The Canadian owner of the Sobeys grocery store chain is poised to make itself Canada's second-biggest grocer through a surprise takeover of Canada Safeway.
Stellarton, N.S.-based Empire Co. announced Wednesday it has signed a deal with Safeway Inc. to buy all of Canada Safeway's assets for $5.8 billion plus "certain liabilities" through its Sobeys food retailing division -- which already operates the Sobeys, IGA, Thrifty Foods, FreshCo and Price Chopper chains, among others.
The Safeway assets on the table include 213 full-service Safeway grocery stores in Western Canada, including 199 in-store pharmacies, 62 co-located fuel stations and 10 liquor stores, as well as four distribution centres, 12 manufacturing plants, Safeway's related wholesale business and the use of the Safeway trademark in Canada.
Safeway's assets in Canada's West are spread over an estimated nine million square feet of real estate, over 60 per cent of which is in Edmonton, Calgary, Vancouver and Winnipeg. Of the total square footage, about 4.8 million square feet is owned by Canada Safeway and valued at about $1.8 billion.
Empire said its deal "positions Sobeys as a leading grocer in Western Canada and the No. 1 grocer in the fast-growing Alberta market."
The deal, already approved by both companies' boards, would come with relatively little overlap for Sobeys, which out of over 1,300 stores across Canada operates 107 Sobeys stores, 46 IGA stores and 29 Thrifty Foods in the West.
On a conference call with financial analysts Wednesday, Empire and Sobeys executives said they've identified about $200 million per year in synergies between Sobeys and Canada Safeway, to be achieved over the next three years. Of those synergies, 50 per cent are expected to be achieved in the next 12 months.
Among those synergies, Empire said it expects to "integrate and modernize" Calgary-based Canada Safeway's distribution network with its own, and leverage Sobeys' information technology infrastructure.
Furthermore, Empire said it expects to save on the merged chains' purchases of foods and generic drugs, and to integrate the two chains' private-label product lines (including packaging and formulation) and customer loyalty programs.
The acquisition is expected to be paid for through an Empire equity and bond offering, cash on hand, a term loan and unsecured notes, the sale/leaseback of an as-yet unspecified amount of Safeway's owned real estate and the sale of as-yet unnamed "non-core" assets.
The deal would increase the number of stores in the Sobeys chain from 1,315 to 1,538, but company brass on the conference call did not say how many, if any, of those stores would remain under the Safeway name or be "rebannered," nor how many of those stores would still be open in three years' time.
The company, which said its deal with Safeway is not open to competing bids, said it expects to complete the acquisition by this fall, pending review by the federal Competition Bureau.
Company executives wouldn't speculate on Wednesday's call whether the bureau would order Sobeys to sell off any of the two chains' assets.
The company also wouldn't speculate on any layoffs through the merger of the two chains, saying its focus at the moment is on the "cultural fit" between the two organizations.
Empire CEO Paul Sobey said the deal "represents an excellent strategic fit, strengthening our presence in Western Canada with the addition of great employees, excellent stores and exceptional real estate.
"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," he said, emphasizing Empire will continue to own 100 per cent of Sobeys.
California-based Safeway Inc., which still owns over 1,400 stores in the U.S., said it plans to use the proceeds from the deal to pay down debt and buy back stock and may also use the proceeds to "invest in growth opportunities."
"We are pleased to enter into this agreement with Sobeys in order to realize the higher multiples attributed to Canadian supermarket companies," Safeway Inc. CEO Robert Edwards said in a separate release.
"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."
Canada Safeway booked revenues of $6.7 billion for the trailing 12 months ending March 23, with operating profit of $428 million. -- AGCanada.com Network
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