Merger Arbitrage Mondays – Kroger And Albertsons Combine In Massive Supermarket Merger

Merger activity increased last week with five new deals announced and six deals completed. Three of the five deals announced were potential deals in the works.

Kroger and Albertsons – The Merger

On October 14, 2022, the 2nd and 4th largest supermarket chains in the U.S. announced that they were joining forces to potentially create one of the largest grocery chains in the country with 4,996 stores covering about 85 million consumers.

Founded in 1883 and headquartered in Cincinnati, Kroger (KR) operates 2,750 stores across the United States and has an enterprise value of over $50 billion. Albertsons (ACI), based in Boise, Idaho, operates 2,273 stores and sports an enterprise value of $25.5 billion.

Krogen Plus Albertsons

Earlier this year, Albertsons had announced that it was reviewing potential strategic alternatives. The company previously tried to go public in 2018 through a merger with Rite Aid (RAD) but the merger, much to my surprise, was rejected by Rite Aid investors. Albertsons finally went public in 2020 in an IPO priced at $16, which was below its initial price range of $18 to $20 per share and was a downsized $800 million IPO.  Kroger entered into a definitive agreement to acquire Albertsons last Friday, for $24.6 billion. The combined company is expected to represent a major industry consolidation and could pose competitive threat to the likes of Walmart and other grocery chains.

According to the merger agreement,

‘Kroger will acquire all of the outstanding shares of Albertsons Companies for an estimated total consideration of $34.10 per share. The cash component of the $34.10 per share consideration may be reduced by the per share value of a newly created standalone public company (“SpinCo”) that Albertsons is prepared to spin off at closing in conjunction with required regulatory clearance. As part of the transaction, Albertsons will pay a special cash dividend of up to $4 billion to its shareholders. The cash component of the $34.10 per share consideration will be reduced by the per share amount of the special cash dividend, which is expected to be approximately $6.85 per share. This cash dividend will be payable on November 7, 2022, to shareholders of record as of the close of business on October 24, 2022.’

The merger is expected to be completed early in 2024, providing sufficient time for the deal to clear antitrust and regulatory challenges. Senators Elizabeth Warren and Bernie Sanders have already stated that the merger between Kroger-Albertsons would result in higher food prices of US consumers.

Back in 2015, when Albertsons was acquiring Safeway, the FTC had ordered the companies to sell 168 stores before they were allowed to merge. As part of the deal, Safeway had also spun off its gift card provider, Blackhawk Networks into an independent company. Expecting a similar requirement, Kroger and Albertsons are establishing a subsidiary that will be spun off into an independently traded public company, comprising of 100 to 375 stores. The companies have indicated that SpinCo will have a strong balance sheet but given the massive debt load of the new combined company, I would not be surprised if they load up the SpinCo with significant debt.

According to the New York Times,

The F.T.C. has directly — or indirectly — blocked a number of retail deals. The two biggest food distribution companies, Sysco and US Foods, called off their $3.5 billion deal in 2015 after a federal judge had ruled in favor of the F.T.C’s decision to block it. That same year, the F.T.C. blocked a second attempt by Office Depot and Staples to merge. Rite Aid and Walgreens walked away from their $5 billion deal in 2017 before the F.T.C. had a chance to officially weigh in.

Kroger will pay Albertsons $600 million if the deal falls apart over antitrust issues, according to the deal’s terms.

It was interesting to see that the day the merger was announced, retail REIT Kimco Realty (KIM), which leases properties to both Albertsons and Kroger, decided to sell 11.5 million shares at an average price of $26.18. They still hold 28.34 million shares after this sale. Kroger saw its stock sink more than 7% and Albertsons saw its stock drop more than 8% after the deal was announced. If we see further selling in the coming days, Albertsons could present a short-term trading opportunity in light of the special dividend of $6.85, which has a record date of October 24, 2022. The arbitrage spread on the deal is currently 30.10%.

You can find all the active deals listed below in our Merger Arbitrage Tool (MAT) which automatically updates itself during market hours.

