2014 has been a big year for mergers and acquisitions so far. Year-to-date, deal volume is up 72% to $2.5 trillion. In the U.S., where equity markets have been on fire for the last two years now, M&A volumes are up a whopping 85.3% since the calendar flipped to January. A lot of that huge transaction volume has to do with the fact that suitors don't have many options to deploy their cash right now.
Even though the broad market has rallied hard in the last year, there are still pockets of value, particularly in some individual small-cap stocks. Likewise, with low interest rates and more cash than ever before parked on corporate balance sheets, large companies are in search of ways to earn meaningful ROI on that $1.25 trillion mountain of corporate cash.
So as management teams come to the realization that they need to either put money to work or hand it back to investors, acquisitions are looking a whole lot more appealing again. Mergers and acquisitions can provide amazing value for purchasing firms' balance sheets -- and they can provide instant gratification for shareholders in the target firm.
Too often, investors think that there’s no money to be made once a deal has been announced, but that’s just plain wrong; between merger arbitrage opportunities and value creation for acquiring firms, it’s worth paying attention to Wall Street’s deal book. So that's exactly what we're doing this week.
With that, let's take a look at four M&A deal stocks worth watching right now.
We'll start things off with grocery giant Safeway (SWY), a name that's been selling itself off as fast as it could for the last year. First, the firm spun off its Blackhawk Network (HAWK) gift card subsidiary and its Canadian businesses last summer. Then it announced that it would unload its Dominick's stores in the Chicago back in October. Earlier this year, Safeway cut to the chase with the announcement that it would begin to explore selling itself.
A month later, Albertsons (backed by Cerberus Capital Management) announced that it would purchase Safeway for $9.4 billion -- a deal that will pay Safeway shareholders a total estimated value of $36.15 per share. $32.50 of that comes in the form of cash from Cerberus. At current price levels, that means that there's a 4% risk premium still priced into shares of Safeway today.
Basically, that 4% payout translates into the risks of the approximately $3.65 per share from Safeway's Mexican business not being paid out. For investors willing to take on a more speculative merger arbitrage opportunity, there's still some cash left in the deal.