Safeway could be a potential takeover target
Eve Mitchell / Contra Costa Times
Beset by tough competition and buffeted by the Great Recession, Safeway has struggled to find its footing, leading to speculation that it is ripe for a takeover by a bigger grocery chain or private equity firm.
The grocery industry has undergone a transformation in recent years, as stores such as Walmart, Target, Trader Joe’s, Fresh & Easy and dollar stores stock more groceries. And unlike Safeway, those stores are nonunion, putting pressure on Safeway’s cost structure and profits.
On Thursday, Safeway will report earnings for the first quarter of 2012. Analysts expect the Pleasanton-based grocer to earn 30 cents a share on revenue of $10.07 billion, compared with profit of 29 cents a share and sales of $9.8 billion for the same quarter last year.
But the larger issue for the company will be the takeover rumors, with either Kroger, the country’s largest grocery chain, or a deep-pocketed private equity firm seen as possible buyers. Earlier this month, for instance, the chain experienced its biggest weekly rally since 2009 on speculation about a possible acquisition after the grocery chain changed payout mechanisms for executives in the event of a takeover.
In an email, a Safeway spokeswoman said, “We don’t comment on rumors.” Kroger did not return phone calls.
Over a 10-year period ending in mid-April, Safeway’s stock price declined by 52 percent while Kroger rose slightly by 4.5 percent. On Wednesday, Safeway’s stock closed at $21.60 and Kroger closed at $23.19. Cincinnati-based Kroger operates 2,435 supermarkets and other types of stores nationwide while Safeway operates 1,678 stores in the U.S. and Canada. In the Bay Area, Kroger operates stores under the Food4Less and the FoodCo. names, discount grocery stores that compete with Safeway’s Pak ‘N Save stores.
‘Food for thought’
Food retail analyst Karen Short of BMO Capital Markets released a report last week that explored a scenario involving Safeway, the country’s second-largest grocery, being acquired by Kroger.
“To be clear, we are by no means suggesting a transaction is in the works. We are merely providing food for thought because we strongly believe this transaction makes sense for both shareholder bases,” the report said.
In a phone interview, Short said, “If I could have a wish list on what could make the industry better, that would be at the top of my list.”
“In general, I think this is kind of a broken industry and it’s very challenging. There is a lot of competition from nonconventional formats that are nonunion,” Short said in the interview. “The point is, the synergies are fairly significant between the two of them. So you are going to eliminate overhead, a significant amount of overhead, and that would improve the profitability of the combined entity fairly significantly.”
The takeover talk comes as Safeway is also facing tricky labor negotiations. United Food and Commercial Workers union Local 5 is in ongoing labor talks with Safeway, Save Mart Supermarkets (Lucky) and Raley’s (Nob Hill Foods).
“The unions and all three companies are continuing to look at health coverages that maintain quality care at a level to keep our members and their families healthy and allow the companies the ability to remain competitive,” Mike Henneberry, Local 5 communications director wrote in an email. The negotiations, which involve two other locals in addition to Local 5, cover 53,000 members at the three retailers throughout Northern California, including 14,000 at Bay Area Safeways.
Safeway is probably a better play for a private equity firm, said Jeff Green, a Phoenix-based retail marketing consultant.
“I think it’s going to be a private equity (firm) over some buyer like a Kroger,” he said. “I don’t think (Kroger) can affect (Safeway) sales. They have enough of their own issues to want to take on somebody else.”
A takeover wouldn’t be the first for the company. KKR took Safeway private in a 1986 leveraged buyout after Peter Magowan, the grocer’s CEO at the time and grandson of the company’s founder, allied with KKR in a takeover battle against Herbert and Robert Haft. KKR sold its stake by 1999, making more than $7 billion on its original $129 million investment, according to KKR’s records.
Both Green and Short see Safeway as an attractive property that is not in a distressed condition.
“It’s a good operationally run company with pretty good real estate,” Green said.
“Safeway is not a distressed asset. They have a very high-quality store base. They’ve invested in their real estate. They own a lot of their real estate in great locations,” Short said.
Safeway made the right move a few years ago when it upgraded stores to provide shoppers with a more attractive shopping experience than the discount model of Walmart, said Kirthi Kalyanam, professor of marketing and director of the Retail Management Institute at Santa Clara University. But, he said, it ran into some economic headwinds.
“When they were doing this transformation, we had something happen called 2008. All of a sudden, consumers were voting with their pocketbooks and decided to go back to Walmart,” he said, referring to the financial meltdown after Lehman Brothers filed for bankruptcy. “So the timing was a bit unfortunate. … If the economy was OK, then the renewal would have worked out just fine. And if (Safeway) did nothing, it would have been much harder for them to be a viable company.”