Safeway Said to Explore Sale of Canada, Dominick's

MARK HAMSTRA

PLEASANTON, Calif. — Safeway here was reported to be exploring the sales of its Canadian division and its Dominick's banner in Chicago, although analysts said they were doubtful such plans were very far advanced.

Financial Times, the British newspaper, cited unnamed sources as saying that Safeway felt it was not getting enough credit on Wall Street for the value of its Canadian division, which operated 222 stores, 12 manufacturing plants and four distribution centers, and generated about $5.5 billion in sales and $229 million in profit in 2006. The report also said that Roundy's Supermarkets' parent company, Chicago-based investment firm Willis Stein, had approached Safeway about buying the 83-store Dominick's division.

Safeway could not be reached for comment.

Analysts said the recent spike in the value of the Canadian dollar against its U.S. counterpart might have given rise to the recent speculation about the Canadian division.

“Although we do not believe that Safeway Canada is any more or less for sale than it has been in the past, there may be recent circumstances that bring the possibility back into focus,” said Perry Caicco, an analyst with CIBC World Markets, Toronto, in a report last week.

He said the other major Canadian supermarket operators have long coveted Safeway's assets in that country. The stores are concentrated in Western Canada, where Wal-Mart has just begun to make inroads with its supercenter format — a development that may signal that the value of Safeway's Canadian assets were at a peak.

Caicco pegged the sale value of the division at about $3.7 billion (U.S.).

Another analyst, Ryan Balgopal of Scotia Capital, also in Toronto, estimated that the division could attract bids from Canada's Big Three — Metro, Loblaw and Sobeys — in the range of $3.5 billion to $4.4 billion.

Although he said he does not believe that Safeway has an active auction under way for the assets, he said he “can't entirely discount the potential of the transaction.”

“Given the move in the Canadian dollar, it is conceivable that the company is looking at its assets in a new light,” he wrote in a report last week.

The Canadian dollar, long weaker than that of the U.S., last week was valued at about $1.09 U.S.

Balgopal said Safeway's Canadian division is considered a “prize asset” because of its strategic locations and market share, second only to Loblaw in that region of the country. He also suggested that Safeway's 12 food-processing plants in the country could be sold by a buyer to fund the acquisition of the stores.

The division would be a “perfect fit” for Montreal-based Metro, he said, which has expressed interest in expanding in Western Canada. He considered Loblaw, Toronto, which is in the midst of a major restructuring, to be a less likely bidder, and he said Empire Cos., the Stellarton, Nova Scotia-based parent of Sobeys, might be hesitant to take on the acquisition right now because of its recent purchase of the Sobeys shares it did not already own.

Caicco of CIBC World Markets, however, speculated that Empire would be the “only plausible buyer,” as Metro is burdened with the recently acquired Canadian assets of A&P.

He pointed out that Safeway also has several incentives not to sell the Canadian business, including the fact that it has been a strong generator of return on investment. Safeway also has no immediate need for the proceeds from a sale, he noted.

Safeway had tried to sell its Dominick's division, the No. 2 chain behind Jewel in the Chicago market, in 2003, but it had since been taken off the block. Willis Stein, meanwhile, had reportedly been seeking a buyer earlier this year for Milwaukee-based Roundy's, which operates the Pick 'n Save chain in Wisconsin and Rainbow Foods in Minneapolis. In February, Roundy's unveiled plans to begin expanding into Chicago, with up to 13 stores planned in the next three years.