The Dog Giving Safeway a $9 Billion Bone

It's employment Friday! The Labor Department's February employment report is being well received as it shows businesses added a better than expected 175,000 workers to payrolls -- despite the cold snap. Nevertheless, that gain was not enough to outweigh the number of new entrants into the labor force and the unemployment rate ticked up a tenth of a percentage point to 6.7% (the consensus estimate had it unchanged). U.S. stocks opened higher this morning, with the benchmark S&P 500 and the narrower Dow Jones Industrial Average (DJINDICES: ^DJI  ) up 0.23% and 0.48%, respectively, at 10:15 a.m. EST. In retail news, private equity firm Cerberus Capital Management is leading a consortium that will acquire Safeway (NYSE: SWY  ) for $9 billion before merging the supermarket chain with an existing portfolio company, Albertsons.

In brick-and-mortar retail, there are only two paths (I'm excluding here niche retailers): retrench because you are forced to or scale up massively if you have the ambition and the means. RadioShack and Staples illustrated the former path this week, announcing significant store closures, while Cerberus and its partners are selecting the more ambitious strategy. Indeed, Safeway's 1,300 locations will take the group's footprint to another level once added to Albertsons' 1,000 stores. In a statement announcing the acquisition, Safeway made it clear that there would be no business closures, with the merger expected to create a group that boasts 2,400 stores, 27 distribution facilities, 20 manufacturing plants, and more than 250,000 employees.

At $40 per share, the price being paid by Cerberus represents a 17% premium to Safeway's stock price on Feb. 18, the day prior to company disclosing it was in sale talks. However, Safeway is free to solicit other offers during a "go-shop" period. Kroger is reportedly a potential bidder, although the company declined to comment on acquisition plans during its earnings call yesterday.

While the strategic rationale for acquiring Safeway and merging it with Albertsons is clear -- scale matters -- the timing of Cerberus consortium's offer appears off. Why didn't it come forward a year ago, for example, when the shares were some 40% lower? Cerberus is a canny and very successful (if very discreet) investment group, but retail supermarket chains aren't an obvious choice to harvest huge profit as the industry undergoes significant change and faces new competitors (think, for example). Cerberus will hope to avoid a repeat of the fiasco that occurred when it waded into another challenged industry with the acquisition of Chrysler.

Read/Post Comments (0) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2868128, ~/Articles/ArticleHandler.aspx, 8/29/2015 2:16:32 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Alex Dumortier

Alex Dumortier covers daily market activity from a contrarian, value-oriented perspective. He has been writing for the Motley Fool since 2006.

Today's Market

updated 5 hours ago Sponsored by:
DOW 16,643.01 -11.76 -0.07%
S&P 500 1,988.87 1.21 0.06%
NASD 4,828.33 15.62 0.32%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/28/2015 4:55 PM
^DJI $16643.01 Down -11.76 -0.07%
SWY $0.00 Down +0.00 +0.00%
Safeway, Inc. CAPS Rating: **