March 6 (Bloomberg) -- Safeway Inc., the second-largest U.S. grocery-store chain, agreed to be bought by Cerberus Capital Management LP’s Albertsons in a deal valued at about $9.2 billion, creating a bigger competitor to Kroger Co. and big-box rivals.
Safeway investors will receive about $40 a share, consisting of $32.50 apiece in cash, plus stock in its gift-card unit Blackhawk Network Holdings Inc., according to a statement today. Safeway, based in Pleasanton, California, said last month that it was in talks about a sale of the company.
Albertsons and Safeway are seeking to cut costs and expand their reach amid mounting competition from Wal-Mart Stores Inc. and warehouse clubs, as well as online food sellers and delivery services. U.S. supermarket and grocery-store sales rose an estimated 0.4 percent to $531.4 billion in 2013 and are expected to decline 1.7 percent this year, according to a January report from research firm IBISWorld Inc.
“This merger will improve our competitive position,” Safeway Chief Executive Officer Robert Edwards, who will remain in charge of the combined company, said during a conference call today. “Our customers will benefit from significant cost saving synergies and a stronger management team.”
Safeway shares fell as much as 6.3 percent to $37 in extended trading, a sign investors expected the company to fetch a higher price in the deal. The shares had increased 21 percent this year through the close of regular trading today, outpacing the 1.6 percent gain of the Standard & Poor’s 500 Index.
The new company will have between $55 billion and $60 billion in revenue, according to Scott Mushkin, a New York-based analyst at Wolfe Research. The deal will “create a dominant West Coast operation as well as meaningfully enhance the eastern portion of the company,” he said in a note this week. Cerberus and its Boise, Idaho-based Albertsons operations had emerged as the leading bidder for Safeway last month.
The Albertsons-Safeway tie-up would create a company with more than 2,400 stores, 27 distribution facilities and 20 manufacturing plants. No store closings are expected, according to today’s statement. Edwards will become president and CEO of the new company when the deal is completed, while Albertsons CEO Bob Miller will be the executive chairman.
Kroger, the biggest U.S. chain, has about 2,640 supermarkets under such names as Kroger, Dillons and King Soopers. The Cincinnati-based company also has 786 convenience stores, as well as about 320 jewelry stores and 38 food-processing plants in the U.S. Kroger sales rose 1.7 percent to $98.4 billion in the year ended in February.
Built into the deal is a 21-day “go shop” period, letting a rival bidder make an offer. The provision was put in place in case Kroger wants to try to beat the Cerberus offer, said a person familiar with the matter, who asked not to be identified because the discussions are private.
Kroger had made an approach to Safeway recently about buying parts of the company, people with knowledge of the situation said this week. The rival grocery chain had also approached Cerberus about buying some of Safeway’s stores after a Cerberus deal, one of the people said.
If Kroger or another bidder makes an offer during the go shop period, then Safeway has 15 days to enter talks with that bidder, according to the company’s statement.
Keith Dailey, a Kroger spokesman, declined to comment.
Safeway has been simplifying its operations and recently sold its 72 Dominick’s stores in the Chicago area after divesting its Canadian business and conducting an initial public offering of its Blackhawk gift-card unit.
Kroger, led by CEO Rodney McMullen, has outperformed rivals lately as it opens and acquires new stores and expands its private-label brands. The company earlier this year bought Matthews, North Carolina-based supermarket Harris Teeter in a transaction valued at about $2.46 billion.
Cerberus, a New York-based private-equity firm, led an investor group last year that bought the Albertsons, Acme, Jewel-Osco, Shaw’s and Star Market grocery stores from Supervalu Inc. in a deal valued at about $3.3 billion.
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