Spinoff On Aisle Four At Safeway

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After denying spinoff plans for its gift-card subsidiary Blackhawk at its investor day earlier this year, supermarket giant Safeway (SWY) unveiled plans last week for…a spinoff of its Blackhawk subsidiary. Further proof that you can always take a CEO or politician’s word to the bank. For those who are unfamiliar with the business, Blackhawk Network Holdings is a leading prepaid payments network and offers “gift cards and payment services from leading brands through a network of leading grocery stores, big box, convenience, pharmacy, specialty stores and Internet retailers including GiftCardMall.com.” Few details of the potential transaction have been released, but Safeway plans on offering up a minority stake of the business via IPO sometime in the first half of next year.

Blackhawk makes money by taking a commission on the cards and Safeway has said that 2011 was a strong year for the unit with it generating ~$78m of EBITDA. Janney estimates “the company could be valued at $936 million,” and trade at an industry premium due to its “established growth in a niche market.” Not everyone in the analyst community is as bullish though. As highlighted in this Barron’s blog post, Ajay Jain at Cantor Fitzgerald offers some very interesting insight into this transaction. Mr. Jain finds the timing of the transaction ‘odd’ and believes that there is “little incremental value that can be monetized through a spinoff” due to Blackhawk’s relatively small earnings contribution. Additionally, Mr. Jain points out that the IPO could “have the undesirable effect of further exposing the core retailing operations in a more negative light,” as grocers have been struggling recently.

Finally, he also questions management’s motives for the spin, noting that “the potential for management to monetize their options in the Blackhawk subsidiary through an IPO could be very significant.” While stock spinoffs often align shareholder and management interests, an IPO allows for a quick cash out, potentially leaving shareholders stuck with unmotivated executives.

Despite these concerns, the market reacted positively to the news with Safeway notching some nice gains. We will keep you updated as more information regarding the transaction is released.

Disclosure: Author holds no position in any stock mentioned.

 

 

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