Did Wall Street firm seal Dominick's fate

Source: Chicago TribuneDec.迷你倉 22--Dominick's was founded by one man, an immigrant named Dominick DiMatteo, whose son helped him build the grocery chain. But unraveling the question of who was responsible for the demise of Chicago's second-largest supermarket company isn't so straightforward. The trail leads to Northern California, where Dominick's owner, Safeway, is headquartered. And from there it goes to New York.This year, a Wall Street hedge fund called Jana Partners invested more than $300 million in Safeway stock and demanded that the company make changes, notably that it exit "subscale and lower margin geographies."That demand was made public Sept. 17.About three weeks later, on Oct. 10, Safeway announced that its struggling chain of more than 70 Dominick's stores would be shuttered Dec. 28. The decision meant as many as 6,000 employees could lose their jobs right after Christmas, and that customers who shopped at Dominick's stores throughout the Chicago region would need to find other places to buy groceries.In the meantime, Jana Partners scored millions in profits on its Safeway investment.Whether Jana was responsible for Safeway's decision to close Dominick's isn't known, but the arrival of the hedge fund illustrates one of Wall Street's most powerful forces, and the one perhaps most feared by CEOs: so-called activist investors.While all publicly traded companies ultimately are answerable to shareholders, activists are a special breed of hands-on investors.Mostly associated with hedge funds and billionaires like Carl Icahn and William Ackman, the activists are best-known for clamoring for change. These shareholders study underperforming stocks, looking for ways to boost the price. They and other shareholders benefit from the run-up.Often there is drama along the way, sometimes played out in public, in which the activist challenges and pushes the company. Sometimes, the company fights back.The Securities and Exchange Commission, which regulates public companies, has been encouraging companies to interact more with their activist shareholders."Right now the whole activist thing is being encouraged, not discouraged," said Tom Sosnoff, whom Jana Partners once sued. Sosnoff co-founded thinkorswim, an online brokerage. "The current environment sees that the activists add value, not the other way around."The activism business is booming. Of the $2.51 trillion that hedge funds managed as of the end of September, the amount controlled by activist investors amounted to $89 billion of that. That figure is up from $65.5 billion at the start of the year, according to Kenneth Heinz, president of Chicago-based Hedge Fund Research Inc. One factor leading that growth, Heinz said, is that as the economy stabilized, investors became more willing to take on risks.William Brodsky, executive chairman of the Chicago Board Options Exchange, said he's "happily never been in the position" of facing off with corporate activists. "It's not all good or all bad. It's part of the process."Sometimes, he added, a company requires "a kick in the pants" that an activist shareholder can provide.In the case of Safeway, Jana's timing has been ideal.This year, Safeway began shrinking the size of its operations with the sale of its Canadian stores for $5.68 billion. The company's plan was to use the proceeds to pare its debt and buy back its shares, moves that often push up the value of remaining shares. The downside of the deal, however, was that it faced a huge tax bill from the sale.Jana's demand was disclosed about three months after the Canadian deal was announced. By pulling the plug on Chicago, Safeway could not only satisfy Jana, but also generate a $400 million to $450 million tax benefit. It could then use that money to offset gains from the Canadian sale.Safeway had "been performing very poorly in Chicago, and the problems date back to almost immediately after they bought" Dominick's in 1998, said Meredith Adler, who follows Safeway as an analyst for Barclays Capital. "I will not make a whole list of the things they screwed up. But they screwed up a lot of things."Safeway tried and failed to sell Dominick's in 2002-03, signaling the company understood it faced a challenge in Chicago.Adler said that while she didn't know Jana's exact role in Safeway's exit decision, the hedge fund's presence loomed."It's possible (Safeway had) been thinking about this for a while, but as you know, Jana Partners did take a stake (and) did talk to them," Adler said. "I don't know what those conversations were exactly, but I'm sure they encouraged them to find ways to create shareholder value."In May, Safeway named a new chief executive, Robert Edwards, who was promoted from chief financial officer.Officials at both Safeway and Jana declined interview requests.One thing is clear: When Jana presses for changes, companies usually listen.Walied Soliman, who claims he is "the only lawyer" to have fought Jana and won, represented Agrium, a Canadian fertilizer company that wouldn't follow Jana's instructions after the hedge fund became the company's largest shareholder.A battle ensued. Jana sought to replace five of Agrium's board members with its own nominees in order to exert some control over the company.It quickly got ugly and expensive. The fight cost Agrium more than $12 million to defend itself, the company reported.Though Agrium came out on top, more and more company executives don't want to be drawn into such battles because they tend to evolve into a high-stakes public relations campaign. The company tries to convince its shareholders that its executives are good stewards of the company and that they should