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Merger Arbitrage with Winn-Dixie Stores and Bi-Lo

December 19, 2011 | About:
whopper investments

whopper investments

49 followers
At the beginning of the year (when I was first starting the site up), I mentioned WINN as a potential value play. It traded at a huge discount to both book value and at a tiny fraction of sales, and any signs of an upturn could have sent the stock much, much higher. I also mentioned it could be a takeover candidate. At the time, the stock traded for ~$6. If you had bought then, the stock would have been on a wild ride through the year- going up almost 60% through June and ending up down almost 20% until today, when the company announced plans to get bought out at a nice premium of $9.50 per share.

Very little is out on the deal so far. I haven’t seen anything other than the press release actually. However, it’s tough for me not to see the deal going through. The strategic rational makes sense- the two stores have no overlap, and by combining they can cut some SG&A and try to get profitable. That makes all the sense in the world to me. WINN’s gross margin is 27.5%, perfectly equal to Supervalu’s (SVU) 27.5% in their retail business (see page 20 for a breakout). Supervalu generates positive EBIT from their retail line (excluding intangible impairment), while WINN generates slightly negative EBIT. That tells me WINN might have a scale problem, and this deal could solve it.

There’s upside too. Again, the deal is cheap on both an EV / EBITDA basis and an EV / Sales basis. Maybe SVU or KR comes in and makes a topping bid. Maybe a P/E player does it. It’s tough for me to imagine the deal not going through. No chance of anti-trust concerns, given low market share and no overlapping markets. The deal makes sense strategically given the margin concerns discussed above, and it’s not subject to financing considerations. Only risk is the deal gets voted down- insider ownership is low, and it’s owned by a pretty wide swath of institutions- but it’s tough for me to imagine a mutual fund voting down an unanimously approved deal at a 75% premium.

I added a little bit at ~$9.20. The deal is scheduled to close in the next 60 to 120 days. Assuming it takes 120 days, that’s 10% annualized. If it takes a bit longer and stretches to 150 days, that’d be 8% annualized. At 90 days, you’d be looking at 13.7% annualized. Given an outside shot of a competing bid and little risk of the deal falling through, I like those odds and would add to my position if the stock dipped further.

Disclosure- Long WINN


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