Safeway Inc. (SWY), the second-largest U.S. grocery-store chain, rose the most in more than three months after agreeing to sell its Canadian stores to Empire Co. (EMP/A)’s Sobeys Inc. unit for about C$5.8 billion ($5.7 billion).
Proceeds from the sale will be used to pay down $2 billion in debt and buy back stock, Pleasanton, California-based Safeway said yesterday in a statement. The boards of both companies have approved the deal.
The sale will give Safeway a jolt of cash as new Chief Executive Officer Robert Edwards, who took over May 14, works to reverse slowing sales gains amid competition from Kroger Co. (KR) and Wal-Mart Stores Inc. (WMT) The deal also will simplify Safeway’s business.
The chain now “can focus on the core U.S. operations,” said Joe Feldman, a New York-based analyst at Telsey Advisory Group. “They just have a cleaner business” and can concentrate on the company’s new loyalty and fuel-rewards programs.
“It certainly catapults them to be more dominant everywhere between British Columbia and Ontario,” Feldman said yesterday in an interview. “Safeway has a leadership position in a lot of the markets up in Canada” and they also own much of the stores’ real estate, which makes the business more profitable, he said.
“Those couple of things gave Sobeys the desire to spend up,” Feldman said.
Safeway Canada reported C$6.7 billion in revenue and C$428 million in operating profit in the 12 months ended March 23. The acquisition will immediately add to adjusted earnings per share, Stellarton, Nova Scotia-based Empire said yesterday in a statement. Safeway’s real estate is worth about C$1.8 billion in Canada, it said.
Sobeys, founded 106 years ago, will use Safeway to expand in western Canada and take on Brampton, Ontario-based Loblaw, the country’s biggest grocery retailer, as well as Wal-Mart and Target Corp. (TGT), which are adding stores in Canada. Minneapolis-based Target has said it will open 124 locations in Canada this year.
Wal-Mart also is bolstering its presence in Canada. The Bentonville, Arkansas-based retailer is investing C$450 million in new supercenters and renovations in the country. It’s also increasing its distribution network, according to a company statement from January.
Sobeys owns or franchises more than 1,300 stores in 10 provinces with retail banners that include Sobeys, IGA, Foodland, FreshCo and Thrifty Foods. The company also operates Lawton’s Drug Stores. It has 95,000 employees.
The Empire acquisition is the second-largest involving a Canadian company this year, surpassed only by the $8.7 billion takeover of Bausch & Lomb Holdings Inc. by Montreal-based Valeant Pharmaceuticals International Inc. announced May 27.
Revenue at Safeway has stagnated recently. Sales rose 1.3 percent last year to $44.2 billion and may increase 1.3 percent to $44.8 billion in 2013, according to data compiled by Bloomberg.
The company, which trails Kroger as the largest U.S. grocery-store chain, had $5.3 billion of long-term debt as of March 23.
“We believe a significant factor in the strategic rationale for this sale was the need to de-lever the balance sheet,” said Ajay Jain, an analyst at Cantor Fitzgerald in New York, in a research note yesterday. “Now the focus for investors will be the core U.S. operations, which continues to lose market share,” he said.
“Safeway will remain heavily levered and profitability of U.S. operations will continue to decline,” Jain predicted.
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