Safeway Inc. has agreed to sell its Canadian operations to Sobeys Inc. for $5.7 billion ($5.8 billion Canadian, or about $4.0 billion after taxes and expenses) in cash and the assumption of certain liabilities.


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Safeway sells Canadian operations to Sobeys

June 13th, 2013

PLEASANTON, Calif. – Safeway Inc. has agreed to sell its Canadian operations to Sobeys Inc. for $5.7 billion ($5.8 billion Canadian, or about $4.0 billion after taxes and expenses) in cash and the assumption of certain liabilities.

The deal, which has been approved by the boards of both companies, is expected to be completed during the fourth quarter.

The sale, which was unsolicited by Safeway, will give Sobeys, which is a wholly owned subsidiary of Empire Co., 213 supermarkets under the Safeway banner, as well as 199 in-store pharmacies that boast "market-leading productivity," according to Sobeys, 62 co-located fuel stations, 10 liquor stores, four primary distribution centers and 12 manufacturing plants. The stores are located in the western and central provinces of Alberta, British Columbia, Manitoba, Saskatchewan and Ontario, and will substantially increase Sobeys’ footprint in the western half of Canada, including the No. 1 position in the rapidly growing Alberta market. More than 60% of the stores are located in the Vancouver, Calgary, Edmonton and Winnipeg markets.

According to Safeway, its Canadian operations generated adjusted operating profit of $428 million (Canadian) during the trailing 12 months ended March 23, 2013, on sales of $6.7 billion, for an operating margin of 6.39% of sales. Analysts say that Safeway Canada historically accounted for about one-third of the parent company’s operating profit.

The acquisition will boost Sobeys’ pro forma revenues to around $24 billion and provide it with an additional $1.8 billion in owned real estate. Sobeys will finance the transaction through equity and debt offerings as well as a sale and lease-back transaction on some of the real estate being acquired.

Sobeys’ management expects the acquisition to be immediately accretive to adjusted net earnings, boosting earnings by more than 25% once expected synergies are fully realized. Executives plan to achieve cost synergies of about $200 million annually within three years by integrating distribution and procurement and eliminating redundant administrative and marketing costs.

"The acquisition of Canada Safeway represents an excellent strategic fit, strengthening our presence in western Canada with the addition of great employees, excellent stores and exceptional real estate," said Paul Sobey, president and chief executive officer of Empire. "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 deal does not include $300 million in public debt held by Canada Safeway which is due in March 2014, and for which Safeway will remain responsible. For its part, Safeway plans to use the proceeds from the sale to pay down $2.0 billion in debt and use the majority of the remainder for stock buy-backs to shore up its earning per share, with some of the proceeds possibly to be allocated to initiatives designed to increase operating income.

"We are pleased to enter into this agreement with Sobeys in order to realize the higher multiples attributed to Canadian supermarket companies," said Robert Edwards, president and chief executive officer of Safeway. "The substantial cash proceeds from this transaction will allow us to create value for Safeway stakeholders and contribute to the growth of the ongoing business."
 

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