vote their shares to keep them running things. And the activist shareholder questions the competency of迷你倉西貢those same people and promotes its own candidates for board seats."In the case (of activists) who engage in proxy battles, the message is: You, board, and you, management team, (you) don't know what you're doing," Soliman said. "You gotta get the hell out of the way, because we're smarter and better than you. ... Having these guys put out letters and circulars, telling the world about how incompetent you are, isn't the idea of a fun afternoon."Sidley Austin attorney Michael Gordon said it can be in a company's best interest to settle. He represented CNET as Jana accumulated at least a 10.6 percent stake in the media company in 2007 and filed suit against the company, seeking to replace most of its board members."The alternative is many, many months in prolonged discussions and negotiations," he said. "And I would advise a client, that if it comes to a proxy fight, they're likely to lose."In May 2008, less than six months after Jana announced its position, CBS Corp. announced it would acquire CNET for $1.8 billion.Jana's aggressiveness has made it a Wall Street darling.Jana's two main funds gained more than 33 percent and more than 23 percent in 2012 respectively, far outpacing the benchmark S&P 500. As of Nov. 30, Jana's two main funds were up 25.4 percent and 16.6 percent this year.As of the end of March 2012, Jana reported $2.9 billion in assets under management, according to an internal Jana report. That war chest has since swollen to more than $7 billion. In internal documents Jana describes its strategy as "investing in change."Among its wins: Kerr-McGee Corp., which sold assets and instituted the largest share buyback in company history; Houston Exploration Corp., which sold itself entirely; chemical company Ashland Inc., which owns Valvoline motor oils and is in the process of selling two of its business units; and Charles River Laboratories International, which aborted an acquisition Jana opposed.The money activists can make in short order is substantial, as the Safeway investment demonstrated. Jana had bought some shares for as little as $25 to $26 each. By the morning after the Chicago closing announcement, a share was now worth more than $33. And when Reuters reported that a private equity firm that owned Albertsons "was exploring" buying all or part of Safeway, its stock soared again, even though such a deal never materialized.On Dec. 4, Jana announced that it had sold a little more than one-third of its stake, including 3 million shares back to Safeway.The full implications of Dominick's closing can be measured in different ways. There is the tax benefit to Safeway and the elimination of the headache the chain had become. There is the disruption to the Chicago supermarket scene, with some of the chain's stores closing and others being put in the hands of new owners. There are the Dominick's employees losing their jobs. And then there is the increased value of Safeway shares to every investor, including Jana, whose profit is significant but can't be precisely calculated by outsiders.While some may object to an investment firm effectively profiting from job losses, the financial rewards of a company's increasing stock price are spread to many parties, including any pension funds that may have invested in Jana. Activist shareholders also can push companies to make difficult but necessary changes that management otherwise wouldn't have the stomach to do alone.Jana, in its internal documents, says a "SWAT" team manages its activist positions. Even while it was dealing with Safeway, it was swatting at another company with a large Chicago-area operation: Outerwall.On Oct. 4, Jana announced a stake in Outerwall, the parent company of Oakbrook Terrace-based Redbox, the video rental kiosk operator. Jana, Outerwall's largest shareholder, called for it to sell all or part of its business.On Dec. 10, Outerwall announced that Redbox President Anne Saunders had stepped down; that it planned to shutter three new ventures: Rubi (a coffee-vending kiosk), Crisp Market and Star Studio; and that it had reduced its workforce by 251 positions, an 8.5 percent reduction, as part of its "operating review."Outerwall stock has risen from $51.90 the day Jana disclosed its position to $66.09 Friday.Jana also joins with large investors to gain even more clout. Such was the case when the hedge fund teamed with the Ontario Teachers' Pension Plan to pressure McGraw-Hill to split in four pieces in 2011. In response, McGraw-Hill announced it would divide itself in two -- but then sold off its educational division instead.McGraw-Hill CEO Harold "Terry" McGraw III, in an interview with Bloomberg, had said the company was planning to split at about the time Jana emerged as a shareholder. "When you're talking about Jana, we were in the eleventh hour when that came along."Jana's founder is Barry Rosenstein. Rosenstein, 54, became a yoga devotee after being partially paralyzed in a 1992 windsurfing accident. He started Jana in 2001.Rosenstein spent 3{ years in the late 1980s working as a corporate raider for Asher Edelman, the man who served as the basis for Gordon Gekko's character in the movie "Wall Street."One Chicago lawyer who has fought Jana described Rosenstein as "among the top five activists that people really fret about. If a CEO were to call me today and say, 'Jana has just taken a significant position in my company,' I would tell him, 'You're in trouble.'"Melissa Harris writes the Chicago Confidential column. She can be reached at mmharris@tribune.com or 312-222-4582. 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