Safeway SWY
January 27, 2015 - 7:12pm EST by
2015 2016
Price: 35.15 EPS 0 0
Shares Out. (in M): 231 P/E 0 0
Market Cap (in $M): 8,100 P/FCF 0 0
Net Debt (in $M): 1,469 EBIT 0 0
TEV ($): 9,569 TEV/EBIT 0 0

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  • Merger Arbitrage
  • Contingent Value Right (CVR)
  • Special Situation
  • Grocery Stores
  • Mexico


This is an incredibly short write-up.  The headline is that you are creating an asset for 20c/share that is worth $0.51-1.01/share or more and will be realized in 3 years or less.  The opportunity exists because most institutional investors are either not willing or not able to own a non-transferrable contingent value right.

Safeway is being acquired by Albertson's.  Thursday 1/29 is the last day of trading.  FTC clearance is done, financing is done, this is closing.

The consideration is the following:

$32.50/share in cash at closing
$2.38/share in cash from the initial proceeds from the sale of Safeway's property development business (PDC).  There is no uncertainty around this number.
$0.07/share in cash to be paid within one year of closing related to the sale of PDC.  Shareholders will receive a non-transferable contingent value right (CVR) for this amount.  There is risk it could be slightly higher or lower.

= $34.95/share in known cash consideration

+ 1 contingent value right related to the company's 49% ownership stake in Casa Ley, a supermarket chain based in Mexico.
= $34.95 + ??????? in the CVR

What is the contingent value right in Casa Ley?

Albertson's s did not want to buy Safeway's 49% non-controlling stake in Casa Ley so they structured around it.  The basic idea is that the stake will be monetized at some point (after closing) and the Safeway shareholders will receive an additional payout.  The process is that the "Shareholder Representative" (a subcommttee of the current SWY board, see the link below which goes into details on the Casa Ley CVR) is responsible for marketing the stake in Casa Ley, and when sold, the proceeds will be distributed to shareholders.  If the stake is not sold after three years, the CVR holders are contractually obligated to receive the fair market value of the stake in Casa Ley, EXCLUDING any discount for minority or illiquidity. 

How much is the Casa Ley CVR worth?

At the time of the announcement of the Safeway/Albertson's merger, Safeway said it would give shareholders two contingent value rights that together would be worth $3.45-$3.85/share.   One CVR related to Safeway's PDC business and the other CVR related to Casa Ley.  At the end of 2014, Safeway announced that the sale of PDC would bring in proceeds of $2.45/share, which implies that the remaining value of Casa Ley is $1-1.40/share, IF we assume that the $3.45-3.85/share target that management announced is still accurate (they haven't provided an updated number). 

Another way to look at it:  in the 2013 10-K, Safeway disclosed that its share of equity income (related to Casa Ley) for FY13 was $18mm.  Casa Ley equity income was $18mm in FY12 and $13mm in FY11.    If we use a P/E multiple range of 10-20x on Casa Ley's historical net income of $18mm, we get $180mm-360mm, which is $0.78-1.56/share in value pre-tax.  It's impossible to know what the tax liability on this sale, but it's probably large given that Safeway originally invested in the early 1980s.    If we assume a 35% tax rate on the whole amount, it comes to ~$0.51-1.01/share of after-tax proceeds.


Buy 1 share of Safeway today for $35.15
Receive $34.88/share upon closing (on Friday)
Receive $0.07/share in one year
Receive $0.51-1.01 in three years or less (or up to $1.40 if you believe SWY)
Total profit:  31-81c/share
IRR range = 31-54% assuming CVR paid out in 3 years (obviously better if Casa Ley sold earlier)


Reference materials:
Safeway press release on Albertson's deal:
Safeway press release on PDC sale: 8-K discussing Casa Ley CVR:
Safeway 10-K where Casa Ley equity income was disclosed:



I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


When Casa Ley is sold in three years.

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