Sobeys Inc. to Acquire Canada Safeway - Empire Company to Own 100% of the Combined Company

 
 
Empire Company Limited (Empire) and its wholly-owned subsidiary, Sobeys Inc. (Sobeys), have announced that Sobeys has reached a definitive  agreement with Safeway Inc. to acquire substantially all of the assets of Canada Safeway Limited (Canada Safeway) for a cash purchase price of Cdn. $5.8 billion, subject to a working capital adjustment, plus the assumption of certain liabilities.
 
Paul D. Sobey, President and CEO of Empire said, "This is a significant and historic event for Sobeys, which has been proudly serving Canadian food shoppers for 106 years. The acquisition of Canada Safeway represents an excellent strategic fit, strengthening our presence in Western Canada with the addition of great employees, excellent stores and exceptional real estate.
 
"The acquisition allows us to leverage our existing assets and in turn position Sobeys to compete even more effectively within the changing, and increasingly competitive, grocery retail landscape. Empire is committed to continuing its focus on food retailing and related real estate assets and will continue to own 100 percent of Sobeys which will be a stronger food company with excellent growth prospects."
 
Transaction Overview and Rationale
 
The assets to be purchased by Sobeys include the following:
  • 213 full service grocery stores under the Safeway banner in Western Canada;
  • 199 in-store pharmacies with market leading productivity;
  • 62 co-located fuel stations;
  • 10 liquor stores;
  • 4 primary distribution centres and related wholesale business; and
  • 12 manufacturing facilities.
The acquisition of Canada Safeway represents a unique and highly strategic opportunity for Sobeys to leverage its existing asset base.  Management believes that, for several reasons, including those described below, the transaction will significantly enhance Sobeys' scale, while creating an opportunity to realize meaningful synergies and earnings accretion:
  • Creates a new growth platform for Sobeys
  • Positions Sobeys as a leading grocer in Western Canada and the #1 grocer in the fast-growing Alberta market
  • Solidifies Sobeys' #2 position nationally with pro forma revenue of approximately $24 billion
  • Canada Safeway has an exceptional store network totaling approximately 9 million square feet in sought-after locations of which over 60 percent is located in Vancouver, Calgary, Edmonton and Winnipeg
  • $1.8 billion in owned real estate (based on an independent appraisal as at March 30, 2013)
  • Aligned corporate strategy - both companies have complementary offerings, are focused on excellence in fresh food and represent a great cultural fit
  • Strengthens Sobeys' talent base
  • Identified cost synergies of approximately $200 million annually within three years
  • Management expects the acquisition to be immediately accretive to adjusted net earnings per share and in excess of 25 percent accretive once synergies are fully realized
  • Significant free cash flow generation and rapid de-leveraging
"We are very excited by this acquisition and the future opportunities it presents," said Marc Poulin, President and CEO of Sobeys. "This is a win-win for both companies, as well as for our customers and employees. Our employees have always been the foundation of our success and, with the addition of the great team at Canada Safeway, our customers can continue to expect a high quality offering with excellence in fresh food supported by great service. Our offering will only get stronger as we share and build upon best practices of two great businesses."
 
Mr. Poulin added, "Sobeys expects to benefit from increased economies of scale. We anticipate capturing annual cost synergies of approximately $200 million within three years, through integrating and modernizing distribution networks, reducing cost in procurement, administration and marketing, and leveraging Sobeys' IT infrastructure."
 
Financial Highlights
 
For the 52 week period ended March 23, 2013, Canada Safeway generated approximately $6.7 billion of sales and $513 million of adjusted EBITDA. After giving effect to the full realization of $200 million of expected synergies, the planned Sale-Leaseback described below, and assumed capital leases, management has placed an effective acquisition multiple on the transaction of approximately 7.4 times adjusted EBITDA.  Management expects the transaction to be immediately accretive to adjusted net earnings per share and in excess of 25 percent accretive once synergies are fully realized.
 
Financing of the Transaction
 
The acquisition of Canada Safeway's assets will be paid for in cash in Canadian dollars. It is Empire's and Sobeys' intention that financing for the acquisition will come from a combination of the following: (i) a $1.5 billion Empire equity offering; (ii) a planned $1.0 billion sale-leaseback of acquired real estate assets (the "Sale-Leaseback"); (iii) a $1.825 billion term loan and the issuance of $800 million in unsecured notes by Sobeys; (iv) other real estate and non-core asset sales; and (v) available cash on hand.  As some of these transactions may not be completed by the time of closing, Scotiabank has provided Empire and Sobeys with fully committed credit facilities for the full purchase price plus transaction expenses required to close the transaction. Crombie REIT has a right of first offer in respect of any real estate sales undertaken by Sobeys.
 
Closing of the Transaction and Other Information
 
Closing of the transaction is subject to customary conditions, including receipt of relevant regulatory approvals and is expected to occur in the fall of 2013.
 
Scotiabank and Morgan Stanley acted as advisors to Empire on the acquisition.

 

on June 12, 2013