Albertsons and Safeway announced today that they have completed the merger transaction. This wasn’t exactly a surprise after they received clearance from the FTC earlier this week. What is very interesting is that the press release contains valuations for both CVRs since that is required for tax reporting purposes. An estimated value of $1/share for Casa Ley isn’t bad:
Both contingent value rights will be non-transferable and non-tradable. For tax reporting purposes, Safeway intends to report that the fair market values of the contingent value rights at the time of the merger for PDC and Casa Ley are $0.0488 and $1.0149, respectively, per share, based on third party valuations.
Also nice is that the timings of the payments for PDC have been moved forward a little bit while the total amount has been increased slightly. It’s just a small difference, but probably enough to raise the IRR of the merger arb with a few percentage points.
With respect to PDC, both the initial cash distribution ($2.412 per share) and the total estimated asset value including the CVR ($2.461 per share) have increased slightly over the estimated values set forth in Safeway’s December 23, 2014 press release announcing the sale of PDC. Those earlier estimates were $2.38 per share and $2.45 per share, respectively.
Disclosure
Long Safeway
I’ll be curious to see what we get for Casa Ley as opposed to what it is worth. In theory, we would get in the ballpark of $1.0149 if the company is not sold in 3 years, since that agreement does not allow for a minority discount to be applied. However, an open market sale does not offer that protection against discounts so my guess is that the company gets sold in about 18 months for the lowest price possible that doesn’t generate a legitimate lawsuit , say 55-60 cents. In any case, I’ll be happy if we get 60 cents as I got in for about 24 cents net.
Yes, that will be interesting to see. On one hand you have a ‘shareholder representative’ that probably doesn’t have a good incentive to get a great price, on the other hand this also reminds me of a liquidation scenario where there is little upside for management to overpromise. I don’t think it is a coincidence that the consideration for PDC was adjusted upwards.
If they were trying to not get sued, why estimate it’s worth at $1.00+? If you sell something at $1.00+ fair value for a tax reporting purpose at 50 cents you just took a 50% haircut when, in theory, you would get the $1.00+ 3 year time value of money in 3 years, per the contract.
They will most definitely get sued selling it for 50-60 cents. Anything under $1 will result in a lawsuit.
To play devil’s advocate: when the deal was presented Albertsons had an incentive to inflate the value of the non-core assets since that would make the deal sound better. If they did indeed do that it would be better for them to continue that story now and then use some excuse like “changing market conditions” in three years time.
Great idea, but the capital needed to obtain a decent number of Casa Ley CVRs was substantial.
I wonder if there is anyway to trade these CVRs now, post merger.
That’s probably the reason why the opportunity existed, and no: impossible to trade them anymore.
Albertson filed a S-1. Key points as it pertains to Casa Ley:
“On January 30, 2015, the Company completed its acquisition of Safeway by acquiring all of the outstanding shares of Safeway for cash consideration of $34.92 per share, or $8,263.5 million, and issuing contingent value rights of $1.0266 and $0.0488 per share relating to Safeway’s 49% interest in Casa Ley and deferred consideration related to Safeway’s previous sale of the Property Development Centers, LLC (“PDC”) assets, respectively, for an aggregate fair value of $270.9 million.”
“The Company records its CVR obligations at fair value using a combined income and market approach. The CVR obligation is estimated using the income approach of a discounted cash flow model with a weighted average cost of capital of 10.0%, and a guideline company method resulting in adjusted total invested capital. As of February 28, 2015, the estimated fair value of the CVR obligations were $270.9 million.”
The $1.0266 for Casa Ley is about 1% higher than the $1.0149 mentioned in the 01/30/15 press release. Obviously what it is actually sold for in today’s market is a separate conversation.
Alpha do you have a definitive number on what the number of diluted shares of Safeway was at closing? If I do $8,263.5 million divided by $34.92, I get to 236.6 million shares. But if I divide $270.9 million by ($1.0266 + $0.0488), I get to 251.9 million shares. I think 251.9 million shares is the right number, but I just wanted to verify with you.
I thought that the number of shares outstanding was around 230 million, add a couple of million of options that were exercised and the correct number should be ~236 million. Not sure were the other shares are coming from.
The $270m is the carrying amount of the CVR’s on the Albertson balance sheet, which says nothing about the number of shares that were outstanding. So either we get more money or they use a conservative carrying value for the CVR’s for whatever reason.
Anyway, no point in spending a lot of time on this, AFAIK you can’t trade the CVR’s anyway.
“The Company records its CVR obligations at fair value using a combined income and market approach. The CVR obligation is estimated using the income approach of a discounted cash flow model with a weighted average cost of capital of 10.0%, and a guideline company method resulting in adjusted total invested capital. As of February 28, 2015, the estimated fair value of the CVR obligations were $270.9 million. The above inputs used for determining the fair value of the CVR obligations are Level 3 fair value measurements. Changes in the fair value of the CVR obligations can result from changes to the discount rates, as well as the Mexican currency value relative to the US Dollar.”