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Time to say goodbye to Safeway?

Analysts and experts believe the American supermarket giant will sell its Canadian operation

Safeway-sign

The big question on the lips of many grocery industry watchers these days: “Is Safeway selling its Canadian stores?” It’s come up at least a few times before, most recently in 2007 when the share price of California-based Safeway lagged the market.

This time, analysts say, the likelihood of a sale is greater for several reasons. So the question becomes: Who will buy Canada Safeway, for how much and what will it mean for the market?

Canada Safeway was established in 1929 and now has 222 stores: 96 in Alberta, 72 in B.C., 33 in Manitoba, 15 in Saskatchewan and six in Ontario.

Although it contributes a small part of Safeway’s total North American sales, the Canadian division’s profits are high compared to the rest of the company. Canada contributes only 15 per cent of Safeway’s overall sales, but 34% of its profits.

The primary motivation to sell the Canadian division, according to analysts (Safeway declined to comment for this article), is to bolster Safeway’s share price, which is about the same as it was 10 years ago.

Reports suggest the company is in break-up mode and seeking to monetize various pieces, including its manufacturing operations, which include dairies and bakeries in Canada. Safeway stock is so beat up that analysts have resorted to the old “real estate value” calculation to support valuation.

“CEO Steve Burd recently stepped upstairs and passed the president title onto a successor. Mr. Burd’s exit might not be too far away. We would doubt if Mr. Burd would want to leave without making a splash to finally get the share price up,” explains Perry Caicco, managing director of CIBC World Markets in Toronto. “A sale of Canada could materially improve the Safeway share price by surfacing a valuable but otherwise hidden asset.”

Another reason for a sale now is that the Canadian loonie is strong versus the American dollar. Safeway also owns valuable real estate in Vancouver and elsewhere that it could monetize separately.

A third reason to sell is the large capital investment Safeway would have to make to truly differentiate its stores going forward, particularly in light of potential competition from Target next year.

Among the leading suitors for Safeway’s Canadian operations are Metro Inc., which does not operate in Western Canada yet; and George Weston, the main owner of Loblaw.

Some European-based supermarkets may also be circling, including Ahold of the Netherlands and Belgium’s Delhaize, both of which already operate supermarkets in the U.S. With several motivated buyers, Safeway may be able to realize at least 10 times gross profit, or US$4.9 billion.

“We’ve always said that if Safeway ever sells, Weston will decide who the buyer is. Weston is sitting on a ton of cash and huge balance sheet capacity,” observes Caicco.

“The synergies for Loblaw would only be about $120 million [purchasing plus some back office savings], and the Competition Bureau would demand some store sales in a few markets.”

Caicco does have a warning for Weston: “If the whole project were to look too expensive and too risky, Weston would smartly let one of their competitors overpay for it.”

How would the supermarket landscape in Canada look after a sale of the Safeway unit?

Industry watchers say this depends largely on the buyer, but most don’t think it will have a significant impact on the business environment, at least not initially. Several observers agree a buyer will have to make a major investment to reinvent the stores.

One consultant, Ian Percy, a Canadian living in Arizona, suggests the acquiring company re-fashion the stores to more of a Trader Joe’s model that promotes value-oriented store brands. An interesting idea for whoever comes up with the cash, perhaps.

Or for Safeway–should it decide to stay in Canada after all.

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