Why Safeway Shares Surged

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of grocery store operator Safeway climbed 10% today after adopting a "poison pill" to prevent a hostile takeover.

So what: Safeway learned that an unnamed investor has bought up a significant stake in the company recently, so the poison pill should give management the room it needs to continue with its turnaround initiatives. Specifically, the company's defensive plan -- one preferred stock purchase right will be distributed for each share of common stock held as of Sept. 30 -- becomes exercisable if a person or group acquires 10% or more of the company's common stock, or 15% by an institutional investor, making it pretty expensive for an investor to purchase a controlling stake.

Now what: With the poison pill in place, expect the pending sale of Safeway's Canadian assets to proceed without a hitch. "The Board of Directors believes that the rights plan will help promote the fair and equal treatment of all stockholders of the Company and ensure that the Board remains in the best position to discharge its fiduciary duties to the Company and its stockholders," said Safeway in a statement. Of course, with the stock now up more than 100% from its 52-week lows and trading at a 20-plus P/E, I'd wait for a much wider margin of safety before jumping in.

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The article Why Safeway Shares Surged originally appeared on Fool.com.

Fool contributor Brian Pacampara has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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