Safeway Planning IPO of Stake in Gift-Card Business

Safeway Inc. (SWY), the second-largest grocery chain in the U.S., is planning an initial public offering of a minority stake in its Blackhawk Network Holdings Inc. business.

The transaction may take place in the first half of 2013, depending on market conditions, Pleasanton, California-based Safeway said in a statement today. Blackhawk provides prepaid products, such as restaurant gift cards, to retail and grocery stores in the U.S., Canada, Europe, Mexico and Australia.

Blackhawk is “an undervalued asset within the company,” Charles Cerankosky, a Cleveland-based analyst at Northcoast Research Holdings LLC, said in an interview. The business generates at least $100 million in earnings before interest, tax, depreciation and amortization, he said.

The load value, or purchase amount put on gift cards, increased 25 percent in 2011 to $6.9 billion, William Tauscher, chairman and chief executive officer of Blackhawk, said at an investor conference in March. Profit at Safeway, which is facing more competition from big-box retailers and dollar stores, fell 12 percent last year and may drop about 5.7 percent this year, according to analysts’ estimates compiled by Bloomberg.

Safeway, which operates 1,666 stores in the U.S. and Canada, rose 4.3 percent to $16.50 at the close in New York, for the biggest gain since Nov. 30. The shares have fallen 22 percent this year.

Kroger Co. (KR) is the largest grocery-store chain in the U.S.

To contact the reporter on this story: Leslie Patton in Chicago at lpatton5@bloomberg.net

To contact the editor responsible for this story: Robin Ajello at rajello@bloomberg.net

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