Albertsons acquisition of Safeway is a done deal after receiving clearance from the FTC today and the company expects that the merger will be completed within the next five business days. When a deal is this close to being completed the spread between the share price and the offer price is usually non-existent, but Safeway’s case isn’t that straightforward since shareholders will receive two contingent value rights (CVRs). The merger consideration will consist of:
- $32.50/share cash consideration for the merger
- $2.38/share consideration for the sale of Safeway’s PDC subsidiary
- $0.07/share CVR related to this sale consisting of money in escrow
- An unknown amount for Safeway’s 49% stake in Casa Ley since it hasn’t been sold yet
The biggest unknown factor is the CVR for Casa Ley, a Mexico-based food and general merchandise retailer. Safeway estimated that the value of PDC and Casa Ley would be between $3.45/share and $3.85/share. If we subtract the $2.45 that was received for PDC it means their interest in Casa Ley should be worth something between $1.00 and $1.40/share.
With Safeway currently trading at $35.15 we can buy the two CVR’s for just $0.27. I think the $0.07/share payment for the PDC CVR has a relative low risk, so we would effectively be buying their Casa Ley stake for just $0.20/share. That sounds like a pretty sweet deal to me!
The timing of the Casa Ley payment is uncertain. The deadline in the CVR is set at three years after the close of the merger and if it isn’t (fully) sold by then CVR holders will receive fair market value (see page 154 in the merger agreement for more details). Both CVRs are non-transferable so if the sale of the Casa Ley stake takes a lot of time you will have zero liquidity for years (the $0.07/share for the PDC CVR is payable within a year though). This could exactly be why the market is offering the current deal.
I don’t think that owning assets with a limited liquidity is a problem, since owning stocks should be done with a long-term time horizon anyway. And if the market is willing to pay a significant risk premium for owning illiquid assets I’m happy to pocket it. It could of course also be the case that I’m simply missing another risk that the market isn’t…