Cerberus Capital Management's $9 billion deal to merge Safeway (SWY) with Albertsons is a bet that a larger supermarket chain can better fend off an attack on the grocery business by big-box stores and online retailers.
Safeway, the No. 2 grocery-store operator in the U.S., agreed Thursday to be acquired by Cerberus's Albertsons for about $40 a share. The deal will unite two chains with locations across the country -- especially in the West -- and narrow Kroger's (KR) lead as the nation's top supermarket company.
Cerberus, a private-equity firm that has spent years investing in the supermarket industry, will use the new company's heft to combat a growing array of threats. Big-box retailers such as Walmart Stores (WMT) and warehouse clubs are increasingly targeting grocery customers, using their size and breadth of products to attract shoppers. Online food sellers and delivery services, including Amazon.com (AMZN), also have made neighborhood supermarkets less essential than before.
"This merger will improve our competitive position," Safeway Chief Executive Officer Robert Edwards, who will be in charge of the combined company, said Thursday on a conference call. "Our customers will benefit from significant cost saving synergies and a stronger management team."
Safeway shares fell as much as 6.3 percent to $37 in extended trading, reflecting concerns the deal may not close at the current price. The shares had increased 21 percent this year through the close of regular trading Thursday, outpacing the 1.6 percent gain of the Standard & Poor's 500 Index.
As part of the agreement, investors will get $32.50 a share in cash, plus stock in Safeway's gift-card unit Blackhawk Network Holdings (HAWK), according to a statement Thursday. Safeway, based in Pleasanton, Calif., had said last month that it was in talks about a sale of the company. Assuming a diluted share count of about 235 million shares, the transaction would value the chain at $9.4 billion.
The new company will have between $55 billion and $60 billion in revenue, according to Scott Mushkin, a New York-based analyst at Wolfe Research. The deal will "create a dominant West Coast operation, as well as meaningfully enhance the eastern portion of the company," he said in a note this week. Cerberus and its Boise, Idaho-based Albertsons operations had emerged as the leading bidder for Safeway last month.
The Albertsons-Safeway tie-up would create a company with more than 2,400 stores, 27 distribution facilities and 20 manufacturing plants. No stores are expected to be closed, according to Thursday's statement. Edwards will become president and CEO of the new 250,000-employee business, while Albertsons CEO Bob Miller will be the executive chairman.
The company will still have to contend with an industry that isn't growing. After rising an estimated 0.4 percent to $531.4 billion last year, U.S. supermarket and grocery-store sales are expected to decline 1.7 percent this year, according to a January report from research firm IBISWorld.
Safeway also would remain second banana to Kroger. That company has about 2,640 supermarkets under such names as Kroger, Dillons and King Soopers. The Cincinnati-based chain also runs 786 convenience stores, as well as about 320 jewelry stores and 38 food-processing plants in the U.S. Kroger sales rose 1.7 percent to $98.4 billion in the year ended in February, a better pace than the overall industry.
Kroger may still play a role in the Cerberus deal. Built into the current agreement is a 21-day "go shop" period, letting a rival bidder make an offer. The provision was put in place in case Kroger wants to try to beat the Cerberus price, said a person familiar with the matter, who asked not to be identified because the discussions are private.
Kroger had made an approach to Safeway recently about buying parts of the company, people with knowledge of the situation said this week. Kroger had also approached Cerberus about buying some of Safeway's stores after a Cerberus deal, one of the people said.
If Kroger or another bidder makes an offer during the go shop period, Safeway has 15 days to enter talks with that party, according to the company's statement. If Safeway ends the deal during the go shop period, it would owe a breakup fee of $150 million. The amount rises to $250 million after that period. The buyer, meanwhile, would owe $400 million if the deal falls apart.
Keith Dailey, a Kroger spokesman, declined to comment.
Even without Kroger stepping in, the transaction faces an antitrust review by the U.S. Federal Trade Commission. State attorneys general also may request information,
"But we're prepared for the review with the FTC and look forward to having that completed so we can close the transaction," he said.
The FTC will focus on geographic areas where Safeway and Albertsons compete, Seth Bloom, an antitrust attorney in Washington, said in a phone interview.
"They're going to look at where there are overlaps," said Bloom, founder of Bloom Strategic Counsel and a former general counsel of the U.S. Senate Antitrust Subcommittee. "This is a deal that's going to turn very much on the geographic markets."
Safeway has been simplifying its operations and recently sold its 72 Dominick's stores in the Chicago area. It had previously divested its Canadian business and held an initial public offering of its Blackhawk gift-card unit in April of last year. Blackhawk's shares have climbed 9.3 percent since the IPO.
Kroger, led by CEO Rodney McMullen, has outperformed rivals by adding stores and expanding its private-label brands. The company bought Matthews, N.C.-based supermarket Harris Teeter earlier this year in a transaction valued at about $2.46 billion.
Cerberus first placed its bet on Albertsons in 2006, when it teamed up with Supervalu (SVU) and CVS (CVS) to acquire the chain in a deal valued at $17.4 billion. They then split up the company. Supervalu bought more than 1,110 stores, while Cerberus led a group that separately picked up 655 stores, mostly in Florida and the West. The group included Kimco Realty, Klaff Realty, Lubert-Adler Partners and Schottenstein Real Estate Group.
Last year, the Cerberus-led group bought Supervalu's Albertsons, Acme, Jewel-Osco, Shaw's and Star Market grocery stores in a deal valued at $3.3 billion. The group also paid $216.7 million for about a 21 percent stake in Supervalu.
Cerberus is headed by Stephen A. Feinberg and manages about $25 billion in capital. Its biggest transactions include the $7.45 billion purchase of a majority of Chrysler in 2007. The previous year, it engineered a takeover of General Motors' (GM) auto finance unit, General Motors Acceptance Corp., for $7.4 billion.
Both deals ran aground in the financial crisis, with Chrysler filing for bankruptcy protection in 2009. Despite that, Cerberus recouped most or all of its Chrysler investment. GMAC was bailed out by the U.S. government and was renamed Ally Financial.
The latest acquisition brings another chance to revive a well-known brand in a sluggish industry.
The merger will allow the new company "to compete more effectively and efficiently in meeting customer's changing needs in an increasingly competitive landscape," Edwards said.