News Analysis
Ending months of speculation, Safeway last month finally found a new partner. Not surprisingly, it was private equity firm Cerberus Capital Management, the large New York City based private equity company, which has been the most active player in the retail food industry over the past year, acquiring Supervalu (its Symphony Investors unit bought Supervalu’s wholesale, Save-A-Lot and regional chain units) and its AB Acquisition/New Albertsons subsidiary acquired 877 former Albertsons stores. Late last year, Cerberus also purchased United Family Markets in West Texas.
The Safeway deal is valued at approximately $9.2 billion ($40.10 per share) and includes 1,335 stores, 13 distribution centers and 20 manufacturing plants. Pending Federal Trade Commission approval, the deal is expected to close late this year. The Safeway deal is one of the largest private equity acquisitions in industry history and the largest since Kroger acquired Fred Meyer, the large West Coast retailer, for approximately $13 billion in 1998. And if approved, New Albertsons would become the second largest “pure play” supermarket chain in the U.S. behind Kroger.
There remain several key questions about the deal that should be answered with the next 12 months including: Which stores will have to be closed or sold and who might acquire those overlapping locations, given significant store overlap issues in several key markets (particularly on the West Coast)?; How radically will Cerberus/New Albertsons/AB Acquisition rearrange infrastructure and personnel at the corporate and divisional levels?; How much will the new organization invest in cap-ex, especially in building new stores or significantly remodeling many older stores that resemble “Lifestyles (of the 1990s)”?; And as a private equity firm, how long will Cerberus stay in the game?
As for store overlap issues, industry observers believe the big conflict regions are Southern California (Vons, Albertsons) and the Pacific Northwest (Safeway, Albertsons). However, there are geographic store overlaps in Phoenix, Denver and even in parts of Texas (a Safeway train wreck with its Randalls and Tom Thumb stores). It’s anybody’s guess who will end up with these potentially divested locations, but Kroger (which contrary to published reports did not make a bid for the entire company, we learned) seemingly would be interested in some fill-in locations (however, it too would have even more potential overlap issues in many of the markets where both Safeway and Albertsons operate stores). With the glut of retail locations in most markets, analysts said they wouldn’t be shocked if many of the closed locations remain dark.
Regarding personnel changes, trade analysts expect a further streamlining, perhaps not as deep at the divisional level although there will be local shifts, too.
In fact, Safeway CEO Robert Edwards, who will become chief executive of the new organization, has quietly made significant moves involving senior staffers over the past several months. Additionally, with industry icon Bob Miller to serve as executive chairman and de facto Cerberus tactician Justin Dye, currently chief strategy officer at New Albertsons (and another key Cerberus link), trade observers believe that several former Albertson veterans will hold key posts within the “new” Safeway. And several sources also acknowledged that New Albertsons’ current smallish corporate headquarters in Boise, ID will ultimately shift to Safeway’s larger corporate offices in Pleasanton, CA.
As for significant capital expenditure increases resulting in an accelerated new store pipeline, don’t bet on it, analysts predict. Spending significant capital in new stores is generally not in the game plan of private equity firms and hasn’t been the case over the past year in analyzing Cerberus’ acquisition of Albertsons.
However, monetizing real estate assets and exploiting the advantages that supermarket cash flow brings to the table are two of the primary reasons this deal is happening and are part of a bigger end game which insiders believe is to ultimately take the beefed up company public.
In analyzing Cerberus/New Albertsons/AB Acquisition’s 877 store acquisition by Cerberus/New Albertsons from Supervalu a little more than a year ago, there are several changes that have been implemented that are worth noting. New Albertsons has done a fine job of reinstilling pride in the associates at store level, it has lowered retails, and it has restored a more “local” presence to its divisional operations (Safeway’s issues in those areas need far less radical surgery).
New Albertsons also brought in new leadership, primarily comprised of “Miller’s posse,” executives who once toiled for the original Albertsons organization in the 1970s and ‘80s and have brought supermarket professionalism to Acme Markets, Shaw’s, Jewel-Osco and Albertsons. But new stores, no.
In those past 13 months, other than Jewel/Osco’s recent acquisition of several former Dominick’s (Safeway) stores in the Chicago area, there has been virtually no new store activity. However, to be balanced, the now controlled Cerberus stores look more refreshed and there have been limited improvements to the physical plants.
Here’s a more detailed breakdown of the deal:
- Cerberus will pay approximately $9.2 billion ($40.10 per share) to acquire Safeway Stores. That includes: $32.50 per share in cash; $3.65 per share of the estimated after-tax net proceeds from sales of primary non-core Safeway assets – Property Development Centers (its shopping centers unit) and Casa Ley (the Mexican supermarket chain of which Safeway holds a 49 percent stake). Shareholders will receive either a cash payout by closing or through Contingent Value Rights post-closing; and $3.95 per share which is the estimated value of its 37.8 million shares of Blackhawk, Safeway’s gift card business (which launched an IPO 11 months ago).
