Analysis: With $5.7B Acquisition Of Safeway's Canadian Assets, Sobeys Is Telling Loblaw (L) To Move Aside
The deal could be summed up as a two-word message to Canada’s largest grocer, Loblaw Companies Ltd. (TSE:L): Move over.
Sobeys Inc. is buying Safeway Inc.’s (NYSE:SWY) Canadian division for $5.7 billion, solidifying its place as the country’s second-largest food retailer and nipping at the heels of a stagnant Loblaw, which has struggled to grow in recent years.
So, what made Safeway Canada such an irresistible meal? The food retail sector is hot in the Great White North.
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Wal-Mart Canada Corp. (NYSE:WMT) is adding more grocery aisles to its stores. Target Canada Company (NYSE:TGT), another big-box retailer from the U.S., is opening its first Canadian stores this year.
And companies have long been salivating over Safeway Canada, which gives its new owner a huge presence in Western Canada. Of the company’s 223 stores, 75 are in British Columbia.
Loblaw and Metro Inc., a Quebec-based competitor, have eyed the company. And Paul Sobey, the chief executive of Sobeys parent company Empire Company Ltd. (TSE:EMP.A), said he has been considering the purchase since 2001.
“We’ve been looking at Canada Safeway, as with other opportunities, [for] a long, long period of time, he said, according to the Globe and Mail. “We’re very familiar with the assets.”
The purchase is also a win for the U.S.-based Safeway, which has been squeezed by a declining market share at home.
But Sobeys' purchase is not without its risks.
Researchers at UBS said in a note that discounters like Wal-Mart, Target and Costco will be able to offer lower prices as Safeway Canada tries to justify a purchase price that they said was already overvalued.
"The pressure will be to reduce prices as Wal-Mart, Target and Costco continue to push for market share at lower prices than Safeway Canada," the note said.
"We think the current bid valuation is already a stretch."
Shares in Empire were up 11 percent to $75.05 by 10:30 a.m. EDT on Thursday.
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