Safeway Inc. Swallows the Poison Pill
When the market closed on Tuesday, Safeway Inc. (NYSE: SWY) shares increased 10.5% ending the day at $30.99. Safeway Inc. is an American based supermarket chain that is currently the second largest grocer franchise only to The Kroger Company (NYSE: KR). Based on the 2010 fiscal year Safeway managed to pull in a whopping $41 billion in estimated sales and as of December 2011 was responsible for 1,678 storefronts throughout the United States, as well as parts of Canada and Mexico. Based on revenue Safeway is currently the 11th largest retailer in the United States. However, this staggering spike in the stock was not the result of the typical market fluctuations.
The successful hedge fund, Jana Partners LLC, has apparently had interests in the supermarket giant, and on Tuesday they made it public when they acquired a 6.2% position among the company stockholders. Jana Partners and their investors goal for this purchase (as is typically their goal in large investments of this caliber), is to become one of the primary stockholders in order to have a higher weighted vote on the Safeway Inc. Corporate Board of Directors. Jana has developed plans to influence various corporate changes that they feel will help return a higher capital to it’s investors.
In response to the moves made by Jana’s investors, Safeway has chose to adopt what is sometimes jokingly referred to as the ‘poison pill’ plan in order to maintain their operation and long-term goals without influence from the successful hedge fund. The technical investment term for the ‘poison pill‘ is known as the ‘Shareholders Rights Plan’. The ‘Shareholders Rights Plan’ is a corporate strategy that is designed to offset ‘hostile takeovers’, where private investors or group investors buy a large percentage of company shares in order to make managerial decisions. With Safeway’s announcement, shareholders of the company (excluding Janna) will be encouraged to buy more shares at a discount in order to dilute Jana’s ownership and the stock pool.
Jana Partners LLC and their investors, like many hedge fund companies, are no stranger to what is currently happening with Safeway. Jana was founded in 2001 by Barry Rosenstein and currently has over $6 billion in assets under managing alone. Companies like Jana have became profitable, advising their investors to buy shares in public equity markets through activist strategy plans implement by the company. Jana utilized this strategy to influence changes they are intending to propose, such as ridding storefronts in less profitable regions and selling the company’s entire share in the recently made public Blackhawk Inc. (which was developed by Safeway).
As of May the CEO of Safeway has been Robert Edwards and within his short tenure he was responsible for selling the company’s operations in Canada for $5.7 billion (far more than had been projected). With this proposal, Edwards hopes to maintain company ownership of both their venues in regions Jana has deemed nonprofitable (parts of Chicago, Arizona, and Southern California) and their majority stake in Blackhawk (73%)(NYSE: HAWK).
Under Safeway’s current corporate management the company continues to have success, staying on par (within +/-2% single share value) of their primary competitors (Kroger, Supervalu, and Roundy’s). Along with the recent surge in share prices the company finished the day with a market capitalization of 7.5 billion.