Sobey’s buys Safeway’s Canadian assets

Supermarket chain Sobeys Inc. says its $5.8-billion acquisition of Safeway’s Canadian assets will give it a foothold in sought-after retail markets in Western Canada.

TORONTO — Supermarket chain Sobeys Inc. says its $5.8-billion acquisition of Safeway’s Canadian assets will give it a foothold in sought-after retail markets in Western Canada.

“After the acquisition, Sobeys will be a leading grocer in Western Canada and the largest grocer in Alberta, an attractive, high-growth market,” president and chief executive Paul Sobey said Wednesday. “This acquisition represents a unique and highly strategic opportunity for Sobeys to leverage its existing asset base, effectively creating a new platform for growth.”

Empire Co. Ltd. (TSX:EMP.A), the Nova Scotia-based parent of the Sobeys chain, said the cash deal will give it $1.8 billion of real estate.

The transaction to buy Canada Safeway Ltd., which has 213 stores, will be completed through Empire’s wholly-owned Sobeys Inc. subsidiary. Included in the transaction are 199 in-store pharmacies and 62 gas stations on the Safeway properties.

Empire Co. will also own 10 liquor stores, four distribution centres and 12 manufacturing facilities as part of the deal.

Empire said it expects to find cost synergies of about $200 million over three years by integrating the distribution, information technology and procurement divisions of both grocers.

The company also said it will cut its administrative and marketing costs by combining management teams, but would not comment on whether layoffs are expected.

“We have a need for great, talented people,” said Sobey. “There’s a great cultural fit in regards to the employee basis between the two organizations.”

Marc Poulin, president and chief executive of Sobeys Inc., said the company is not sure whether it will be re-branding the Safeway stores.

“It’s too early to tell, obviously, at this stage,” said Poulin.

“We just completed the acquisition. We will do proper marketing and research to determine what will be the course on the bannering side.”

Sobeys owns or franchises more than 1,300 stores across Canada under several banners that include Sobeys, IGA, Foodland, FreshCo, and Thrifty Foods.

The company noted the acquisition positions it to compete more effectively within the changing and increasingly competitive grocery retail landscape in Canada.

In addition to traditional rivals like Loblaw (TSX:L) and Metro Inc.(TSX:MRU), major U.S. retail players like Walmart (NYSE:WMT) and Target (NYSE:TGT) have been making inroads in Canada with a broad selection of food items in their stores.

Safeway Inc. chief executive Robert Edwards told analysts in a conference call that the offer to buy its Canadian operations came directly from Empire Co.

“An auction process was not run and this was an unsolicited offer,” he said.

“We believe that this transaction maximized the value of our Canadian assets.”

In its last financial year, Safeway delivered $6.7 billion in sales. The California-based company has some 1,400 stories in the U.S.

Safeway said the proceeds from the sale will go to paying down debt and buying back stock, and may also be used to invest in “growth opportunities.”

However, an analyst at Gimme Credit labelled the transaction credit neutral for Safeway, noting the store’s Canadian operations have earnings margins nearly twice as high as the overall company.

About 60 per cent of the properties are in Vancouver, Calgary, Edmonton and Winnipeg.

Empire’s spun out Crombie real estate investment trust will have the first opportunity to buy any of the $1 billion in real estate assets the company plans to sell.

Empire expects the transaction to close in the fourth-quarter and immediately add to adjusted net earnings per share.

Wayne Hanley, national president of UFCW Canada, which represents thousands of Canada Safeway and Sobeys workers, said the union has asked for talks with Sobeys to discuss the takeover.

“While the purchase of Canada Safeway by Sobeys is a significant change in the Canadian food retail landscape, what has not changed are the collective agreements in place with both employers,” Hanley said.

“We do expect Sobeys to live up to the labour commitments in place at Canada Safeway and have no reason to doubt they will.”

Stock in Empire, which made the announcement after markets closed, was down 97 cents, or 1.41 per cent, at $67.61 Wednesday on the Toronto Stock Exchange.

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