Winn-Dixie's Stellar Deal: Upside Potential Remains

| About: Winn-Dixie Stores, (WINN)

Once trading at $30 in 2007, shares of Winn-Dixie (NASDAQ:WINN) traded $5.43 on Friday at a time that Mr. Market was really depressed. Privately owned supermarket chain BI-LO LLC thought it was ridiculous and made a $9.50 offer for the firm, a whopping 75% premium compared to Friday's close.

While the big profit opportunities are gone, shareholders could still squeeze some money out of the deal.

Sleeping stock

Winn's has been a really boring stock. Operating in the stable supermarket businesses the company has reported annual revenues in the range of $7bn over the last years without any signs of substantial growth. In most years small profits were reported but last year it lost $70mn on increased investments in new stores to revamp growth.

Value play

On Friday the market capitalization of just $300mn valued the stock at a mere 0.05x annual revenues and 2.5x expected EBITDA of $120-$135mn for the full year. While it has not really been profitable the company holds $200mn in cash, has no long term debt and negligible leasing obligations.

The deal

Privately owned BI-LO LLC proposes to merge with Winn-Dixie creating a bigger chain with 690 stores in 8 US states. Winn-Dixie shareholders can tender their shares $9.50 and the deal is expected to close within 60-120 days.

At shares price of $9.50 stock is still far below its $850mn book value which stands at around $15 per share.

How to benefit

Shareholders could still get in and buy the shares at yesterday's close of $9.24.

They can make the last $26cts a return of 3% in an expected timeframe of 60 till 120 days. There are no obvious reasons for the deal to go wrong as anti-trust risk is negligible.

For those around thinking that the newsflow might have woken up bigger competitors (such as Supervalue) of private-equity firms, there is still at 5ct offer for the March 2012 10 call, which becomes profitable if indeed a bidding war might be ignited.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.