Sobeys to acquire Canada Safeway stores for $5.8B

The Sobeys grocery store chain has reached a deal to buy more than 200 Safeway stores in Western Canada for $5.8 billion,Sobeys' parent company, Empire Company Limited, announced Wednesday.

"The acquisition allows us to leverage our existing assets and in turn position Sobeys to compete even more effectively within the changing, and increasingly competitive, grocery retail landscape," Empire president and CEO Paul D. Sobey said in a news release.

The $5.8 billion acquisition will be paid for in cash, and Sobeys Inc. will assumesomeliabilities, including some related topensions.The deal has been approved by the boards of directors of both companies and is expected to close in the fall of 2013 subject to approvalbythe Competition Bureau.

Along with 213 Safeway grocery storesmore than60 per cent of whichare in Calgary, Vancouver, Edmonton and WinnipegSobeys will also acquire:

• 199 in-store pharmacies.
• 62 gas stations.
• 10 liquor stores.
• 4primary distribution centres and a related wholesale business.
• 12 manufacturing facilities.

Sobeys willget $1.8 billion worth of real estate in the deal.

Unclear if dominant brand will be Safeway or Sobeys

The Nova Scotia-based company, whose history datesto 1907 and whichhas beenwholly owned by Empire since the Sobey familytook it privatein 2007,said it has not yet decided whether it will brand the new network of stores under the Safeway or Sobeys banner or keep the two brands independent.

"At this stage, we're happy the transaction hasoccurred, and now, we need to do the marketing work that needs to occur to take the best decision for the success of our employees and that will please our customers," said Sobeys president and CEO Marc Poulin on a conference call with journalists and analysts.

The company would not say whether layoffs could be expected as a result of the purchase.

"We need good-quality employees that are really committed to the customer focus," Empire CEO Paul D.Sobey saidin answer to a CBC News question about layoffs.

"At this point in time, our focus is on the people side of the equation and the cultural fit between the two organizationsperiod."

That cultural fit is "excellent," Sobey said.

Expects to save $200 million a year

Sobeys said the merging of the two chains will result insignificant economies of scale. It expects to save $200 million annually within three years by integrating and modernizing the two chains' distribution networks; reducing the cost of administration, procurement and marketing; andmaking efficient use ofSobeys' IT infrastructureacross the new network of stores.

Sobeys is Canada's second-largest grocery store chain after Loblaws, with sales in the 2012 fiscal year of $16.2 billion. It also owns several other grocery store brands, includingFreshCo., Thrifty,Price Chopper and Foodland.

Canada Safeway, the Canadian subsidiary of California-based Safeway Inc.,generated about $6.7 billion in sales in the 52 weeks ended March 23, 2013.

Safeway Inc. said in a news release thatthe proceeds from the sale ofits Canadian operationswould be used to pay down $2 billion of debt andto buy back stock.

The companyremains responsible for Canada Safeway's $300 million in public debt, which is due March 2014 and is not included in the transaction.

Empire said the acquisition will be financed throughcombination ofa $1.5 billion equity issue, $1 billion from the sale or leasebackof acquired real estate, a $1.825 billion term loan, the issuance of $800 million in unsecured notes, bridge financing and cash.

It's possible that the federal Competition Bureau could force Sobeys to sell off some of its stores as a condition of approving the deal.