Supervalu's (SVU) announcement that it was selling five of its grocery store chains to a Cerberus-led investor consortium sent the stock soaring nearly 40%. As a long-term investor in Supervalu I was delighted. As I read more details of the deal, I realized that there was an attractive arbitrage opportunity that other investors not currently holding Supervalu could also profit from.
Supervalu operates about 1100 traditional grocery stores under brands including Acme, Albertson's, Jewel-Osco, Shaw's, and Shoppers. It also operates about 400 Save-A-Lot stores and licenses more than 900 more. Save-A-Lot is a smaller, discount food store, typically about 15,000 square feet in size and offering about 2,500 products. Supervalu additionally operates a supply chain and wholesale distribution business to 2,700 independent grocery stores. In general, Supervalu has shown to be much better operators of the Save-A-Lot stores and its supply chain business than of the traditional grocery stores, and so selling five of its grocery store chains to Cerberus, while keeping its wholesale and Save-A-Lot businesses, appears to allow Supervalu to refocus on its areas of expertise.
The arbitrage opportunity still available to investors comes from a secondary portion of the deal announcement:
In addition to the Sale, within ten business days of today, a newly-formed acquisition entity owned by a Cerberus-led investor consortium ("Symphony Investors") will conduct a tender offer for up to 30 percent of SUPERVALU's outstanding common stock at a purchase price of $4.00 per share in cash (the "Tender Offer").
Within 10 business days of the announcement, the Cerberus-led investor consortium will offer to buy up to 30% of Supervalu's outstanding common stock at $4.00 per share. The announcement was January 10, which means that the tender offer should be announced by January 24th. At the current price of $3.57, this represents a high probability short-term gain of 12%. Tender offers are restricted by Regulation 14E of the SEC to be a minimum of twenty business days and a maximum of 60 calendar days. The 12% gain over 1-2 months corresponds to a 72-144% annualized gain.
There are, of course, risks to this trade. First, the tender offer could fall through, if for example Cerberus pulled out of the deal or necessary financing fell short. This seems extremely unlikely to me, after all the parties have announced details of the deal, including a definite timeline. Second, the tender offer could be oversubscribed. In general (although there are exceptions), an oversubscribed tender offer is prorated. In other words, if 60% of the shares are tendered in an offer to buy 30%, each investor who tendered shares would have half of his or her shares purchased at the offer price. Considering Supervalu's current below-tender share price and high short interest, an oversubscription is a potential risk. However, even if 100% of shares are tendered, each investor will still have 30% of his or her shares purchased. This oversubscription risk can also be mitigated by the likely gradual increase in the share price as the end of the tender offer approaches. Since it is likely that investors will take advantage of this arbitrage opportunity, as time passes the maximum profit is likely to decline. Investors who buy Supervalu now may very well be able to sell for nearly $4 per share as the tender offer comes to a close.
Supervalu is a large generator of cash flow that has made a deal to shed some of its less profitable businesses in exchange for a drastic reduction in its debt. The new company will be leaner, more within its area of expertise, and will be in a better financial position. I currently own and have owned shares of Supervalu for capital appreciation, and plan to continue doing so. This tender offer presents an attractive opportunity for investors to profit from arbitrage. Though not without risk, I have purchased some additional shares for this purpose, and you may find it beneficial for your portfolio as well.