Cerberus Closes Deal On Albertsons With Caveat

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Cerberus Capital Management, the private equity firm that owns grocery store chain Albertsons, has closed the deal with Safeway Inc. (NYSE:SWY), but a final bailout clause still leaves an opening for competing grocery chain The Kroger Co. (NYSE:KR).

According to a report in the Wall Street Journal, Safeway Inc. has agreed to an acquisition price “just over $40 a share,” a deal valued at $9.4 billion.  If consummated, the marriage would create a grocery chain with more than 250,000 employees and 2,400 stores.  The combination would allow the new firm to save money by uniting their distribution and purchasing capabilities. In a conference call the company said the savings would allow them to lower prices to consumers and improve stores, but hedge funds such as Jana Partners would likely expect the benefits of the acquisition to be returned to shareholders, the more likely outcome.

Deal not done… yet

But the deal isn’t done just yet. Safeway Inc. (NYSE:SWY) has inserted a “go-shop provision” into the deal, according to the report.  With this provision Safeway and its banking partner Goldman Sachs Group Inc (NYSE:GS) could seek other offers. Should another offer prevail, the report noted, the victor would be required to pay Cerberus up to $250 million in a breakup fee. Cerberus had faced rumored competition from rival chain The Kroger Co. (NYSE:KR), the largest grocery chain, but a bid has yet to materialize amidst anti-trust concerns.

According to the report, Cerberus is paying $32.50 a share in cash plus they would give Safeway shareholders the right to another $3.65 a share in proceeds from asset sales as well as an estimated $3.95 worth of shares in gift-card company Blackhawk Network Holdings Inc. that Safeway had already agreed to distribute to its investors.

After pressure from hedge funds, first reported in ValueWalk, Cerberus and Safeway began acquisition talks for months, according to the report. In February Safeway publicly announced discussions about a possible sale of the company.

Cerberus becomes major grocery store player

Competition with The Kroger Co. (NYSE:KR) for a supermarket chain is nothing new, as Cerberus was on the losing end last year when Kroger acquired Harris Teeter Supermarkets Inc for $2.4 billion.

Cerberus, with $25 billion under management, is building a growing stable of grocery store properties, having purchased Supervalu Inc. (NYSE:SVU)’s Albertsons stores and four of its other chains, including Chicago’s Jewel-Osco and New England’s Shaw’s, according to the report. The fund got its start in 2006 when it acquired more than 650

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About the Author

Mark Melin
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)valuewalk.com

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