Shoppers are not used to finding bags of money on the shelves at the local Safeway store next to the peanut butter and the mayonnaise. Maybe that's because they don't know how to look.
Herbert and Robert Haft know how to look.
The Hafts' Dart Group Corp. stands to make an estimated $80 million on its acquisition of stock in Safeway Stores Inc. if it loses the bidding for control of the company. And if it wins -- which isn't considered likely now -- it would gain control of the nation's largest grocery retailer with $19 billion in annual sales last year, for an investment of $149.5 million.
It is the ability of the Hafts, father and son, to win while losing that dramatizes the amazing moneymaking ways of Wall Street. As the Hafts have disclosed in Dart's recent public filings, they paid the $149.5 million for 3.6 million shares of Safeway, at prices ranging between $40.38 and $45.75 a share.
The Hafts propose to buy the company, which is based in Oakland, for either $58 a share, if Safeway resists, or $64 if Safeway's management agrees to a friendly merger. At this point, Safeway is fighting. It has lined up a powerful investment firm, Kohlberg Kravis Roberts & Co., to help raise money to buy up Safeway's stock at an even loftier price of $69 a share in cash and securities, according to KKR's calculations.
Although some financial analysts question whether Safeway is worth $69 a share -- a total of $4.2 billion -- any payment close to that would represent a windfall for the Hafts and thousands of other Safeway shareholders who have enjoyed the stock's climb from around $30 a share a year ago. The winners range from loyal Safeway employes who banked on the company's prospects to the state teachers' retirement funds in Texas, California and New York, and include pension funds and mutual funds.
How could the Hafts, with a $149 million investment covering less than 6 percent of Safeway's total stock, achieve this feat of financial jujitsu?
The answer is leverage. The market believed that Safeway was potentially worth more than the $30 or $40 a share if some major changes were made in its operation to shift more of the company's wealth to shareholders. That is what the Hafts' bid promised.
Their bid was credible in part because they have done it before. Dart Group Inc. made two takeover bids last year, for May Department Stores Co., the third-largest department store company, and Jack Eckerd Corp., the second-largest drugstore chain. Even though the takeovers failed, the Hafts made $13.3 million in profits by buying the stock low and selling it high.
With that track record, they were able to recruit the aggressive investment banking firm, Drexel Burnham Lambert Inc., to back their bid. Drexel Burnham says it is "highly confident" it can find investors to lend the Hafts up to $3.9 billion to make the acquisition. The investors have lined up, confident that the Hafts can run Safeway -- or at least run up its stock.
The counterattack by Safeway's management and KKR is a leveraged-buyout offer, similar to that made by the Hafts. However disruptive and costly it is to Safeway, it is a game with no losers, say the advocates of leveraged buyouts. If Safeway can be run more efficiently, carry more debt and sell off some assets, why shouldn't stockholders reap the benefits, LBO proponents ask.
But there are losers, including the people who sold the stock that the Hafts bought at $40 to $45 a share. Since securities law permits the Hafts to begin amassing their stake in Safeway without public disclosure, the sellers had no notion that the buyers were planning to boost the price to the $60-a-share neighborhood.
The Securities and Exchange Commission goes after investors who trade stock based on "inside" knowledge of such importance. The Hafts, obviously, were "outsiders" and free to acquire their initial stake without public disclosure.
Other losers may be the people and institutions still holding their Safeway stock, waiting for the bidding to conclude, and the employes and management of Safeway.
The KKR approach is to require members of top management who want to remain with a company to invest a significant portion of their wealth into the new venture, thus intensifying both the thrill of victory for management or the agony of defeat, should that occur.
Although the details of the KKR operational plan are not public, it is expected that KKR would ask Safeway Chairman Peter A. Magowan and a handful of other top managers to stay on, enabling them to maintain control of the company instead of turning it over to the Hafts.
That presumably is not a minor matter for Magowan, the son of the late Robert A. Magowan, who joined Safeway as chairman from Merrill Lynch and raised it into national retailing prominence in the 1950s and 1960s.
If the KKR buyout takes place as proposed, Magowan would receive upwards of $70 in cash, debt and stock for each of his 85,000 Safeway shares, or nearly $6 million. He might wind up putting most of that into the new venture.
That won't make Magowan a loser, unless the Hafts have pushed the bidding for Safeway too high, leaving its new owners and managers so deeply in debt that the company cannot afford the investment in new stores, more automated facilities for handling goods, and the other constant improvements that competition requires.
That spells risk for Safeway's employes as well as those investors still holding stock. The KKR offer would give Safeway's remaining shareholders a combination of cash and securities in exchange for their stock -- linking the value of that payment to the company's future success.
But not the Hafts. "I don't know what kind of a retailer he is," said William N. Smith, an analyst with Smith Barney, Harris Upham, speaking of Herbert Haft. "But he's a genius at playing the market."