How activist investor entered scene months before grocery chain announced its closing

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.