The $9.4 Billion Question: Is Kroger Still Shopping for Safeway?

Private Equity Firm Cerberus Close To Deal To Purchase Safeway Grocery Stores
Getty Images/Justin Sullivan
Since the financial crisis, big buyouts haven't been regular headline news. But now we have Safeway (SWY) -- a bona fide multibillion-dollar takeover saga that's unfolding anew every day.

Earlier this month, AB Acquisition, an affiliate of private equity firm Cerberus Capital Management, agreed to acquire the prominent supermarket chain in a deal valuing it at around $9.4 billion. But before the Cerberus buyout was announced, market rumors had it that a rival supermarket chain would be the new Safeway owner. (More details on that in a moment.)

It still could happen. The Cerberus deal has a "go-shop" provision that allows Safeway 21 days to accept buyout proposals from parties willing to offer a better deal. Now Safeway will go shopping with muscular investment bank Goldman Sachs (GS) acting as its financial adviser.

In other words, there's still a chance that the rumored rival firm -- or another suitor altogether -- will make a last-minute offer and end up owning the big supermarket chain.

A Super-Sizing Chain

The scuttlebutt centered around Kroger (KR), the No. 2 supermarket operator in the country behind Wal-Mart Stores (WMT). Buying Safeway would make a lot of sense for Kroger, allowing it to acquire a company with a complementary business profile. Indeed, media reports have it that the firm approached Safeway about buying certain parts of its operations.

Kroger has been down this road before. Last summer, it acquired North Carolina-based Harris Teeter Supermarkets for $2.4 billion, significantly increasing its footprint in the Southeast.

That was only the latest in a long string of pricey acquisitions stretching back several decades. In 2007, for instance, it closed a deal with SuperValu (SVU) to buy 18 of the latter's Scott's Food & Pharmacy stores in Indiana. In 1998, it vaulted to the position of top grocer in the country when it paid almost $13 billion for Fred Meyer, operator of the popular West Coast supermarket chain Ralphs, among several other grocery brands.

Can Kroger Even Afford to Buy Safeway?

If Kroger were to pony up for Safeway, it would have to go hat in hand to potential lenders. At the end of its most recent fiscal year, the company had only $260 million in cash, a far cry from that $9.4 billion AB Acquisition is waving in front of Safeway. And since Safeway has described that offer as "definitive," any competing bid will likely have to be significantly higher, to the point where Safeway would have a hard time turning it down without incurring the wrath of its shareholders.

Also, Kroger has recently loaded up on debt. Fiscal 2013 ended with its long-term borrowings standing at nearly $9.7 billion, or more than 50 percent higher than the $6.1 billion at the end of the previous fiscal year.Taking on a slew of new debt would push that number well into 11 figures.

%VIRTUAL-article-sponsoredlinks%And if Kroger makes a winning bid, it would be on the hook for a $150 million termination fee of the Safeway/AB Acquisition marriage. For any potential bidder that doesn't make the grade, said penalty goes up to $250 million. That's a lot of money to ante up for a poker game with at least one rich cardsharp at the table.

But then again, for this scope of buyout, fat fees and large-scale borrowings come with the territory. AB Acquisition is leaning heavily on debt financing, admitting that its plan is to borrow $7.6 billion -- roughly 81 percent of that $9.4 billion total consideration.

Once more, Kroger has been in this position before, and in spite of its current red-tinged balance sheet, it's not considered a high-risk borrower. Ratings agency Moody's currently has a Baa2 score on Kroger's senior unsecured debt, a level the agency considers to be investment-grade. Kroger could very likely secure enough in loan commitments if it wanted to make a run.

It's Close to Closing Time

So, financing a bid compelling enough to catch the attention of Safeway is almost certainly doable for Kroger. But it won't be easy or cheap. The company's also fighting against time; as of this writing it's got less than three weeks to secure financing and cobble together an offer.

Still, Safeway, with its 1,335 stores under its own brand name and others, would be a heck of a complementary asset for Kroger and would make it a dominant operator particularly in the West, Safeway's stronghold.

Like all multibillion-dollar takeover stories, the Safeway saga will be a compelling one to watch. The question: will Kroger be a part of it?

Motley Fool contributor Eric Volkman has no position in any stocks mentioned. The Motley Fool recommends Goldman Sachs. Try any of our newsletter services free for 30 days.​
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