More Merger Arbitrage: My Investment in Albertsons Companies, Inc.

Seventh in the Series

Happy New Year! I just went from October 4, 2023, to January 16, 2024, without buying a single share of any security whatsoever. ?This drought ended when I added additional Devon Energy shares, a stock I mentioned in a previous post in this series, on the 17th of January.? ?

The stock market has separated itself from reality, especially the reality of higher interest rates.? An idea, one that seems to be supported by the Federal Reserve, that interest rates will be cut somewhat dramatically in 2024 has taken hold.? Mind you, inflation is still close to 4% and I do not see it returning to 2% at any time in the foreseeable future.? Hence, cutting interest rates will risk fanning the flames of inflation, while doing so appears to be just an attempt to maintain asset prices at current levels.? Nonetheless, we are in an election year, and Washington may have other priorities than that of doing what is right for the long term monetary policy of the United States.

I have written a post in this series whenever I have made a major stock purchase.?Part of doing so is because it will allow me to think through these decisions.?Part of it is to make a record of why I made the decisions that I did, so at a later date, I can examine how right or wrong I was in making these decisions.?Finally, part of it is to stir some potential discussion and in doing so, obtain a different point of view.

This article represents the seventh major investment that I have made since September 2022.? The first major purchase was made in September, when I purchased shares of Paramount Global (PARA).? That stock purchase, at $20 /share, is under water currently.? It was, however, made with a significant margin of safety, and as PARA is acquired and then sold in separate actions over the short to mid horizon, I believe that I will still see a positive return on the investment.? This was content value play – PARA content holdings by itself are worth more than $20/share.? Time will tell if I am right or not.?

During October 2022, I made a second major investment, which was Verizon (VZ).? At $36/share, I am already in the black and with a seven percent (7%) dividend yield, I am pleased with this investment so far.

In December 2022, I made a major purchase in Activision Blizzard (ATVI), as a merger arbitrage play.? This position closed in October and saw a 17% return in less than a year.? Not too shabby.

In March 2023, I made major purchases in Blackstone Mortgage Trust (BXMT), and Devon Energy (DVN) – the same Devon that I added to on 1/17/24. BXMT is paying me a thirteen percent (13%) dividend yield.

In late July 2023, I made a major investment in Tower Semiconductor (TSEM).? Like ATVI, this was a merger acquisition play.? Unfortunately, the merger with Intel failed to be consummated because of China refusing to approve the merger.? TSEM shares were badly hammered, reaching a low in early October with the terrorist attacks in Israel.? The share price has bounced back but is still down over 20%.? I believe I have a margin of safety with the share price that I purchased at, and in the end, will see a positive return.? It will not be the large double digit return that was possible in the merger arbitrage, however, it should still be an acceptable return.

Today, I made another major purchase of shares and it is again a merger arbitrage play.? The stock that I purchased is Albertsons Companies (ACI).? ACI has agreed to be acquired by Kroger (KR) last year.? The merger was supposed to be completed this quarter but has now been pushed back to the third quarter 2024.? Kroger has offered $27.25 per ACI share.? My cost basis in this position is $21.80.? Hence, I am looking at a twenty-five percent (25%) return within the next nine months.? ???

Albertsons is a food and drug retailer in the United States. ACI is engaged in the operation of food and drug retail stores that offer grocery products, general merchandise, health and beauty care products, pharmacy, fuel and other items and services in its stores or through digital channels. The company operates approximately 2,271 stores across 34 states and the District of Columbia. ?Grocery store brands include Albertsons, Safeway, Vons, Pavilions, Randalls, Tom Thumb, Carrs, Jewel-Osco, Acme, Shaw's, Star Market, Market Street, Haggen, Kings Food Markets and Balducci's Food Lovers Market. ACI operates approximately 1,722 pharmacies, 1,328 in-store branded coffee shops, 401 associated fuel centers, 22 dedicated distribution centers, 19 manufacturing facilities and various digital platforms. Albertsons own brands include Signature SELECT, Open Nature, Signature Cafe, Lucerne, Waterfront BISTRO, Primo Taglio, Signature Care, Signature Reserve and Value Corner.

The biggest threat to the merger is whether the merger will be approved by US regulators.? The hold up here is with the FTC, much like with the ATVI acquisition. The merged Kroger/Albertson company would be the second largest grocery store chain in the United States.? Number one by a mile is Wal Mart.? There is also a lawsuit from the Washington state attorney general against this merger.? This case was filed in state court earlier this week.

Several US politicians have come out against this merger.? These politicians are the usual ones who are against any sort of major business acquisition. Politics is where the risks lie here. ?

Albertsons and Kroger have offered divestitures to protect competition and the free market in order to complete the merger.? The FTC will decide whether to attempt to block the merger or not in February.

I suspect that the FTC will challenge this merger similar to what it did with the ATVI merger with Microsoft.? I suspect that Kroger will force the federal court to rule on the merger before the FTC holds its own hearing on the merger.? More than likely, the federal court will support the completion of the merger.?

My expectation is for the merger to be completed before the end of the third quarter of this year.? With that said, I can see this merger not being completed until after the November elections.? You need to respect politics in a Presidential election year.

My waiting for this merger to be completed is buffeted by a 12 cents per share dividend on ACI shares.? The dividend yield for this is 2.2%.

If the merger is completed in the third quarter, I will receive two dividend payments.? So potentially I could see at least an additional 1.1% return from dividends collected while waiting for this merger to close in the third quarter.

Should the merger fail, I believe that a margin of safety is present here.? Albertsons is the fifth largest grocery chain in the United States.? Folks in the US will continue to need to shop for groceries. ?

Peter Lynch valuation method has a share price for ACI at $43.17. Projected future cash flow has the shares valued at $22.8.? The return on equity is over 73%.

At best, I will realize a 25%+ return on the investment before the end of the year.? At worst, I will see a single digit return before I close the position. ?I like my odds here.? Let’s see if I am correct or not.