Albertsons, Safeway to merge

The deal with Safeway comes after a reunification of two Albertsons chains.
The deal with Safeway comes after a reunification of two Albertsons chains.

Albertsons and Safeway, the nation's second-largest grocery chain, said Thursday that they will combine under the company that owns Albertsons.

With traditional grocers continuing to struggle nationwide, Safeway, based in Pleasanton, Calif., put itself up for sale last month. Analysts and industry watchers said a Safeway sale would reshape the industry, leading to the closure of stores across California and the Southwest and transforming Safeway into a neighborhood grocer that resembles Trader Joe's.

The merger will create a chain with more than 2,400 stores, 27 distribution centers and 20 manufacturing plants. The combined workforce will exceed 250,000.

Customers will benefit, said Bob Miller, Albertsons' CEO, who will be promoted to executive chairman of the combined chain. Safeway's current CEO, Robert Edwards, will stay on as CEO.

"Working together will enable us to create cost savings that translate into price reductions for our customers," Miller said. "Together, we will be able to respond to local needs more quickly and deliver outstanding products at the lowest possible price, more efficiently than ever before."

But he declined to say what effect the merger will have on Albertsons' headquarters in Southeast Boise.

"We have a large corporate office in Idaho. We'll continue to have a strong presence there," Miller told the Idaho Statesman on Thursday. It is "too early to say which positions will be where."

As of last summer, 73 of the 110 corporate employees serving Albertsons' Intermountain division were based in Boise.

The $9 billion deal is expected to close in the fourth quarter. Store operations will remain unchanged in the meantime, executives said.

Safeway shareholders will receive $40 per share in the deal, slightly above the stock's recent trading price, though Edwards noted that the price is 56 percent higher than Safeway's share price six months ago. Shares closed at $39.47 on Thursday, valuing Safeway at about $9 billion. The purchase will include about $7.6 billion in debt financing, mostly in the form of loans.

The parent company of Albertsons is AB Acquisition LLC, an entity created by an investor group led by New York private-equity firm Cerberus Capital Management when the group bought Supervalu Inc.'s Albertsons stores. AB Acquisition will acquire all outstanding shares of Safeway, the companies said in a joint news release after stock markets closed for the day.

"This is one of the most exciting deals that's been discussed in decades," said Burt Flickinger, a retail analyst at Strategic Resource Group in New York.

The merged chains still will be second to Cincinnati-based Kroger, at least in terms of revenues. Kroger, whose holdings include the Fred Meyer chain, had $92 billion in sales in 2012.

Safeway had $38 billion in U.S. sales and $42 billion in global sales that year, according to the National Retail Federation.

Albertsons does not report sales but last year confirmed an Idaho Statesman estimate that revenues surpassed $21 billion. That makes Albertsons Idaho's largest company measured by revenue and employment. Albertsons has about 3,000 employees in 32 Idaho stores.

"We intend on keeping the existing retail footprint of both of our companies," Miller said. "We don't expect to divest any stores, and there's no store closures planned at this time because of this merger."

The merged company will operate stores under 16 banners, an Albertsons spokeswoman said.

Flickinger said one possible outcome of the merger would put more stores under management in Boise - if certain Albertsons and Safeway banners in Southern California and Texas are combined and run by Albertsons in Boise.

Regardless, Flickinger said, the merger "would give Albertsons significantly more size and scale, and procurement power, which would really help with cost of goods, which could be passed along and reflected in lower prices to consumers."

Albertsons got its start almost 75 years ago in North Boise, where Joe Albertson opened a grocery store he called "Idaho's largest and finest."

Albertson had gotten his start at Safeway. Early in his career, he worked as a clerk at a Safeway store while taking business classes at the College of Idaho. Safeway pulled out of Idaho in the 1980s.

By 2006, Albertsons Inc. stretched from coast to coast, with about 2,500 stores and 240,000 employees under several banners, including Albertsons, Acme Markets, Bristol Farms, Jewel-Osco, Shaw's and Star Markets. It was the second-largest grocery chain in the U.S.

That year, Albertsons Inc. did what Safeway did eight years later: It gave in to pressures from discount retailers and put itself up for sale. The company sold in three pieces for $17.4 billion. Stand-alone pharmacies were sold to CVS. Some of the grocery stores, including all Albertsons supermarkets in Idaho, went to Minnesota-based Supervalu. The Albertsons stores that Supervalu didn't want - more than 600 of them, mostly in weak divisions in the South and Southwest - were bought by the same Cerberus consortium that is now buying Safeway. They hired some Albertsons Inc. executives to run it from the former Albertsons Inc. campus on ParkCenter Boulevard that Supervalu also occupied.

Cerberus pared its store roster to 190, earning millions for itself and its partners by selling failed properties for their real-estate value. When Supervalu finally gave up and put itself up for sale, Cerberus bought the remaining former Albertsons Inc. stores and reunited the two Albertsons chains in Boise. Albertsons quickly hired about 900 new employees in Idaho. It also renovated some stores in Boise and dropped a loyalty-card requirement for sale prices.

Safeway has been panned for neglected stores and ranked by industry publications as having among the worst customer service.

Cerberus's investment partners are mostly real estate companies: Kimco Realty Corp., Klaff Realty LP, Lubert-Adler Partners LP and Schottenstein Stores Corp.

If the merger fails, the Albertsons parent company will pay Safeway $400 million.

The San Jose Mercury News contributed.

Audrey Dutton: 377-6448, Twitter: @IDS_Audrey