Busy Times At Safeway As It Exits Chicago, Draws Cerberus’ Interest

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Canadian operations sold. Dominick’s to withdraw from Chicago. Private equity taking aim at his company. Yes, it’s been a busy six months for CEO Robert Edwards, who took the helm at Safeway Stores Inc. in May replacing Steve Burd, the iconic chief executive who had led Safeway for 20 years.

A month into his tenure, Edwards engineered his first major deal – a $5.6 billion sale of Safeway’s Canadian operations to Empire Cos., parent of the Sobeys chain. The acquisition of 213 stores would provide Sobeys with a leading position in Western Canada and grow Sobeys’ overall sales to around $24 billion. Safeway Canada had sales of around $6.7 billion and a profit of $428 million (Canadian) in the 12 months that ended March 23. Just before presstime, the Canadian Competition Bureau approved the transaction after Sobeys said it would sell 13 Safeway units and 10 Sobey’s stores. Safeway said proceeds from the transaction are expected to be used to pay down around $2 billion of debt, with the majority of the remainder to be used to buy back stock. In addition, some of the proceeds may be used to invest in growth opportunities.

“The substantial cash proceeds from this transaction will allow us to create value for Safeway stakeholders and contribute to the growth of the ongoing business,” said Edwards.

Sobeys said it intended to pay for the transaction using a combination of: a $1.5 billion Empire stock offering; around $1 billion through the sale and leaseback of the acquired facilities; a term loan of $1.825 billion; and the issuance of $800 million in new Sobeys debt.

Then last month Safeway announced in early 2014 it would be exiting the Chicago market in where it operated 72 Dominick’s stores. Safeway entered the Chicago market in 1998 when it acquired Dominick’s for $1.2 billion (the regional chain operated 116 units at that time). “The decision to sell Canada Safeway and to exit the Chicago market is consistent with Safeway’s priority of maximizing shareholder value,” said Edwards. “These actions will allow us to focus on improving and strengthening our core grocery business. We are continuing to review all of our businesses to optimize our allocation of resources, improve sales and grow operating profits.”

The company said Dominick’s incurred a net loss of $8.4 million for the third quarter, compared with a loss of $6.2 million a year ago; and a loss of $21.5 million for the year to date, compared with $16.8 million for the 36-week period a year ago.  For the fiscal year ended Dec. 29, 2012 Dominick’s had a net loss of $31.5 million. Safeway said the exit from Chicago will result in a cash-tax benefit of between $400 million and $450 million that it will use in the short term to offset cash tax expenses from the sale of its Canadian assets. Any other cash proceeds will be used to buy back stock and invest in growth opportunities, the company said.