Monday, January 23, 2006

Hit #76

Albertson's (ABS) finally agreed to be bought by a group that includes Supervalu, CVS, and Cerberus Capital. The deal values Albertson's at $26.29/share, with shareholders receiving $20.35 in cash and the rest as Supervalu (SVU) shares. This has been one of the more complicated deals in recent years, partly so in order to avoid anti-trust concerns.

Alberston's has been up for sale for a while now, and I made 2 posts on the upcoming deal - here and here. This current offer represents a premium of 29.4% over my average cost of $20.3/share.

Supervalu shares surged 7% after the announcement - unusual for a buyer, especially in the retail sector. CVS headed down a bit, but will emerge stronger from this deal. If CVS shares drop another 10%, they are worth buying for the longer term. For now, Rite Aid is a better, takeover, bet.

In fact, if Walgreens' growth phase is done, and it looks that way, a combined long CVS/Rite Aid and short Walgreens trade may be very profitable. Longs Drug Stores (LDG) also remains a target, and the recent pullback has made it less expensive, though not anywhere close to a bargain level. I own Rite Aid and Longs shares, the latter bought at much lower prices.

There will definitely be more activity in this sector soon. Safeway and Kroger, the latter was part of the initial takeover discussions, will have to react. Will they come up with a merger ? Such a merger proposal will invite strong anti-trust scrutiny though. I own Safeway stock, bought after some bad news last year.

Wild Oats Markets (OATS) remains a takeover target, and even after the strong gains over the last few months, looks attractive. I own a somewhat large number of OATS shares, bought after a spectacular earnings miss some months ago.

I will likely end up selling the Supervalu shares I get in exchange as part of this deal. Supervalu's debt level after this deal is worrying and I don't want to be there holding the bag when things start turning ugly.

As for Albertson's, I am happy it will be gone. After one or two trips to Alberston's, I could never get myself to go there again - clean and organized aisles, but not enough compensation for the distressing service.

Previous hit - Identix (#75)


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