Winn-Dixie: Takeover Target Extraordinaire

Winn Dixie (WINN), "Takeover Target Extraordinaire ": thanks to Jefferies & Companies' initiation of research coverage, which started with an underperform rating, WINN is even more vulnerable as an acquisition target. Jefferie's opinion was not what the "street" wanted to hear, and the stock was taken behind the woodshed , and subjected to a 10% beating. The shares are dirt cheap in comparison with their recent trading range of $11 to $32, since emerging from reorganization just two years ago.

The company has a stellar balance sheet: WINN has no debt, and $175 million in cash . Its enterprise value (market cap + debt- cash) of about $500 million, makes it an extremely attractive investment for the national grocery chains such as KR, SVU and SWY.

Regional Dominance: the company's 521 stores competes with Wal -Mart (WMT) and Publix (PUSH.OB) in the south eastern states of Florida, Alabama, Louisiana, Georgia and Mississippi. In most of its markets, it commands either a number one, or number two position.

Possible suitors: a large national chain could actually get paid for the acquisition. If the acquirer elected to utilize a stock swap of its own shares to consummate the transaction, it would be able to capture the company's $175 million cash position while not assuming any debt. The acquiring company could then add over $7.5 billion to its top line, (WINN's annual sales) while eliminating redundant departments, and obtaining obvious synergies. A logical buyout price would be somewhere in the $17 area, representing nearly a 40% premium.

Possible buyout scenarios: Kroger could issue (print up) roughly 41 million shares necessary to produce a stock swap agreement that would result in only a 6% increase to its 652 million shares outstanding. KR's sales would grow by more than 10% as a consequence. SVU would need to swap about 48 million shares, adding about 23% additional shares to its current 212 million total shares outstanding. Its annual sales would rise about 17% to $53 billion with a WINN combination. In a SWY buyout scenario, the company would need to issue about 43 million shares, from 429 million shares outstanding to 472 million , in order to pull a deal off adding 17% to its top line. In all cases, although the acquiring company's would be subject to dilution through additional shares outstanding, the acquisition should be accretive to earnings right out of the starting blocks.

Second quarter estimates: WINN is scheduled to report second quarter results on 2/18. The Street is forecasting a loss of 9 cents on revenues of $2.25 billion. These expectations seem too low, and should be easily beatable . The shares are way oversold and due for a nice bounce due to: (1) the posting of better than expected earnings results, (2) a short covering (3) the development of takeover speculation. (4) bargain hunting. The stock at these levels presents a compelling risk ratio ratio of 4 to 1 and should be aggressively purchased.

Disclosure: Long WINN, SWY, SVU and KR

Comments

[User 351795]

WINN went into reorg for a reason, & it is inevitable they will be there again. They can't compete with PUSH & WMT, and they don't need to buy them, they will be out of business soon enough.

2009 Feb 05 03:42 PM