Merger Arbitrage

Deal Statistics:

Total Number of Deals Closed in 2022 158
Total Number of Deals Not Completed in 2022 5
Total Number of Pending Deals
Cash Deals 48
Stock Deals 17
Stock & Cash Deals 2
Special Conditions 9
Total Number of Pending Deals 76
Aggregate Deal Consideration $1.11 trillion

New Deals:

  1. The combination of SeaSpine Holdings Corporation (SPNE) and Orthofix (OFIX) in an all stock merger-of-equals. Under the terms of the agreement, SeaSpine shareholders will receive 0.4163 shares of Orthofix common stock for each share of SeaSpine common stock owned.
  2. The acquisition of ForgeRock (FORG) by Thoma Bravo for $2.3 billion or $23.25 per share in cash.
  3. The acquisition of KnowBe4 (KNBE) by Vista Equity Partners for $4.6 billion or $24.90 per share in cash. We added KNBE as a potential deal to the Deals in the Works section on September 19, 2022, and the price after the news of the potential deal came out was $22.17.
  4. The acquisition of Grindrod Shipping Holdings (GRIN) by Taylor Maritime Investments Limited and Good Falkirk Limited for $506 million. Under the terms of the agreement, shareholders of Grindrod Shipping Holdings will receive $26.00 per share, comprising the offer price of $21.00 in cash and a special dividend of $5.00. We added GRIN as a potential deal to the Deals in the Works section on August 29, 2022, and the price after the news of the potential deal came out was $23.56.
  5. The acquisition of Albertsons Companies (ACI) by The Kroger Co. (KR) for $24.6 billion or $34.10 per share in cash. The cash component of the $34.10 per share consideration may be reduced by the per share value of a newly created standalone public company (“SpinCo”) that Albertsons is prepared to spin off at closing. As part of the transaction, Albertsons will pay a special cash dividend of up to $4 billion to its shareholders. The cash component of the $34.10 per share consideration will be reduced by the per share amount of the special cash dividend, which is expected to be approximately $6.85 per share. This cash dividend will be payable on November 7, 2022, to shareholders of record as of the close of business on October 24, 2022. We added ACI as a potential deal to the Deals in the Works section on February 28, 2022, and the price after the news of the potential deal came out was $31.40.

Deal Updates:

  1. On October 12, 2022, Brookline Bancorp (BRKL) and PCSB Financial Corporation (PCSB) announced that the deadline for stockholders of PCSB to elect the form of consideration that they wish to receive in PCSB’s pending merger with Brookline has been extended to November 15, 2022.
  2. On October 13, 2022, Nikola Corporation (NKLA) announced the successful completion of its exchange offer to purchase all outstanding shares of common stock of Romeo Power (RMO).
  3. On October 14, 2022, Steel Connect (STCN) announced that it intends to reconvene the company’s 2021 Annual Meeting of Stockholders on October 28, 2022.

Approvals

  1. Pzena Investment Management (PZN) received all regulatory approvals
  2.  ironSource (IS) received shareholder approval
  3. Covetrus (CVET) received shareholder approval
  4. Meridian Bioscience (VIVO) received shareholder approval
  5. Exterran Corporation (EXTNreceived shareholder approvals
  6. TransGlobe Energy Corporation (TGAreceived final approval from the Court of King’s Bench of Alberta for the previously announced plan of arrangement.
  7. Avalara (AVLR) received shareholder approval
  8. Berkshire Hathaway (BRK.ABRK.B) and Alleghany Corporation (Y) received all regulatory approvals.

Hurdles

  1. October 12, 2022: According to Reuters, Microsoft (MSFT) said Britain’s competition regulator had relied on objections from its rival Sony in referring its Activision Blizzard (ATVI) deal to an in-depth inquiry, in particular “misplaced” concerns about ‘Call of Duty’.
  2. On October 12, 2022, Altair US, a pre-IPO angel investor in Avalara (AVLR) and one of the company’s largest shareholders, reiterated that it intends to vote against the company’s proposed sale to Vista Equity Partners.
  3. October 13, 2022: According to Bloomberg, Twitter’s (TWTR) lawyers tried again last week to learn what Elon Musk had told federal authorities who were investigating his attempt to take the social media company private.
  4. On October 14, 2022, SailingStone Capital Partners, a long-time owner of Turquoise Hill Resources (TRQ) stated that it intends to vote against the proposed transaction with Rio Tinto (RIO) during the special meeting of shareholders currently scheduled for November 1, 2022.
  5. October 17, 2022: According to Reuters, Broadcom (AVGO) will seek early European Union antitrust approval of its proposed acquisition of VMware (VMW) by pointing to competition from Amazon (AMZN), Microsoft (MSFT), and Google (GOOGL).

