Just before hitting the three year deadline after which Albertsons would be required to pay CVR holders fair value for their stake in Casa Ley they announced that it was sold for approximately US$345 million. The transaction is scheduled to close by February 28, and CVR holders are expected to receive a payout between 87 to 90 cents per CVR six weeks later. It’s a slightly disappointing result since the CVR was valued at $1.0149 at the time of the merger. Albertson is quick to point out that since then the Mexican peso depreciated 20% against the dollar, but on the other hand we have been in a raging bull market for three years as well. Not the best outcome possible, but still pretty decent I think. Now that we know how big the final payout will be we can calculate what kind of return my first ever CVR-trade generated:
| Date | Description | Cash flow |
|---|---|---|
| 1/27/2015 | Buy one SWY share | (35.12) |
| 1/27/2015 | Buy one put as hedge | (0.12) |
| 2/3/2015 | Receive cash consideration merger | 34.91 |
| 5/11/2017 | First payment PDC CVR | 0.017 |
| 4/11/2018 | Midpoint estimated payout Casa Ley CVR | 0.885 |
| IRR: | 23.12% |
As you can see the trade generated a return of 23% over a more than three year time period which is obviously pretty good, although I believe this understates its profitability. I basically paid 33 cents in 2015 to get paid 90 cents three years later. Looking at it from that perspective the internal rate of return sounds low, but that has to do with the large amount of capital that needed to be tied up in this trade for a week. But thanks to a cheap margin loan it was almost free capital, and accounting for this leverage the internal rate of return would be way higher.
Disclosure
Author is still long two SWY CVR’s