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Companies and Brands

Safeway Investors Cheer Up a Little on Sale of Canadian Stores

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By Paul Ausick Updated Published
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Over the past five years, shares of Safeway Inc. (NYSE: SWY) have traded in a range of around $15 to $30 a share. The low point came last summer and the high point came in June 2008. Worse, the company has seemed to be at a loss for a way out of the doldrums.

So it is no surprise that the company jumped at an offer from Canada’s Empire Co. Ltd. to acquire Safeway’s Canadian assets for $5.7 billion in cash. That amount was higher than the company’s market cap at yesterday’s close.

Canadian sales for Safeway totaled about $6.6 billion for the 12 months through March 2013, so the deal puts Empire back in the thick of the grocery store fight in Canada.

And Safeway shareholders — what do they get? Most probably expect a one-time dividend of some kind. Safeway has about 237 million shares outstanding, so the payment from Empire is worth about $24.00 per share.

Unless Safeway shares its sudden good fortune with shareholders through some kind of special dividend, today’s sale will not do an awful lot to change investors’ perception of the company. If Safeway uses the cash to pay down some of its $6.2 billion in debt, it will remain significantly leveraged. And when all that is said and done, the company’s profitability is likely to continue to decline.

The Kroger Co. (NYSE: KR) has twice as many U.S. stores as Safeway, and Whole Foods Market Inc. (NASDAQ: WFM) and The Fresh Market Inc. (NASDAQ: TFM) have far better profit margins. Discounters like Wal-Mart Stores Inc. (NYSE: WMT) and Family Dollar Stores Inc. (NYSE: FDO) offer low food prices as an enticement to attract more customers into the megastores. Safeway’s closest competitor may be Supervalu Inc. (NYSE: SVU), which has seen shares jump nearly 150% so far this year.

Safeway has not indicated that it has any plan in place to compete successfully in the grocery market. The Empire deal was unsolicited, so Safeway cannot even take any credit for finding a deep-pocketed buyer. This deal will not change what is fundamentally wrong at Safeway.

Safeway’s shares are up about 9.7% at $25.37, in a 52-week range of $14.73 to $28.42.

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About the Author Paul Ausick →

Paul Ausick has been writing for 247Wallst.com for more than a decade. He has written extensively on investing in the energy, defense, and technology sectors. In a previous life, he wrote technical documentation and managed a marketing communications group in Silicon Valley.

He has a bachelor's degree in English from the University of Chicago and now lives in Montana, where he fishes for trout in the summer and stays inside during the winter.

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