to 2012 earnings of 71 cents per share, or $170.7 million to see the revenue drop.