Winn-Dixie Gets An Early Gift

By Stephen D. Simpson, CFA | December 23, 2011 AAA

With only six days left 'til Christmas, BI-LO decided to finish its shopping list in a big way, announcing Monday that it was acquiring Winn-Dixie (Nasdaq:WINN) in an all-cash deal. Although some shareholders may lament that BI-LO's acquisition sells short Winn-Dixie's ability to turn itself around, the fact is that getting 85% or 90% of a company's possible value in straight-up, no-risk cash is not such a bad deal.

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The Deal
Winn-Dixie announced Monday morning that it had accepted an offer from privately held BI-LO to sell itself for $560 million or $9.50 per share in cash. That price represents a 75% premium to Friday's close, but only tiny premiums on the basis of EV/revenue or EV/EBITDA multiples. (For related reading, see Value Investing Using The Enterprise Multiple.)

What BI-LO Is Getting
Winn-Dixie has a long history in the south/southeastern United States, but it has clearly had its ups and downs more recently. The company filed for bankruptcy back in 2005, and though it has been on an encouraging road back, it still isn't a finished recovery story.

Winn-Dixie has been trying to remold its image more recently, and the company has been active in not only in-store remodelings but in operational changes as well. While looks are always subjective, Winn-Dixie's newer stores more closely resemble the likes of Whole Foods (Nasdaq:WFM) or Earth Fare than rivals like Wal-Mart (NYSE:WMT), Target (NYSE:TGT) or Kroger (NYSE:KR).

At the same time, the company has been doing less price-sensitive promotional activity and has been focusing more on rewards cards. A fuel-based rewards card in cooperation with Royal Dutch Shell (NYSE:RDS.A) (NYSE:RDS.B)has been quite popular so far, and the company has been seeing better traffic as a result.

A Curious Buyer
That Winn-Dixie is getting bought out is not exactly surprising. To see BI-LO doing the buying, though, is a little more unusual. BI-LO is not only smaller than Winn-Dixie, but only emerged from bankruptcy itself roughly 18 months ago. Then again, such are the benefits of having well-heeled owners.

Is This a Good Deal for Winn-Dixie?
Winn-Dixie shareholders may well wonder if this is a fair deal for their shares. Unfortunately, it's a question that doesn't have an easy answer. Winn-Dixie was making a lot of operational progress that just simply was not showing up in the share price. Likewise, the company had a healthy balance sheet and was under no particular pressure to make a big move - it could fund its remodeling efforts, and the economies in the Gulf Coast, Florida and Georgia were looking up.

On the other hand, BI-LO is making a pretty robust, risk-free offer here. Sell-side analysts that had buy ratings on Winn-Dixie had price targets typically in the low teens, and my cash flow-based valuation model would back that up. Moreover, although the stock could have been worth something closer to $15 if the company was able to make a lot of progress by 2015, "if" can be a dangerous word in the markets.

The Bottom Line
All in all, Winn-Dixie shareholders are getting a decent (albeit not spectacular) deal. Maybe the company is leaving 10-20% of its real value on the table, but that pales in comparison to the undervaluation Wall Street was giving the stock. While there is likely more room for further consolidation in grocery stores, a competing bid is probably not all that likely, and Winn-Dixie shareholders are likely best served taking their cash and moving on, though investors may want to consider the tax ramifications of selling before year-end. (Find out which companies collapsed after merging. For more, see Biggest Merger and Acquisition Disasters.)

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At the time of writing, Stephen Simpson did not own shares in any of the companies mentioned in this article.

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