Hedge Funds Settle Appraisal Suit With Safeway For $127 Million

Jun 3 2015 | 3:11pm ET

Safeway has settled an appraisal lawsuit with three hedge funds by agreeing to pay them $127 million more for their shares than what other shareholders received when Albertson’s bought the company earlier this year.

The $44-per-share settlement total amounts to a 27% premium over the $34.92 Albertson’s paid for its rival, not counting further contingent consideration that may still accrue from the deal. 

The three funds, Merion Capital, a vehicle backed by Magnetar Capital and a Dutch pension fund, were part of a group of five funds that launched an appraisal rights lawsuit after the Albertson’s deal was announced, arguing that Safeway’s valuation was too low and that the company’s board of directors had not fulfill its fiduciary obligation to secure the best deal possible for shareholders. 

Albertson’s, which is owned by private-equity firm Cerberus Capital Management, was the only buyer to step forward for Safeway, despite a three-week window in which Safeway could find an offer better than Albertson’s $7.6 billion. On the other hand, appraisal rights lawsuits can take years to work out, making the speed of the Safeway settlement noteworthy and suggesting Albertson’s knew it underpaid.

The three funds owned an aggregate 14 million shares of Safeway or approximately 6%. The other two funds, Brigade Capital Management and Muirfield Capital Management, did not agree with the settlement and will continue their litigation. Together, they own a further 3.7 million Safeway shares.

The question whether Safeway’s board fulfilled their duty to shareholders was not settled as part of the agreement, a matter usually litigated separately from appraisal rights questions, noted an article in the Wall Street Journal. 

The increase in M&A activity since the financial crisis has witnessed a corresponding increase in the use of appraisal rights cases by hedge funds, according to the Journal. In such cases, hedge funds buy shares of a company when they learn it exploring a sale, oppose the deal once it is announced, and then sue for a better price.

It doesn’t always work, however - in three recent cases, the Journal relates that courts have awarded exactly the merger price to plaintiffs, plus accumulated interest that is usually around 5%. 

Similar cases pending include challenges to PetSmart’s $8.7 billion buyout by a consortium led by BC Partners, Dole Foods’ $1.2 billion MBO in 2013 and Zale Corporation’s 2014 merger with rival Signet Corp. in which it paid a 41% premium to Zale’s valuation at the time.

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