) has reached a conclusive decision with respect to its Canadian
operations. Share price of this food and drug retailer climbed
29.68% (or $6.86) higher during the after-trading hours following
the company's announcement of an agreement to sell its Canadian
operations. The stock was also up 24.45% (or $5.64) before the
opening bell on Thursday.
Safeway inked a definitive agreement to divest its business
operations in Canada - Canada Safeway Limited to Canadian food
retailer Sobeys Inc. for $5.68 billion in cash (roughly $3.91
billion after taxes and expenses), plus the assumption of certain
liabilities. Empire Company Limited owns the Sobeys supermarket
Safeway is still liable for roughly $294 million of Canada
Safeway's public debt due Mar 2014. It will also retain cash and
other receivables of a similar amount.
Safeway's net asset sale to Sobeys include its 213 full grocery
stores in Western Canada, 199 in-store pharmacies, 62 co-located
fuel stations, 10 liquor stores, 4 primary distribution centers
and the related wholesale business and 12 manufacturing
facilities in Canada.
The transaction is expected to close in the fourth quarter of
2013, subject to standard closing conditions. The company will
report Canada Safeway as discontinued operations from the second
quarter of 2013.
Safeway plans to use the net proceeds to repay $2 billion of its
debt. Until the most recent quarter, the company continued to
operate with a high debt level of $5.3 billion. As reported
earlier, the first-quarter debt level was higher than the debt of
$5.2 billion in the sequentially prior quarter. Safeway's highly
leveraged balance sheet was a cause of concern for investors.
According to the company, the bulk of the remainder will be used
for share repurchases. As reported earlier, Safeway did not
repurchase any shares in the last three quarters. Presently, the
company is left with $0.8 billion of authorization to buy back
shares. Shareholders should look forward to attractive returns in
the form of share buybacks in the near future.
Going forward, Safeway's share buyback activity along with lower
interest expense, owing to reduced debt level, should further
leverage earnings in the upcoming quarters.
Although the company asserts that the divestment reflects a deft
plan to sharpen focus on the U.S. market, we remain apprehensive
due to the lack of clarity on management plans to gain momentum
in the domestic market.
Notably, Safeway's Canadian operations have been more profitable
than the U.S. operations, as seen in the level of operating
profit over the past few years. In 2012, the company recorded
operating profit of approximately 2% and 5.4% in the U.S. and
Canada, respectively. Further, the situation worsened in the
domestic market as reflected by the declining profits in recent
times. We wait to see the impact of the sale on its profitability
In light of these facts, Safeway's decision to sell its Canadian
stores might come under intense scrutiny from investors and
analysts alike. We prefer to remain on the sidelines for this
retail giant until further visibility is obtained.
Accordingly, the stock carries a Zacks Rank #3 (Hold). While we
have a neutral investment disposition on Safeway, other players
Etablissements Delhaize Fr
The Kroger Co.
The Fresh Market Inc.
), carrying a Zacks Rank #2 (Buy) warrant a look.
DELHAIZE-LE (DEG): Free Stock Analysis Report
KROGER CO (KR): Free Stock Analysis Report
SAFEWAY INC (SWY): Free Stock Analysis Report
FRESH MARKET (TFM): Free Stock Analysis
To read this article on Zacks.com click here.