Why Safeway Shares Surged

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Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Safeway were looking fresh today, climbing as much as 19% on word that it would sell its Canadian operations, including 213 stores, to Sobey's for $5.7 billion.

So what: The deal looks like a major win for new CEO Robert Edwards, who came on just a month ago, as Safeway's market value was only $5.5 billion before the news broke. The supermarket chain said the sale proceeds will amount to about $4 billion after taxes, and it will use $2 billion of that money to pay off part of its $5.2 billion debt burden. The rest will go to share buybacks and potential growth opportunities. Only about 13% of Safeway's total locations were north of the border


Now what: Shares were up as much as 30% after hours yesterday after the deal was announced, but steadily fell since then to close out today up just 7.4%. Fitch Ratings was among those throwing cold water on the deal, as it said it would maintain its BBB- credit rating with a negative outlook, pointing out that the Canadian stores brought in a higher profit margin so the sale will hurt profitability. Safeway still faces an uphill battle in the supermarket industry, as retail giants like Wal-Mart and Target continue to focus on groceries, but today's move certainly looks like a smart one.

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The article Why Safeway Shares Surged originally appeared on Fool.com.

Fool contributor Jeremy Bowman has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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