Shareholders Meeting Schedule

  1. ChannelAdvisor Corporation (ECOM) – November 11, 2022
  2. Cowen (COWN) – November 15, 2022
  3. EVO Payments (EVOP) – October 26, 2022

Closed Deals:

  1. The acquisition of Nielsen Holdings (NLSN) by Evergreen Coast Capital Corporation on October 11, 2022. It took 196 days for this deal to be completed.
  2. The acquisition of Terminix Global Holdings (TMX) by Rentokil Initial on October 12, 2022. It took 302 days for this deal to be completed.
  3. The acquisition of Covetrus (CVET) by Clayton, Dubilier & Rice and TPG Capital on October 13, 2022. It took 141 days for this deal to be completed.
  4. The acquisition of Exterran Corporation (EXTN) by Enerflex on October 13, 2022. It took 262 days for this deal to be completed.
  5. The acquisition of TransGlobe Energy Corporation (TGA) by VAALCO Energy (EGY) on October 14, 2022. It took 92 days for this deal to be completed.
  6. The acquisition of Forma Therapeutics Holdings (FMTX) by Novo Nordisk (NVO) on October 14, 2022. It took 43 days for this deal to be completed.

Weekly Spread Changes:

The table below shows weekly spread changes between October 7, 2022, and October 14, 2022.

Symbol Quote Acquiring
Company
Acquiring
Company Quote
Current
Spread
Last Week
Spread
Spread Change
Weekly
Deal
Type
SIMO 59.36 MaxLinear, Inc. (MXL) 30.02 77.20% 65.94% 11.26% Cash Plus Stock
EMCF 31.25 Farmers National Banc Corp. (FMNB) 13.35 -8.15% -17.55% 9.40% All Stock
BKI 61.62 Intercontinental Exchange, Inc. (ICE) 90.15 37.94% 28.75% 9.19% Special Conditions
TSEM 43.05 Intel Corporation (INTC) 25.91 23.11% 18.30% 4.81% All Cash
VMW 106.17 Broadcom Inc. (AVGO) 427.1 34.22% 29.77% 4.45% Special Conditions
TWTR 50.45 Elon Musk (N/A) 7.43% 10.21% -2.78% All Cash
FHN 23.77 The Toronto-Dominion Bank (TD) 61.13 5.17% 8.60% -3.43% Special Conditions
RCOR 2.71 Rocket Pharmaceuticals, Inc. (RCKT) 16.34 1.05% 5.63% -4.58% All Stock
SAVE 19.43 JetBlue Airways Corporation (JBLU) 6.67 72.41% 81.28% -8.87% All Cash
LOTZ 0.269 Shift Technologies, Inc. (SFT) 0.5529 42.27% 56.18% -13.91% All Stock

Top 10 deals with the largest spreads:

Please do your own due diligence on deals with large spreads. Some of these large spreads might be related to regulatory issues or because of the way the deal is structured. We classify some of these deals as “special situation” deals in our merger arbitrage tool and provide additional details to help with the analysis. There may be unique situations related to special dividends, spinoffs, proration, etc. that need to be accounted for when looking at these spreads.

Symbol Announced
Date
Acquiring
Company
Closing
Price
Last
Price
Closing
Date
Profit Annualized
Profit
SIMO 05/05/2022 MaxLinear, Inc. (MXL) $105.19 $59.36 06/30/2023 77.20% 109.65%
SAVE 07/28/2022 JetBlue Airways Corporation (JBLU) $33.50 $19.43 06/30/2024 72.41% 42.43%
LOTZ 08/09/2022 Shift Technologies, Inc. (SFT) $0.38 $0.269 12/31/2022 42.27% 202.99%
BKI 05/04/2022 Intercontinental Exchange, Inc. (ICE) $85.00 $61.62 06/30/2023 37.94% 53.89%
VMW 05/26/2022 Broadcom Inc. (AVGO) $142.50 $106.17 04/30/2023 34.22% 63.72%
ATVI 01/18/2022 Microsoft Corporation (MSFT) $95.00 $72.13 06/30/2023 31.71% 45.03%
ACI 10/14/2022 The Kroger Co. (KR) $34.10 $26.21 03/31/2024 30.10% 20.65%
TSEM 02/15/2022 Intel Corporation (INTC) $53.00 $43.05 02/15/2023 23.11% 69.15%
FCRD 10/04/2022 Crescent Capital BDC, Inc. (CCAP) $4.79 $3.92 03/31/2023 22.19% 48.80%
FSTX 06/23/2022 invoX Pharma (N/A) $7.12 $5.92 12/31/2022 20.27% 97.35%

Deals In The Works

Five new potential deals were added to the ‘Deals In The Works‘ section last week.

