The Dog Giving Safeway a $9 Billion Bone
It's employment Friday! The Labor Department's February employment report is being well received as it shows businesses added a better than expected 175,000 workers to payrolls -- despite the cold snap. Nevertheless, that gain was not enough to outweigh the number of new entrants into the labor force and the unemployment rate ticked up a tenth of a percentage point to 6.7% (the consensus estimate had it unchanged). U.S. stocks opened higher this morning, with the benchmark S&P 500 and the narrower Dow Jones Industrial Average up 0.23% and 0.48%, respectively, at 10:15 a.m. EST. In retail news, private equity firm Cerberus Capital Management is leading a consortium that will acquire Safeway for $9 billion before merging the supermarket chain with an existing portfolio company, Albertsons.
In brick-and-mortar retail, there are only two paths (I'm excluding here niche retailers): retrench because you are forced to or scale up massively if you have the ambition and the means. RadioShack and Staples illustrated the former path this week, announcing significant store closures, while Cerberus and its partners are selecting the more ambitious strategy. Indeed, Safeway's 1,300 locations will take the group's footprint to another level once added to Albertsons' 1,000 stores. In a statement announcing the acquisition, Safeway made it clear that there would be no business closures, with the merger expected to create a group that boasts 2,400 stores, 27 distribution facilities, 20 manufacturing plants, and more than 250,000 employees.
At $40 per share, the price being paid by Cerberus represents a 17% premium to Safeway's stock price on Feb. 18, the day prior to company disclosing it was in sale talks. However, Safeway is free to solicit other offers during a "go-shop" period. Kroger is reportedly a potential bidder, although the company declined to comment on acquisition plans during its earnings call yesterday.
While the strategic rationale for acquiring Safeway and merging it with Albertsons is clear -- scale matters -- the timing of Cerberus consortium's offer appears off. Why didn't it come forward a year ago, for example, when the shares were some 40% lower? Cerberus is a canny and very successful (if very discreet) investment group, but retail supermarket chains aren't an obvious choice to harvest huge profit as the industry undergoes significant change and faces new competitors (think Amazon.com, for example). Cerberus will hope to avoid a repeat of the fiasco that occurred when it waded into another challenged industry with the acquisition of Chrysler.
The article The Dog Giving Safeway a $9 Billion Bone originally appeared on Fool.com.
Alex Dumortier, CFA 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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