Safeway On Acquisition Block Should Be No Surprise To Hedge Funds

Safeway On Acquisition Block Should Be No Surprise To Hedge Funds
safeway Inc. SWY

Safeway Inc. (NYSE:SWY) is in acquisition talks to sell itself, the company announced. Cerberus Capital Management LP, which owns large grocery store chains, is involved in the acquisition talks, according to Reuters.

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.

Jana in talks with Safeway management to “enhance shareholder value”

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, 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.”  The firm had been talking with management about returning more capital to shareholders and making changes in corporate structure.

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In its third quarter investor letter, Jana outlined its rational for a Safeway investment of 6.2%, which prompted Safeway to adopt a poison pill that prevented any investor from owning more than 10% of the stock.  In the fourth quarter investor letter, Jana crowed that “With the announcement on October 10th that the company would review its underperforming geographies, CEO Robert Edwards has shown his commitment to review our ideas for shareholder value creation. There are several more opportunities available to him that we believe will continue to unlock value, including: the separation of Blackhawk Network Holdings (HAWK), exiting non-core markets including the monetization of the Mexican Casa Ley asset, and continued share repurchases.”

Safeway recently exited Chicago market, tail between legs

Safeway has been under significant pressure from hedge funds such as Jana to improve its financial results.  In December the firm pulled up stakes in the Chicago market entirely, selling some of the 72 Dominick’s stores owned but shuttering 40 of the stores which it couldn’t sell.

Shares of Safeway were up 51 cents in after hours trading.

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Mark Melin is an alternative investment practitioner whose specialty is recognizing a trading program’s strategy and mapping it to a market environment and performance driver. He provides analysis of managed futures investment performance and commentary regarding related managed futures market environment. A portfolio and industry consultant, he was an adjunct instructor in managed futures at Northwestern University / Chicago and has written or edited three books, including High Performance Managed Futures (Wiley 2010) and The Chicago Board of Trade’s Handbook of Futures and Options (McGraw-Hill 2008). Mark was director of the managed futures division at Alaron Trading until they were acquired by Peregrine Financial Group in 2009, where he was a registered associated person (National Futures Association NFA ID#: 0348336). Mark has also worked as a Commodity Trading Advisor himself, trading a short volatility options portfolio across the yield curve, and was an independent consultant to various broker dealers and futures exchanges, including OneChicago, the single stock futures exchange, and the Chicago Board of Trade. He is also Editor, Opalesque Futures Intelligence and Editor, Opalesque Futures Strategies. - Contact: Mmelin(at)

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