- AB Acquisition plans to fund the deal in part with debt financing of approximately $7.6 billion, equity contributions from its current investors and their affiliates, partners and co-investors of approximately $1.25 billion, and cash on hand of Safeway.
- Closing of the deal is estimated in the fourth quarter of this year after regulatory approvals are granted; Safeway’s shareholders will vote on the deal in quarter three.
- The newly combined organization promises lower prices, better local assortment, an improved shopping experience and a stronger management team.
- Any new bidders had a 21-day “go shop” window and additional 15-day negotiation period if bona fide offers had been received during the “go shop” period. However, as a deterrent to new bidders entering the process, break up fees of $150-$200 million would have had to be paid to AB acquisition/New Albertsons depending on timing of a successful superior proposal. And if AB Acquisition/New Albertsons failed to close the transaction under certain circumstances, a $400 million reverse break up fee would be awarded to Safeway. That “go shop” window expired on March 27 and no new bidders emerged.
- Safeway’s board declared a special stock dividend of 37.9 million shares of Blackhawk Network Holdings Class B common stock — the entire amount the chain owns. Distribution is scheduled for April 14 to stockholders of record April 3. The Blackhawk shares represent approximately 94.2 percent of the total Class B stock outstanding and approximately 72 percent of the total number of all common stock outstanding in Class A and Class B. The Class B stock is not currently traded on any stock exchange but, upon completion of the dividend, it is expected to trade on the NASDAQ exchange; the Class A shares already trade on NASDAQ. With approximately 230 million shares of common stock outstanding on March 21, Safeway anticipates that each stockholder will receive approximately 0.16 of a share of Blackhawk Class B common stock for every share of Safeway common stock held on the record date, less any shares of Blackhawk Class B withheld in respect of applicable withholding taxes.
- The newly expanded company (prior to any potential FTC store divestitures) would operate 2,410 stores (1,075 New Albertsons units and 1,335 Safeway supermarkets) in 34 states and WashingtonDC. Additionally, it would employ 250,000 associates, operate 27 distribution centers and 20 manufacturing plants and operate under the following banners: Safeway, Vons, Pavilions, Randalls, Tom Thumb, Carrs, Albertsons, Acme, Jewel-Osco, Lucky, Shaw’s, Star Market, Super Saver, United Supermarkets, Market Street and Amigos.
Analysts noted that there are few more thoughts to consider about this whole process: although Kroger apparently attempted to enter the bidding arena at the 11th hour, trade observers have speculated that its interest was primarily to drive up the price of the deal, especially since New Albertsons will soon be Kroger’s primary competitor in many markets. As stated above, Kroger may indeed be interested in specific overlap locations, but Kroger’s corporate grid would have created more overlaps than the New Albertsons-Safeway deal.
And speaking about price, several sources pointed to Safeway’s claim in its press release about the “significant premium” Safeway shareholders would receive based on the closing share price during the past year (a 72 percent gain in value over a year ago; a 56 percent premium over six months ago; and a 17 percent increase since February 18, the day before Safeway revealed its was in sales discussions). Those are nice gains, but insiders believed that Safeway was looking to garner an offer in the $46-$49 per share range.
However, timing is everything. Without another serious bidder, Cerberus held all the leverage. Still, it’s hard to believe that Harris Teeter, a much smaller company with infrastructure assets (real estate control, distribution centers, and manufacturing plants) that can’t match Safeway’s, sold for nearly 25 percent more than the Pleasanton, CA-based chain on a per share basis.
Give former CEO Steve Burd and current CEO Edwards credit – they’ve streamlined Safeway to such a degree over the past two decades that it unintentionally became the optimal poster child for any PE company to desire, especially taking into account the vanilla and centralized way Safeway operates. To a hedge fund or private equity firm, Safeway became the ideal turnkey supermarket chain to target.
And Edwards is certainly a man of his word – since his elevation to chief executive last May, he’s preached “maximum shareholder value.” He’s now achieved his mission, even though the final number may be a little lighter than he and Safeway’s board might have hoped.
This acquisition represents another deal in an increasing string of private equity transactions over the past two years. Most of those initiatives have resulted in the acquiring public equity firm ultimately attempting to or having completed an initial public offering initiative. Firms in that category include: including of Bi-Lo Holdings/Lone Star Funds/Southeastern Grocers (Bi-Lo, Winn-Dixie, Sweetbay, etc.), Sterling Investment Partners (Fairway Market) and even Safeway (Blackhawk Network Holdings), and seek to launch a public offering.
That’s where the real treasure trove lies – break up fees, bonus compensation and a potential windfall for the core executives and insiders, which represent hundreds of millions of dollars to be potentially reaped by those inner circle investors.
And at the end of the day, many trade observers believe that all of these PE deals are less about selling groceries and enhancing the shopping experience and more about Wall Street leaving an indelible mark on what used to be an exciting and entrepreneurial business.