Sobeys parent Empire snaps up Safeway Canada for $5.8-billion

TORONTO • Empire Co., parent of the Sobeys grocery chain, will become a much more potent No. 2 grocer behind Loblaw Cos. in Canada after buying Western Canadian grocery chain Safeway for $5.8-billion — a retailer one top industry analyst referred to as the “big prize in the consolidation sweepstakes� of the fiercely competitive food retail business.

The all-cash deal for 213 Safeway stores was announced after the market closed on Wednesday and gives the 106-year-old Sobeys chain a more robust cross-country network with annual revenue of roughly $24-billion and $1.8-billion in owned real estate.

It intensifies a market battle sparked by the arrival of Target in Canada this year, which hastened mass merchant Walmart’s vast expansion of its grocery operations in this country over the past 18 months. As fortune would have it, Sobeys already supplies Target’s grocery department.

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“The acquisition of Canada Safeway continues Empire’s focus and commitment on our food retailing and related real estate businesses,� Paul Sobey, chief executive of Empire Co., told analysts on a call discussing the deal. “The acquisition allows us to leverage our existing assets and in turn position Sobeys to compete even more effectively within the changing, and increasingly competitive, grocery retail landscape.�

The acquisition is expected to be immediately accretive to earnings before an expected $200-million of annual cost synergies are realized within three years. It will provide a 25% lift to earnings once the synergies are realized, Empire said.

“Safeway was seen as a plum that everyone wanted and it was just a matter of who was going to get it,� said Bobby Hagedorn, a retail analyst at Edward Jones in St. Louis.

“This makes Sobeys a more significant No. 2 competitor to Loblaw and I am sure there was some hope out there that Loblaw could get this deal done, if there were not regulatory [impediments related to ownership].

The takeover of Safeway Canada gives Sobeys 213 full-service grocery stores in Western Canada along with 199 in-store pharmacies and 12 manufacturing facilities.

Viktor Pivovarov/Postmedia News files

“Any time you have a stronger No. 2 in an environment that is not growing a ton, it increases the competitive pressure in an already competitive space, more than anything for Loblaw.� Loblaw’s annual revenue rose 1.1% in 2012 to $31.6-billion.

Empire said it will modernize Safeway’s distribution networks, reduce costs in procurement, administration and marketing, and leverage Sobeys’ IT infrastructure.

The two chains will integrate private label merchandise offerings and loyalty programs and cross-promote their food and fuel businesses.

Along with the Safeway grocery stores the acquired retail footprint includes 199 in-store pharmacies, 62 adjacent gas stations, 10 liquor stores, four distribution centres and 12 manufacturing facilities.

Safeway was seen as a plum that everyone wanted and it was just a matter of who was going to get it

For the year ended March 23, Safeway Canada had $6.7-billion in sales and $513-million in adjusted earnings before taxes, depreciation and amortization.

Earlier this year in a report on grocery industry consolidation CIBC industry analyst Perry Caicco (who dubbed Safeway Canada the aforementioned “prize�) estimated the retailer could fetch a price of about $6.4-billion. He said in the January report that “Sobeys’ experience operating conventional assets in western Canada would make them the best fit for Safeway,� compared to rivals Loblaw and Metro.

He speculated the losing bidders for Safeway would be quick to make bids to buy the No. 2 independent player in Western Canada, Overwaitea, owned by Pattison Group.

Kevin Grier, food industry expert and senior market analyst at George Morris Centre in Guelph, Ont., said it was likely Safeway, a subsidiary of California-based Safeway Inc., had a strong motivation to sell.

For the year ended March 23, Safeway Canada had $6.7-billion in sales and $513-million in adjusted earnings before taxes, depreciation and amortization.

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“The U.S. is getting much more competitive too with the ongoing growth and aggressiveness of Walmart in the grocery market — what is going on there is going on here — and their grocers have been going through a very challenging time.�

Many in retail still underestimate just how important Target is as a strategic catalyst in this situation, he added, “not so much in terms of what Target is doing currently, but what it will be doing, and that is what motivating Walmart. Walmart is growing, and everybody has to react.�

Walmart Canada is spending $450-million on upgrading and expanding its store network this year. The Arkansas behemoth now has 209 grocery-inclusive supercentres in Canada and 170 of its standard discount stores, compared with 333 stores here a year ago — 164 supercentres and 169 discount stores. By year’s end Walmart will have another nine new stores and through store conversions will have 37 more supercentres, for a total of 246 supercentres and 142 discount stores coast to coast.

Empire intends to finance the purchase through a combination of cash, a $1.5-billion equity offering, a planned $1-billion sale and leaseback of the acquired real estate assets, a $1.83-billion term loan and an issue of $800-million in unsecured notes by Sobeys, as well as other real estate and asset sales.

The deal, subject to regulatory approval, is expected to close this fall. Scotiabank and Morgan Stanley acted as advisors to Empire on the acquisition.

Article source: http://www.canada.com/Sobeys+parent+Empire+snaps+Safeway+Canada+billion/8517074/story.html