Merger Experts Wary of Albertsons-Kroger Merger

Gambling on the Result of a Merger or Acquisition is Always a Risky Endeavor, Particularly When It Comes to the Large Supermarket Chain Kroger.

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Safeway Inc. has proposed a purchase of its competitor, Albertsons. This move has caused a decrease in ACI's stock by 0.61%.
In October, Kroger and Albertsons reached an agreement in which Kroger would purchase Albertsons for $34.10 per share in cash, minus a special dividend of $6.85 that Albertsons was set to pay out. If all goes as planned, Albertsons shareholders will receive $27.25 per share from Kroger.

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At present, Albertsons stock is trading at $21.21, which is a 22% decrease from its previous value. It is difficult to determine what this price reflects, as it requires speculation about the likelihood of the deal passing antitrust review and how long it will take. As time is a valuable commodity, this particular transaction could be especially contentious.

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Merger arbitragers who may have purchased Albertson's stock recently are in a difficult situation, as they are not eligible to receive the special dividend payout that was initially planned. In November, a Washington state court issued a temporary restraining order on the dividend being paid, and the Washington Supreme Court extended the order in December. The Supreme Court's decision was based on the idea that the payout could potentially weaken Albertsons financially, making it less competitive with Kroger during the antitrust review process. On Tuesday, the Supreme Court lifted the extension of the restraining order, and Albertson's stock rose 3.3% in after-hours trading, which could be interpreted as a sign that the market believes the ruling is a positive sign for the deal closing.

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Kroger has announced that it is willing to divest up to 650 stores in order to gain regulatory approval. This could be done in two ways: Kroger could find third-party buyers for the stores or, if it is unable to, up to 375 of those stores will be given to Albertsons shareholders. The purchase price will be adjusted depending on the number of stores that will be in the spun-off company and a pre-determined formula. It is necessary to consider the number of stores that will be spun off, which stores will be chosen, and how the market will value the spun-off company.

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If the deal between Albertsons and Ahold Delhaize is called off, the supermarket's stock is unlikely to suffer a major decline. Before the talks began, the shares were trading at $25.67. If they had followed the same trajectory as Ahold Delhaize or Sprouts Farmers Market, without the dividend, they would be worth around $23 today, which is still higher than their current price. Additionally, paying the dividend would not put the chain's financial stability at risk.

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If the transaction is finalized without any division by the beginning of 2024, an arbitrager could potentially gain an annual return of approximately 25%.
The potential for a large return on investment may appear to be a sure thing, however, in the realm of merger arbitrage, the complexity of the transaction makes it a risky venture.