Albertsons Companies Inc. is a food and drug store chain that is in the process of being acquired by Kroger. The FTC, in the meantime, is in the process of searching for something worthy of blocking the deal in court. According to The International Center for Law & Economics, there’s little the regulator can point its finger at. After the companies agreed to sell over 400 stores to C&S Wholesalers last week, there’s even less.

Albertsons went public in mid-2020. Between September, 2020, and and March, 2022, the stock price nearly tripled from under $13 to almost $38 a share. Unfortunately for investors, it then fell almost 50% to barely over $19 in the following twelve months. Last week, ACI closed at $23.63. That’s a 15.3% spread between the market price and the merger deal price of $27.25.

This is an unusually big spread, which implies that there’s is still a good chance that the deal will be challenged by the FTC. Kroger and Albertsons have stated that they will fight in court, if they have to. In most cases, the stock price of the acquired company tumbles on the news of a blocked deal. The Elliott Wave chart below, however, suggests that any such dip is likely to be short-lived.

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The 4-hour chart of Albertsons reveals that the rally from $12.91 to $37.96 is a five-wave impulse. We’ve labeled the pattern 1-2-3-4-5, where wave 1 is a leading diagonal and the five sub-waves of the extended wave 3 are also visible. This impulse was followed by an A-B-C expanding flat correction down to $19.15. Waves A and B are a-b-c zigzags, while wave C is, of course, an impulse marked i-ii-iii-iv-v.

If this count is correct, the Elliott Wave cycle is complete and Albertsons’ uptrend is ready to resume. In other words, the stock offers significant upside with or without the Kroger deal. Only if the deal goes through, that upside will be limited to $27.25 a share. If the FTC sues to block and wins, the long-term potential of Albertsons is even greater.

Not to mention that Kroger is making a very good deal here. At $27.25, Albertsons would be trading at less than 10 times its expected 2023 earnings. Competitors such as Walmart, Costco and Kroger itself are all selling at significantly higher valuations. So there’s not only a bullish Elliott Wave setup and an interested acquirer, but also deep undervaluation in the case.

That’s why Albertsons is the only merger arbitrage position we have in our stock portfolio. The risk/reward is just too attractive to ignore. Even if the deal ultimately fails, we’ll just have to wait until the market gives the company the valuation it deserves. In the end, the FTC blocking the deal might turn out to be a blessing in disguise. In that case, investors might end up making a lot more than 15% in the long term.

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Disclaimer: The author is long Albertsons Companies Inc.

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