Let's take a trip back to Albertsons (ACI) .
It has been more than two months since my last column on the controversial merger between grocery store giants Kroger (KR) and Albertsons. The deal, which was announced in October, called for KR to pay $34.10 per share for ACI, with the tie-up expected to close in 2024. Part of the agreement included a $6.85 special dividend that ACI shareholders were initially supposed to receive back in November, but this was delayed by the courts. However, when the Washington State Supreme Court declined to intervene, the dividend was ultimately paid in January.
The payment of that dividend was a signal, to me anyway, that the deal could move forward, although that is far from certain. The market still isn't buying it, given ACI's current price relative to KR's offer. On Monday, ACI shares closed at $20.75, which implies 31% upside to the takeout price of $27.25 (the initial $34.10 KR offered, less the $6.85 dividend ACI paid). ACI shares, which traded at $21.25 when I wrote my initial piece, slipped to $19.20 late last month, but have since risen about 8%.
The consummation of the deal ultimately lies with the Federal Trade Commission. The deal calls for ACI to divest between 250-300 stores, but some speculate that the company may need to significantly increase that number to appease regulators. ACI currently has more than 2,200 stores in 34 states and the District of Columbia, while KR has about 2,800 stores in 35 states.
ACI now trades at less than 7-times 2024, and 2025 consensus earnings estimates, as of February year-end number, and yields 2.3%, not including the special dividend. I still think shares are cheap here, with or without the deal closing, but the fallout from the special dividend may be one of the reasons shares appear to be cheap.
That dividend, which cost the company about $3.9 billion, was reportedly financed by about $2.5 billion in cash, and $1.4 billion in debt. To take that step, with the prospect of the deal not closing, was indeed a leap of faith. Prior to that dividend payment, ACI had $4.4 billion in cash, and $9.8 billion in debt.
Stay tuned.
