Jana Partners LLC, a New York-based activist investor, said it may seek further discussions with Safeway Inc. about ways to boost returns to shareholders after buying a 6.2 percent stake in the grocery chain.
Options for the Pleasanton, California-based retailer may include returning capital to shareholders and replacing management, Jana said in a filing yesterday. Safeway’s stock rose 11 percent after Jana disclosed its holding, the biggest gain among Standard & Poor’s 500 Index companies.
Jana, which is run by Barry Rosenstein, generally invests in companies undergoing changes such as mergers, spinoffs and bankruptcies, and is known for pushing management to consider changes. The fund also has stakes in Boeing Co., DirecTV, Zynga Inc. and Groupon Inc. It manages about $6 billion, Charles Penner, a Jana partner, said in an e-mail.
The investment company disclosed its stake in the second-largest U.S. grocery-store chain after Safeway had earlier adopted a shareholder rights plan to thwart any unfriendly takeovers, saying an unidentified investor accumulated a “significant amount” of stock.
Safeway rose 0.4 percent to $31.11 at 11:06 a.m. in New York. Through yesterday, the shares gained 71 percent this year, while the Standard & Poor’s 500 Index increased 20 percent.
The grocery chain has simplified operations recently by agreeing to sell its Canadian stores and conducting an initial public offering of its gift-card unit. The moves may help increase free cash flow, making Safeway more attractive to private-equity buyers, said Joe Feldman, a New York-based analyst at Telsey Advisory Group.
“Maybe there’s the thought that with the cash flow you could take on more debt,” he said.
Activist investors are ratcheting up their campaigns, increasingly targeting America’s biggest companies and seeking the ouster of chief executive officers. Assets managed by activist funds have more than doubled over the past five years, to about $73 billion as of the first quarter, from about $32 billion in 2008, according to data compiled by Hedge Fund Research.
Among 23 companies where activists have either won executive or director changes in the past 18 months, 15 outperformed the Standard & Poor’s 500 Index and 8 fell behind since the change was completed, according to data compiled by Bloomberg.
Safeway, which didn’t identify Jana in yesterday’s statement, said the poison pill will help promote “fair and equal treatment” of all stockholders. Under the plan, one preferred stock purchase right will be distributed for each share of common stock held as of Sept. 30, the chain said.
Safeway, second to Kroger Co. among U.S. grocery retailers, in June agreed to sell its Canadian stores to Empire Co.’s Sobeys Inc. unit. The transaction will allow Safeway to focus on its U.S. operations and give it additional cash as it works to revive sales. Revenue in the three months ended June 15 fell 1.6 percent due in part to lower fuel sales, the company said in July.
Last year, revenue rose 1.3 percent to $44.2 billion after increasing 6.3 percent in 2011. Sales will decrease about 15 percent this year after the sale of its Canadian unit, according to analysts’ estimates compiled by Bloomberg.
Safeway, which operates about 1,400 stores in the U.S., had free cash flow of $1.57 billion last year, a 69 percent increase from the previous year. The chain’s price-to-earnings ratio of 13.4 trails the 18.2 average ratio of S&P 500 Consumer Staples Sector Index companies.
Jana’s investment includes options and would be equal to a 4.7 percent stake excluding those derivatives.