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* Bi-Lo offers $9.50 per Winn-Dixie share
* Deal to create 9th largest U.S. supermarket operator
* Deal to close in the next 60-120 days
By Mihir Dalal
Dec 19 (Reuters) - Food retailer Winn-Dixie Stores Inc agreed to go private in a $560 million all-cash deal with smaller rival Bi-Lo LLC, the latest grocery chain that is betting on heft to compete with bigger rivals.
This year has been the busiest for dealmaking in the grocery store sector since 2007, with M&A activity rising by a third till November, according to Thomson Reuters data.
"(The deal) creates the ninth largest supermarket operator in the country," Bi-Lo Chairman Randall Onstead told Reuters in a telephone interview.
The new company will have about 690 grocery stores and 63,000 employees in eight states throughout the southeastern United States. Bi-Lo -- owned by private equity group Lone Star Funds -- currently has 207 supermarkets and employs about 17,000 people.
"There is no store overlap whatsoever, which means there are no store closures," Onstead said.
He also does not see any anti-trust issue, due to the lack of overlaps in store locations, and expects to close the deal in the next four months.
Greenville, South Carolina-based Bi-Lo, which was started by former Winn-Dixie executive Frank Outlaw in 1961, will pay $9.50 per Winn-Dixie share -- a 75 premium to the stock's closing price on Friday.
BMO Capital Markets analyst Karen Short said the offer was reasonable and that a second bidder was unlikely.
Winn-Dixie's valuation has not been all that attractive, given that the company leases all its stores, Short said.
Winn-Dixie's stock has nearly halved since late July when it touched a high of $10.08.
Bi-Lo and Winn-Dixie have both filed for bankruptcy protection in recent years, with privately held Bi-Lo emerging from bankruptcy only last May.
Jacksonville, Florida-based Winn-Dixie was under bankruptcy protection from Feb. 2005 to Nov. 2006.
There were media reports last year that Bi-Lo -- purchased by Dallas-based Lone Star in 2005 from Dutch grocer Ahold -- had been looking to sell itself.
Onstead declined to comment on whether Bi-Lo had put itself up for sale before the proposed deal with Winn-Dixie.
"We are focused on the combination with Winn-Dixie. Both companies have faced headwinds in their past but both are now doing much better and are strong regional brands," Onstead said.
The two companies said in a joint statement that the new management team will be decided once the deal is closer to being finalized.
William Blair, Citi, The Food Partners, Deutsche Bank Securities and Alvarez & Marsal Transaction Advisory Group are acting as financial advisors to Bi-Lo. Goldman Sachs is advising Winn-Dixie.