Analysts Watching Sobeys’ ‘Magical’ Safeway Deal

STELLARTON, Nova Scotia — Analysts in Canada last week were still waiting for another shoe to drop in the wake of Empire Cos.’ sweeping announcement that it would acquire Safeway Canada.

The $5.8 billion deal, announced earlier this month and expected to close this fall, could signal the beginning of a new round of food retail consolidation in Canada, some analysts said. Others thought the deal itself might still draw a challenging offer from competitors Loblaw and/or Metro Inc., despite assurances of an ironclad agreement from officials of both Safeway and Empire, parent of the Sobeys chain in Canada.

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Empire and Safeway said the agreement came as a result of exclusive negotiations initiated by Sobeys. Perry Caicco, an analyst for CIBC World Markets, Toronto, said Safeway’s failure to shop the deal was “inexplicable,” allowing Sobeys to grab the asset at a “reasonable” 9.8 times EBITDA, when factored for real estate.

“We believe Safeway could have gone for more, which means that Empire pulled off a magical deal,” Caicco said in a note to clients.

Neither Empire nor Safeway have released further details about their proposed agreement, which is fueling some speculation. The deal is subject to approval from Canada’s Competition Bureau first.

“There’s a lot of head-scratching going on right now and a lot of queries going around as to whether this is the end of the story or not,” another observer, who asked not to be identified, told SN. “People are wondering if there’s a window of opportunity for a Loblaw or a Metro offer to show up unsolicited.”

Robert Edwards

Robert Edwards, Safeway’s chief executive officer, said the Empire proposal was “an extremely attractive offer” that placed an EBITDA multiple on Canadian assets at more than twice that applied to the whole company. Paul Sobey, Edwards’ counterpart at Empire, described it as “a done deal.”

Keith Howlett, an analyst with Desjardins Securities, Montreal, noted that Safeway had likely received numerous expressions of interest from competitors over the years. “Our view is that Safeway had a good appreciation of the potential bidders, what they might be willing to pay, and how steep the Competition Bureau hurdles for each might be,” Howlett said in a research note.

Good Locations

Observers agree generally that Safeway Canada represents a strong strategic asset in a country where grocers are under pressure due to slow organic growth and rapid expansion from Target and Wal-Mart. Safeway is considered to have good locations in difficult-to-crack markets.

“From a Canadian standpoint, this is a huge event, a game-changer in terms of the landscape,” one observer said. “[Safeway] is a highly valuable asset that gives the owner a lot of strategic opportunity — whether that’s through synergies, or protected marketplaces like Vancouver where there’s really no competition.”

Caicco said the deal could spark additional consolidation, citing a historical precedent when Loblaw followed Sobeys’ acquisition of Oshawa Group in 1997 with a deal for Provigo the following week. He suggested Overwaitea, based in British Columbia, could be the next target.

Read more: Safeway Cashes Out of Canada

“It’s not impossible that a few minutes after the [Safeway] announcement, Overwaitea got on the phone and started a bidding process for their assets,” Caicco said.

Although Sobeys officials insisted they had not made a decision on retaining the Safeway banner, Caicco said a change was “inevitable” over time. More pressing for Sobeys as it takes over is extending its central purchasing initiative to the new stores, which will help accelerate a planned $200 million in annual synergies over a three-year period.