Cerberus Capital Management’s $9 billion deal to merge Safeway with Albertsons is a bet that a larger supermarket chain can better fend off an attack on the grocery business by big-box stores and online retailers.
The deal will unite two chains with locations across the country — especially in the West — and narrow Kroger Co.’s lead as the nation’s top supermarket company.
Cerberus, a private-equity firm that has spent years investing in the supermarket industry, will use the new company’s heft to combat a growing array of threats. Big-box retailers such as Wal-Mart Stores and warehouse clubs are increasingly targeting grocery customers, using their size and breadth of products to attract shoppers. Online food sellers and delivery services, including Amazon.com, also have made neighborhood supermarkets less essential than before.
The new company will have between $55 billion and $60 billion in revenue, according to Scott Mushkin, a New York-based analyst at Wolfe Research. The deal will “create a dominant West Coast operation, as well as meaningfully enhance the eastern portion of the company,” he said in a note this week. Cerberus and its Boise-based Albertsons operations had emerged as the leading bidder after Safeway offered itself for sale.
The Albertsons-Safeway tie-up would create a company with more than 2,400 stores, 27 distribution facilities and 20 manufacturing plants. But it will still have to contend with an industry that isn’t growing. After rising an estimated 0.4 percent to $531.4 billion last year, U.S. supermarket and grocery-store sales are expected to decline 1.7 percent this year, according to a January report from research firm IBISWorld Inc.
Safeway also would remain second banana to Kroger. That company has about 2,640 supermarkets under such names as Kroger, Fred Meyer, Dillons and King Soopers. The Cincinnati-based chain also runs 786 convenience stores, as well as about 320 jewelry stores and 38 food-processing plants in the U.S. Kroger sales rose 1.7 percent to $98.4 billion in the year ended in February, a better pace than the overall industry.
WILL KROGER CHALLENGE THE DEAL?
Kroger may still play a role in the Cerberus deal. Built into the current agreement is a 21-day “go shop” period, letting a rival bidder make an offer. The provision was put in place in case Kroger wants to try to beat the Cerberus price, said a person familiar with the matter, who asked not to be identified because the discussions are private.
Kroger had made an approach to Safeway recently about buying parts of the company, people with knowledge of the situation said this week. Kroger had also approached Cerberus about buying some of Safeway’s stores after a Cerberus deal, one of the people said.
If Kroger or another bidder makes an offer during the go shop period, Safeway has 15 days to enter talks with that party, according to the company’s statement. If Safeway ends the deal during the go shop period, it would owe a breakup fee of $150 million. The amount rises to $250 million after that period. The buyer, meanwhile, would owe $400 million if the deal falls apart.
Even without Kroger stepping in, the transaction faces a review by the Federal Trade Commission. State attorneys general also may request information, Edwards said on a conference call Thursday. The government might require that some of the 2,400 stores be divested, he said.
“But we’re prepared for the review with the FTC and look forward to having that completed so we can close the transaction,” he said.
The FTC will focus on geographic areas where Safeway and Albertsons compete, Seth Bloom, an antitrust attorney in Washington, said in a phone interview.
“They’re going to look at where there are overlaps,” said Bloom, founder of Bloom Strategic Counsel and a former general counsel of the Senate Antitrust Subcommittee. “This is a deal that’s going to turn very much on the geographic markets.”
Safeway has been simplifying its operations and recently sold its 72 Dominick’s stores in the Chicago area. It had previously divested its Canadian business and held an initial public offering of its Blackhawk gift-card unit in April of last year. Blackhawk’s shares have climbed 9.3 percent since the IPO.
Kroger, led by CEO Rodney McMullen, has outperformed rivals by adding stores and expanding its private-label brands. The company bought Matthews, N.C.-based supermarket Harris Teeter earlier this year in a transaction valued at about $2.46 billion.
THE CERBERUS ROLE
Cerberus first placed its bet on Albertsons in 2006, when it teamed up with Supervalu Inc. and CVS Corp. to acquire the chain in a deal valued at $17.4 billion. They then split up the company. Supervalu bought more than 1,110 stores — many of them under other banners — while Cerberus led a group that separately picked up 655 stores, mostly in Florida and the West. Last year, the Cerberus-led group bought Supervalu’s Albertsons, Acme, Jewel-Osco, Shaw’s and Star Market grocery stores in a deal valued at $3.3 billion. The group also paid $216.7 million for about a 21 percent stake in Supervalu.
Cerberus is headed by Stephen A. Feinberg and manages about $25 billion in capital. Its biggest transactions include the $7.45 billion purchase of a majority of Chrysler in 2007. The previous year, it engineered a takeover of General Motors’ auto finance unit, General Motors Acceptance Corp., for $7.4 billion.
Both deals ran aground in the financial crisis, with Chrysler filing for bankruptcy protection in 2009. Despite that, Cerberus recouped most or all of its Chrysler investment.