The moment that every Supervalu (SVU) shareholder had been waiting for finally happened on Thursday, Jan. 10: It was announced that a group of investors, led by Cerberus, are purchasing segments of Supervalu's business and committing to invest in the remaining company. (On Nov. 29, my article "Stick With Supervalu" was published, which noted that a drop in share price to roughly $2.30 was a great entry opportunity for investors to position themselves for the rumored transaction; investors who made purchases around that time frame would have made approximately 50% on their investment in just over one month.) Despite the big price move (33% since Jan. 4), it may not be too late to get long Supervalu.
Shares closed up 14% at $3.47, after trading between $3.25 and $3.62 during Thursday's session. However, Thursday's close still represents a significant discount to the $4.00 price at which Cerberus and other investors plan to make a tender offer (for up to 30% of shares). While the easiest and biggest money has now been made, I think that new investors should still consider buying shares to arbitrage the tender discount -- and to get in at the ground floor for the new, leaner Supervalu.
At the tender price of $4.00, Cerberus and its co-investors will invest about $255 million into the new Supervalu at a valuation of approximately $850 million. While skeptics may argue that the new Supervalu has been stripped of some of its most valuable assets, Cerberus and partners wouldn't be investing in new Supervalu at $4.00/share if they didn't believe that new Supervalu was worth at least $4.00/share. As it is currently impossible for an independent investor to attempt to value the new company (before carved-out financials exist), I'm going to side with the professional investors on this one. If they're willing to pay $4.00, then $3.50 is a steal.
I lightened my enlarged Supervalu position in premarket trading to reduce risk, and an order to buy back that position at a lower price during Thursday's session was not filled. If Supervalu shares continue to linger at prices significantly discounted to the tender price, I will attempt to rebuild a larger position. At $3.47, any shares that are successfully tendered will result in a 18% gain in a very short amount of time and, despite the current discount, it seems reasonable that SVU shares could remain at or above $4 once the tender is completed. The new SVU will carry $3.2 billion less debt and will be backed by new large and intelligent investors -- it sounds to me like it's a great time to buy.
Disclosure: I am long SVU.