* Deal nearly doubles Empire's footprint in western Canada
* All cash deal to be funded via equity, debt and asset
* Safeway to pay down debt, buy back shares with proceeds
By Solarina Ho and Euan Rocha
TORONTO, June 12 Empire Co Ltd, the
operator of Canadian grocery chain Sobeys, said it is acquiring
Safeway Inc's assets in Canada for $5.7 billion, in a
move that will nearly double its reach in the country's western
The C$5.8 billion deal, Canada's biggest so far this year,
resulted in generous premiums for Safeway, which said it would
use the proceeds to pay down debt and buy back shares, and its
shares shot up 30 percent in after-hours trade.
Empire will gain control of 213 full-service grocery stores,
cementing its position as Canada's No. 2 grocer behind Loblaw
Companies Ltd at a time when competition from U.S.
retailers Wal-Mart Stores and Target is heating
"We think it is a game changing deal for Empire," said Barry
Schwartz, a portfolio manager with Baskin Financial, which owns
more than 100,000 shares in Empire.
"This is a huge win for (Empire's) shareholders, and we
expect a significant uptick in the stock tomorrow" he said.
Safeway's Canadian arm generated sales of C$6.7 billion and
over C$500 million in adjusted earnings before interest, taxes,
depreciation and amortization in the 12 months ended March 23.
The deal is expected to boost Empire's earnings immediately
following the close of the transaction late this year.
The company expects roughly C$200 million in annual savings
within three years following the close of the deal by
integrating distribution networks and reducing procurement,
administration and marketing costs.
The all-cash transaction will be financed through equity and
debt offerings, along with a lease-back deal on some real estate
assets being acquired.
In addition to the grocery stores, it is acquiring about 200
in-store pharmacies, along with some liquor stores, fuel
stations and distribution centers as part of the deal.
Empire also said it has identified roughly C$1 billon in
non-core assets sales that could that potentially be used to
help pay back bridge facilities and other debt.
Safeway Chief Executive Robert Edwards said on a conference
call that the company gained a substantial premium to the market
multiples of U.S. retailers. The deal was unsolicited and
Safeway did not conduct an auction for the assets.
Its shares jumped to $29.97 in trading after the closing
bell in the United States on Wednesday.
Joe Feldman, analyst at Telsey Advisory Group in New York,
said while Safeway trades at a multiple of about five times
enterprise value to EBITDA (earnings before interest, taxes,
depreciation, and amortization), it was raking in more than
double that multiple for the Canadian assets.
Safeway's Canadian assets historically accounted for
one-third of the company's operating profit, he added.
Cantor Fitzgerald analyst Ajay Jain said the deal would help
deleverage Safeway's balance sheet but was no cure-all.
"We expect that after the dust settles following the latest
announcement, Safeway will remain heavily levered and
profitability of U.S. operations will continue to decline."
Empire, which has been in the food business for over a
century, already owns some 1,500 stores in 10 provinces with
retail banners that include Sobeys, IGA, Foodland, FreshCo,
Price Chopper and Thrifty Foods.
The takeover, subject to a review by the Competition Bureau,
is expected to close later this year. Empire declined to comment
on whether it expects the agency to compel it to divest certain
assets to win approval.
Canadian rating agency DBRS put its ratings on Empire under
review, highlighting concerns that the acquisition heightens its
financial risk profile, but it also said Empire credit risk
profile could remain consistent with an investment grade rating.
Scotiabank and Morgan Stanley acted as financial advisers to
Empire on the acquisition. Stewart McKelvey and Sullivan &
Cromwell LLP acted as its legal advisors.