TORONTO Empire Company Ltd (EMPa.TO), operator of the Sobeys grocery chain, said on Wednesday it is buying the Canadian arm of Safeway Inc SWY.N for C$5.8 billion ($5.70 billion), a deal that will nearly double its reach in Western Canada.
Empire said the deal, one of the biggest in the Canadian retail sector this year, will give it control of 213 full-service grocery stores under the Safeway banner in Western Canada. It also includes nearly 200 in-store pharmacies, along with some liquor stores, fuel stations and distribution centers.
"We think this is a huge win for (Empire's) shareholders, and we expect a significant uptick in the stock tomorrow" said Barry Schwartz, a portfolio manager with Baskin Financial, which owns more than 100,000 shares in Empire.
"We think it is a game changing deal for Empire, as it was an Atlantic Coast-based grocery chain and it is making a huge push into Western Canada."
Safeway's Canadian arm generated sales of C$6.7 billion and had C$513 million of adjusted earnings before interest, taxes, depreciation and amortization in the 12 months ended March 23.
"We believe this transaction maximizes the value of our Canadian assets," Safeway Chief Executive Robert Edwards said on a conference call.
Edwards said there was no auction for the assets and the deal was unsolicited and came at a "substantial premium to the market multiples for U.S. retailers."
The deal is expected to boost Empire's earnings immediately following the close of the transaction.
Sobeys' Chief Executive Marc Poulin said in a statement he expects to be able to capture roughly C$200 million in annual savings within three years following the close of the deal. The savings will come from integrating distribution networks and reducing the cost of procurement, administration and marketing, among other things.
The all-cash transaction will be financed through equity and debt offerings, along with a lease-back deal on real estate assets being acquired, the company said.
The takeover, which is subject to regulatory approval, is expected to close later this year. Scotiabank and Morgan Stanley acted as advisers to Empire on the acquisition.
($1 = $1.0183 Canadian)
(With additional reporting by Lisa Baertlein; Editing by Jeffrey Hodgson and Carol Bishopric)