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Albertsons parent Cerberus is buying Safeway for more than $9 billion
If the deal is approved, the grocer would close in on Kroger as the nation’s biggest.
March 06, 2014|By Tiffany Hsu
Albertsons is making a play for the top spot in the U.S. grocery industry with the purchase of rival Safeway for more than $9 billion in cash and stock.
Safeway, now the second-largest chain behind Kroger Co., owns the Vons and Pavilions brands in Southern California. With the purchase, Albertsons would operate more than 2,400 stores, compared with Kroger’s 2,640.
The companies said no stores would be closed as part of the transaction, although executives said that the Federal Trade Commission could require divestitures. The combined entity would employ more than a quarter of a million workers, giving it one of the largest head counts in corporate America.
Wall Street seemed cheered by the much-rumored acquisition, which many analysts saw as a necessary step in a cutthroat market increasingly crowded with competitors.
“Consolidation like this was certain to happen,” said Jason Moser, an analyst with the Motley Fool. “This is a total scale play in an industry where scale is what matters the most.”
Some consumer advocates worried that growing consolidation among grocery chains could lead to fewer choices and higher prices, even though the two supermarket companies took pains to emphasize the benefits to customers.
“It’s scary, as if Coke and Pepsi got together,” said Jamie Court, president of Consumer Watchdog, a Santa Monica advocacy group. “This is really a threat to consumers’ getting the lowest prices and the best services. Companies always say there’s economy of scale, but in our view, less competition always equals higher prices.”
The deal with Albertsons would give Safeway investors $40 a share, including $32.50 a share in cash.
Board members of Safeway, based in Pleasanton, Calif., unanimously approved the transaction, which is expected to close in the fourth quarter, assuming it passes muster with antitrust regulators.
Albertsons, of Boise, Idaho, is owned by private equity firm Cerberus Capital Management and other investors, which is offering the proposal through its AB Acquisition arm.
Albertsons Chief Executive Robert G. Miller would serve as executive chairman of the resulting company, while Robert Edwards, currently chief executive of Safeway, would be chief executive.
Consumers are increasingly diversifying their grocery shopping, spreading their purchases among multiple retailers instead of sticking to one stop at a single supermarket, Miller told reporters in a Thursday conference call.
The marriage would help both companies retain positions of power in a grocery industry that includes home-delivery companies, online food retailers such as Amazon Fresh, upscale supermarkets such as Whole Foods and more, he said.
“The way people shop for groceries has fundamentally changed,” Miller said. “We have to adapt.”
He added that a combined Safeway and Albertsons would lead to “substantial cost savings” and fresher and higher-quality products resulting from a more efficient purchasing and distribution system.
More than 19% of market share in the U.S. grocery industry belongs to Kroger, whose chains include Ralphs and Food 4 Less, according to Euromonitor International.
Safeway, which has 1,335 stores, follows with 9.1%. The Publix and H.E.B. chains are next, with Albertsons and its 1,075 stores closing out the top five with a 3.8% share.
Last year, a Cerberus-led investor group spent $3.3 billion in cash and debt assumption buying 887 stores from Supervalu Inc., with the names Albertsons, Acme, Jewel-Osco, Shaw’s and StarMarket. Cerberus already owned some Albertsons stores, which it bought in 2006.
In the fall, Albertsons said it would buy 50 stores operated by Texan chain United Supermarkets.
But Albertsons hasn’t been the only grocery business in expansion mode. In the summer, Cincinnati-based Kroger said it would spend $2.5 billion for Harris Teeter Supermarket Inc. and its more than 200 units.
Moody’s analyst Mickey Chadha said Safeway — which owns 45% of its stores — offered an appealing real estate portfolio, he said.
But he acknowledged that Safeway represents a “big acquisition, and it includes a huge amount of integration and execution risk.”
Chadha was skeptical of concerns that a shrinking pool of grocery brands would result in more expensive supermarket visits for the average American.
“From the consumer standpoint, it’s not a bad thing,” he said. “There’s so much competition in this space that you can’t be increasing pricing. There’s a lot of alternatives out there for shoppers.”
Safeway will benefit from Cerberus’ involvement, said Moser of Motley Fool. The chain’s stores “are in need of a modern-day makeover.”
“Cerberus will upgrade those stores that are so badly in need of it, and maybe down the road they’ll spin this entity out as a publicly traded company,” Moser said.
More grocers are likely to follow the Safeway and Albertsons game plan, said Andrew Wolf, an analyst with BB&T Capital Markets.
When discounters such as Wal-Mart entered the grocery space, competitors were quickly shunted into two categories: “thriving survivors” such as Kroger, which brought their prices down, or companies such as Albertsons and Safeway that were “alive but not growing their earnings,” he said.
“Most of the unionized industry has been in a slowly liquidating situation,” he said. “That’s where a deal like this can be constructive, where one plus one can equal two and a half.”
In the acquisition agreement announced Thursday, Safeway shareholders would get $32.50 a share in cash and the right to an estimated $3.65 a share from asset sales. Shareholders also would receive shares of gift-card firm Blackhawk Network Holdings Inc., in which Safeway owns a stake, valued at an estimated $3.95 a share.
The total $40-per-share value of the deal represents a 72% premium over the share price a year ago before Safeway first began a strategic review and 17% from April 18, the day before the company divulged that it was considering a sale.
Safeway stock slipped 1 cent to $39.47 a share Thursday, before the deal was announced. In after-hours trading, the stock fell nearly $1.50 a share.
Application of course material:
1. The article covers the merger of Albertsons and Safeway. Two of the largest grocery stores in America. Once you have selected either article, you will need to write a summary of the article. The summary should include the major points of the article and how it relates to the material covered in class.
2. Using the Supply And Demand framework, you will need to show how the merger will change the Supply and Demand model. In the analysis, you need to discuss the changes in price and quantity. There are two things to consider, assume the Demand curve stays constant and just the Supply curve shift.
3. Conclude with agreeing or disagreeing with the merger in the article. Include your reasons why you either support or don’t support the purposed merger by using material discussed in class.
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