Jon's Trading Tips
Smith's Food Self-Tender Offer and Stock Price Behavior
By Jon DeBry,
Last Update: 12:00 PM MT Dec 30, 1998Background
Smith's Food and Drug was (and still is) a well-regarded regional grocery chain. I
purchased the stock in 1994 at $22. The stock price struggled for the next two years,
trading between $19 and $28, due to a failed expansion into California and also due to
intense competition in their primary markets.
The offer
In 1996, Smith’s decided to reorganize, and as part of the reorganization, they
decided to buy back up to half of their outstanding shares in a self-tender. The offer to
the shareholders was this: Depending on the number of shares that are tendered,
Smith’s will buy between 50% and 100% of your shares at $36 per share. The current
price was around $23.
What the shareholders did
Needless to say, getting an instant 50% gain on a stock that had gone nowhere for years
was too good to pass up for most shareholders. Most of them (me included) tendered their
shares, and then waited to see what percentage would be purchased. What this meant was we
were all waiting on the company, and no-one was selling. Due to the absence of selling
pressure, the stock drifted up from $23 to $28.
Once the buyback percentage was announced at 50%, a bunch of pent-up selling was
released that immediately pushed the stock price back down to $23.
So we had a very predictable run up of 23%, and then a drop back down.
It sounds so obvious, why did it work?
Smith's was a small, under-followed company. If a larger company had declared the same
offer, the market probably would have immediately priced it into the stock. Also, Smith's
shareholders had been knocked around for years, and were more than glad to make a nice
profit. If the company had more growth potential, fewer people would have tendered, and
the effect would not have been as pronounced.
As a side note, Smith’s value was eventually recognized last year, as Fred Meyer
bought them out at around $58/share.
How can I profit in the future?
Remember that each self-tender is different and each investment situation is different.
Go to any search engine and type in the words "self tender offer". Read the
details of any offer you find, and think of what you would do as a shareholder. Then
devise a strategy to capitalize <JD>. |
