Canadian operations sold. Dominick’s to withdraw from Chicago. Private equity taking aim at his company. Yes, it’s been a busy six months for CEO Robert Edwards, who took the helm at Safeway Stores Inc. in May replacing Steve Burd, the iconic chief executive who had led Safeway for 20 years.
A month into his tenure, Edwards engineered his first major deal – a $5.6 billion sale of Safeway’s Canadian operations to Empire Cos., parent of the Sobeys chain. The acquisition of 213 stores would provide Sobeys with a leading position in Western Canada and grow Sobeys’ overall sales to around $24 billion. Safeway Canada had sales of around $6.7 billion and a profit of $428 million (Canadian) in the 12 months that ended March 23. Just before presstime, the Canadian Competition Bureau approved the transaction after Sobeys said it would sell 13 Safeway units and 10 Sobey’s stores. Safeway said proceeds from the transaction are expected to be used to pay down around $2 billion of debt, with the majority of the remainder to be used to buy back stock. In addition, some of the proceeds may be used to invest in growth opportunities.
“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,” said Edwards.
Sobeys said it intended to pay for the transaction using a combination of: a $1.5 billion Empire stock offering; around $1 billion through the sale and leaseback of the acquired facilities; a term loan of $1.825 billion; and the issuance of $800 million in new Sobeys debt.
Then last month Safeway announced in early 2014 it would be exiting the Chicago market in where it operated 72 Dominick’s stores. Safeway entered the Chicago market in 1998 when it acquired Dominick’s for $1.2 billion (the regional chain operated 116 units at that time). “The decision to sell Canada Safeway and to exit the Chicago market is consistent with Safeway’s priority of maximizing shareholder value,” said Edwards. “These actions will allow us to focus on improving and strengthening our core grocery business. We are continuing to review all of our businesses to optimize our allocation of resources, improve sales and grow operating profits.”
The company said Dominick’s incurred a net loss of $8.4 million for the third quarter, compared with a loss of $6.2 million a year ago; and a loss of $21.5 million for the year to date, compared with $16.8 million for the 36-week period a year ago. For the fiscal year ended Dec. 29, 2012 Dominick’s had a net loss of $31.5 million. Safeway said the exit from Chicago will result in a cash-tax benefit of between $400 million and $450 million that it will use in the short term to offset cash tax expenses from the sale of its Canadian assets. Any other cash proceeds will be used to buy back stock and invest in growth opportunities, the company said.
Over the past year, Wall Street financial analysts have criticized Safeway for not doing more to help increase its stock price. That assessment was primarily targeted toward Burd, who some felt charted a too-conservative course and was slow to seek to maximize shareholder value. Clearly, that perception is changing under Edwards, who joined Safeway as CFO in 2004 and whose background is in finance. With Canada sold and Dominick’s on the route to withdrawal, observers wonder whether weaker performing divisions such as Texas (Randall’s), Southern California (Von’s) or Arizona might be on the block as well. Even Safeway’s profitable Eastern division, based in Lanham, MD, has been mentioned as a region for a potential asset sale because of its geographic isolation from the remainder of the company, despite consistent profitability and many excellent locations.
And Edwards certainly has addressed the undervaluation of Safeway by making quick and decisive moves to increase shareholder value (when Edwards assumed the CEO post on May 14, Safeway shares were trading at $25.45; on October 25 the company’s per share price had jumped to $36.54). Safeway’s board has also authorized a $2 billion share buyback plan.
With private equity back in the acquisition game, the maneuvering has begun, despite Edward’s focus. On September 17, Jana Partners LLC, a Manhattan-based hedge-fund firm that actively seeks corporate change, acquired a 6.2 percent equity stake in the Pleasanton, CA chain. In a regulatory filing after its purchase of Safeway shares, Jana representatives noted they had previously discussed the shedding of some unprofitable regions and returning more capital to investors, with Safeway management.
That same day, Safeway announced the adoption of a one-year stockholder rights plan (“poison pill”). The plan calls for each shareholder to receive one preferred stock purchase right per common share. That purchase right allows existing shareholders to acquire stock in the event an activist investor accumulates a stake of more than 10 percent, or a passive investor buys a position above 15 percent.
Other private equity companies also smell blood and on October 22, numerous industry reports surfaced noting that Cerberus Capital Management LP and perhaps other PE firms are exploring taking a run for all of the big chain which operates about 1,400 supermarkets in the U.S. which has a market value exceeding $8 billion. Safeway has not commented but has retained Goldman Sachs Group as its advisor.
