A Safeway Store And Distribution Center Ahead Of Earning Figures
Matthew Staver/Bloomberg via Getty Images
By Leslie Patton

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.

Blackhawk Network

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.

No Closings

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.

'Go Shop'

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.

Antitrust Review

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,
Edwards said on the conference call. The government might require that some of the 2,400 stores be divested, he said.

"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.

Albertsons Breakup

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.

Auto Industry

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.

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13 Comments

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Michael J Allen

Most commenters here don't seem to understand how free market capitalism works. Others complain about one local store as if this is an assessment of the chain. One guy is proud to shop only in non-union stores. Me too, that way I get lower prices and the workers get food stamps and health insurance subsidies from the government. Great system.

Cerberus says they have no plans to close stores. Wait a week. It's a venture capital company. They will sell off any locations that are underperforming, particularly if they are on expensive real estate. They will get rid of as much management as they can. They will reduce staffs resulting in longer lines, unstocked shelves, and dirty stores. They will get rid of unions if they can. They will extract millions of dollars in management fees. Then they will sell the remaining stores quick before the whole thing collapses if it isn't bankrupt yet.

March 08 2014 at 2:56 PM Report abuse rate up rate down Reply
dansummersell

Betwween Wal-Mart, Costco, Kroger and the healthy small fry (dollar stores, niche food retailers, even drug and convenience stores) Albertsons/Safeway will be crushed out of existance eventually.

March 07 2014 at 10:09 PM Report abuse +2 rate up rate down Reply
bj the dj

What goes around goes around again. When Safeway was bought by KKR in a leveraged buyout 30 years ago it had 2200 stores and was the largest food chain in the world. When KKR finished it was a shell of its original self. I certainly hope Cerebus plans to keep it running and not use it as a cash cow as KKR did.

March 07 2014 at 4:23 PM Report abuse +2 rate up rate down Reply
aaflyboy1

Another great store is TRADER JOES!
Great fruits and vegetables and GREAT PRICES!
NOT TO MENTION, GREAT STAFF!

March 07 2014 at 2:01 PM Report abuse +3 rate up rate down Reply
aaflyboy1

Originally from Western New York. Now, I live in South Florida.
LOVE WEGMANS SUPER MARKETS! They are clean, great fruits and vegetables.
PLEASE WEGMANS, COME TO FLORIDA!

March 07 2014 at 2:00 PM Report abuse +1 rate up rate down Reply
1 reply to aaflyboy1's comment
merstockgto

Wegman's will stay out of Fl for the same reason I left 2 years ago

March 07 2014 at 10:37 PM Report abuse rate up rate down Reply
sonny

Albertson's and Safeway are both gone in this area and Walmart's grocery business is declining. In this area your best bet is a good small IGA store. Problem is finding a good one.

March 07 2014 at 12:49 PM Report abuse +1 rate up rate down Reply
liontwin33

We have a Safeway only 1/2 block from home, and we rarely shop there. Their produce is crap ( ( see rotted produce proudly on display), and their prices are high. We would rather drive 4 miles to a Winco and do our shopping there.

March 07 2014 at 11:07 AM Report abuse +4 rate up rate down Reply
ADAM ANTMAN

These mega-mergers by greedy executives was the culprit that created the 'too big to fail' tightrope in 2008. It shows that greed and stupidity walk hand-in-hand. As long as these people can swoop down and suck up big bucks at the very start, they're set for life and don't give a damn about the aftermath because they know they'll get away with it. And we all know what happened to Marie Antoinette and her 'LET THEM EAT CAKE'. That's the same thing happening here.

March 07 2014 at 11:06 AM Report abuse +3 rate up rate down Reply
David Trott

There are two Safeway (Tom Thumb stores) practices that customers are forced to endure. 1.) At checkout, they beg for charitable contributions. It's horrendous and unrelenting. There have even been occasions when they address customers over the PA system requesting money so they can compete with other Safeway stores. It's so intrusive, and has absolutely nothing to do with their grocering mission. Yes, Krogers & Albertsons also request donations but do so in a manner that is very subtle, and doesn't impede the checkout process. 2.) they also make their cashiers try to use your name which they see on your receipt. Of course, they inevitably butcher the pronunciation of your name, and you feel that your identity has been breached in front of everyone else in line. For these reasons, I've stopped shopping at Safeway affiliated stores..Let's hope these practices are abolished with the merger, or I'll be forced to replace my Albertson's shopping with Walmart & Target.

March 07 2014 at 10:58 AM Report abuse rate up rate down Reply
raidrmik67

The merger with American Stores was a disaster and Larry Johnston made it worst electing to break up the company so he could get his golden parachute of $40 million. Now most of the original ABS is being pieced back together and merged with Safeway? I sure hope the people in charge know what they're doing because last time a merger of this scale happened in the grocery business it was a disaster.

March 07 2014 at 10:48 AM Report abuse +5 rate up rate down Reply