  1. On October 10, 2022, The Wall Street Journal reported that Bio-Rad Laboratories(BIOis in talks to combine with fellow life-sciences company Qiagen (QGEN) in a deal that would be worth more than $10 billion.
  2. On October 11, 2022, Reuters reported that Coronado Global Resources confirmed it was in confidential discussions with Peabody Energy Corp (BTU) regarding a potential combination transaction.
  3. On October 11, 2022, CSC Generation, a significant shareholder of Bassett Furniture submitted a proposal to acquire Bassett Furniture Industries (BSET) for $21 per share in cash.
  4. On October 14, 2022, The Wall Street Journal reported that Nutanix (NTNX) is exploring a sale after receiving takeover interest.
  5. On October 14, 2022, The Wall Street Journal reported that Rupert Murdoch has proposed a recombination of Fox Corp (FOX) and News Corp (NWS), the two wings of his media empire.

Updates

  1. According to Bloomberg, Exxon Mobil (XOM) is considering a takeover of Denbury (DEN).
  2. Bassett Furniture Industries (BSET) board rejected CSC Generation proposals stating they undervalued the company
  3. China Index Holdings Limited (CIH) announced that its special committee of the board of directors has received a revised preliminary non-binding proposal letter, dated October 13, 2022, fromFang Holdings Limited.

SPAC Arbitrage

There were three new SPAC IPOs filed, six new SPAC combinations announced, one completed and two terminated last week. You can find new SPAC IPO announcements in our SPACs tool here.

SPAC IPO

  1. Spring Valley Acquisition Corp. II announces pricing of $200 million IPO.
  2. TenX Keane Acquisition announces pricing of $60 million IPO.
  3. Hudson Acquisition I Corp. announces pricing of $60 million IPO.

New Business Combinations

  1.  XBP Europe the European business of Exela Technologies (XELA) and CF Acquisition Corp. VIII (CFFE) announced that they have entered into a definitive merger agreement.
  2. Flexjet and Horizon Acquisition Corporation II (HZON) announced a definitive business combination agreement that will result in Flexjet becoming a publicly listed company.
  3. Alternus Energy Group and Clean Earth Acquisitions (CLIN) announced the execution of a definitive business combination agreement.
  4. Zoomcar and Innovative International Acquisition Corp. (IOACentered into a definitive merger agreement that will result in Zoomcar becoming a publicly listed company.
  5. Good Works II Acquisition Corp. (GWII) and Direct Biologics announced the signing of a definitive agreement that, will result in Direct Biologics becoming a publicly traded company.
  6. DiaCarta, Ltd., a precision molecular diagnostics company and developer of novel oncology and infectious disease tests, and HH&L Acquisition Co. (HHLA) entered into a definitive business combination agreement.

Updates

  1. Turmeric Acquisition Corp. (TMPM) announced that it will redeem all of its outstanding Class A ordinary shares effective as of the close of business on October 20, 2022, because the company will not consummate an initial business combination.
  2.  Lefteris Acquisition Corporation (LFTR), announced that it intends to dissolve and liquidate due to its anticipated inability to consummate an initial business combination.
  3. Pine Island Acquisition Corp. (PIPP) announced that it intends to dissolve and liquidate because the company will not consummate an initial business combination within the time period required by its Amended and Restated Certificate of Incorporation.
  4. Hunt Companies Acquisition Corp. I (HTAQ) announced that it will redeem all of its outstanding Class A ordinary shares, because the Company will not consummate an initial business combination within the time period required by its amended and restated memorandum and articles of association.
  5. H.I.G. Acquisition Corp. (HIGA) announced that its board of directors has determined to redeem all of its outstanding Class A ordinary shares, effective as of October 24, 2022.

Closed

  1. Dragonfly Energy Corp., (DFLIcompleted its business combination with Chardan NexTech Acquisition 2 Corp.

Terminated

  1. On October 11, 2022, G Squared Ascend I (GSQD) and Transfix announced the mutual termination of their previously announced business combination agreement due to current public market conditions.
  2. OceanTech Acquisitions I Corp. (OTEC) announced that its agreement and plan of merger with Captura Biopharma has been terminated by mutual agreement of all relevant parties.

List of all pending deals:

The list of all pending deals is only available to InsideArbitrage Premium and Plus members.

Disclaimer: I have long positions in Spirit Airlines (SAVE), Atlas Air Worldwide (AAWW), Biohaven Pharmaceutical (BHVN), Twitter (TWTR), First Horizon (FHN), Tower Semiconductor (TSEM) and TEGNA (TGNA). Please do your own due diligence before buying or selling any securities mentioned in this article. We do not warrant the completeness or accuracy of the content or data provided in this article.

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