Albertsons(Ticker:ACI): A Merger Arb Play
On October 13 2022 Kroger announced the acquisition of Albertsons at a price of $34.10 a share net of a special dividend which Albertsons distributed to its shareholders of $6.85 a share. This gives the current merger price of $27.25 a share. The current Albertsons share price sits at $21.98 which gives a deal premium of 25%. This large deal premium is most likely due to the market assuming the deal has a low chance of going through due to antitrust concerns. At the time of writing though I think the deal actually has a high likelihood of going through and this could be a nice little investment.
My experience with merger arb has been hit or miss. My first investment was buying Harvest Health when Trulieve brought it in an all stock deal back in Oct 2021. After the deal closed I was underwater but decided to hold and all told I lost 75% of my investment. My last merger though was more luck than skill as I was a holder of Capri(ticker:CPRI) and made a cool 20% in a little less than a year. Thanks Tapestry.
Anyways this Albertsons deal interests me cause Albertsons itself is trading quite cheaply and most likely if the deal doesn’t go through it won’t go down much. Also the deal is all cash so I won’t get killed because of a all stock transaction. There is a possibility for a spin-off of locations that are too close together which will be subtracted from the deal price by 3x EBITDA of the combined Spinco. This may affect the premium. However the Spinco could be sold instead and could improve the premium.
Valuation
Albertsons at it’s current share price is trading at 13.4 times EV/EBIT ex leases. This is about where peers are trading as Kroger, Ahold, Sprouts, and Weis are trading at 16, 14, 13, and 14 times EV/EBIT. This leads me to believe that in the event the FTC decided to block the merger the companies share price should not be punished too severely. Also in the event of deal termination Albertsons will receive $600M from Kroger which is about $1 per share in value. This should further shield the share price from failing too much.
| Company | Albertsons(ACI) | Kroger(KR) | Ahold(ADRNY) | Sprouts(SFM) | Weis(WMK) |
| EV-EX leases | $31B | $65.7B | €51B | $4.72B | $2.2B |
| EBIT | $2.3B | $4.1B | €3.7B | $358M | $157M |
| EV/EBIT | 13.4 | 16 | 13.8 | 13.18 | 14 |
Deal likelihood
The main reason the market thinks this deal won’t happen is due to antitrust concerns. However the market for grocery is dominated not by Kroger or Albertsons but by Costco and Walmart.
Source: Dane Bowler
After this merger the combined company would only have slightly more share than Costco. The merger reminds me alot of the T-Mobile/Sprint Merger which even though the market structure was pretty concentrated it was allowed because the combined company could better compete against Verizon and AT&T.
Also another tidbit is that a judge earlier this year tossed out a lawsuit by a group of consumers who sued to block the deal. Mostly because the judge is awaiting the FTC’s decision.
The FTC is expected to make a decision by the Fall of this year.
The Bet
Depending on how much downside you assume Albertsons is currently priced at a 45% to 25% chance of the deal going through. That assumes a downside between 0-10%, and the deal being completed within a year. I’ll be taking the other side of the market here and will be planning to hold till either the acquisition is approved or rejected by the FTC. Also in the event of a spin-co I will sell the spin-co as soon as I get it. If the deal goes on for more than a year I may also look to exit.
