Safeway (NYSE:SWY), America's second-largest grocery chain, hasn't been faring as well as its competitors lately. Beset on one side by specialty retailers like Whole Foods Market, and on the other by discounters and dollar stores, Safeway seems to have lost a good deal of its customers. The company has been looking to sell itself, or at least parts of its business. Private equity firm Cerberus has nearly closed the purchase of the supermarket chain, but Kroger (NYSE:KR) has also stated it may be interested in buying parts of Safeway's business.
Private equity party
For some historical perspective, it is perhaps useful to note that this is not the first time Safeway has come into contact with a private equity firm. In 1986, Safeway was acquired in a leveraged buyout by New York investing firm Kohlberg Kravis Roberts for around $4.25 billion, primarily to avoid a hostile takeover by Dart Group. The deal was an enormously lucrative one for KKR, which sold its stake in 1999 to make more than $7 billion on its original investment. The bailout was also an important one for Safeway.
So, it seems as if Safeway has had some good experiences with private equity firms, which perhaps partly explains why it is currently in talks with Cerberus. According to The Wall Street Journal, Cerberus is close to closing a deal worth around $9.2 billion, which translates into around $40 per share, or roughly $0.50 above the closing price at the time of writing. The stock dropped following the news, however, indicating that investors had expected a higher buyout price. .
Under the deal, Cerberus would acquire the whole caboodle, which would add some 1,335 stores to Cerberus' supermarket portfolio. Cerberus already owns the Albertsons chain, which together with Safeway locations would create a dominant supermarket force in the western U.S., with a countrywide total of about 2,400 locations. The deal is still not completely finalized, however, with a clause giving Kroger and other potential suitors 21 days to bid on parts of the chain.
Kroger stepping in
For a while, it seemed as if Cerberus was the only potential suitor, which would support the company's bargaining position. Kroger, too, has now expressed interest in part of Safeway's business, but Cerberus is still seen as the favorite due to potential antitrust issues surrounding the tie-up of the No. 1 and No. 2 U.S. supermarket chains.
In any case, Kroger has been in touch with Cerberus over buying stores that the company might not want, some valuing a complete takeover by Kroger at around $13 billion, a hefty sum. As stated above, rival bidders now have 21 days to make a deal. Safeway is perhaps hoping that Kroger will offer a better price for parts of the chain. However, according to sources familiar with the matter, Safeway would prefer to be sold as a whole.
The bottom line
The supermarket industry was recently shaken up by the news that Safeway was looking to sell to Cerberus in a deal worth around $9 billion. Struggling with increased competition, Safeway has been mulling over various strategic options.
However, the deal will likely be complicated by Kroger stepping in, as America's largest grocery store operator looks to buy parts of the business as well. It is unlikely that Kroger will consider a complete takeover, as such a deal would inevitably run into antitrust concerns, but increased interest in Safeway's assets could potentially complicate Cerberus' buyout.
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John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool’s board of directors. Daniel James has no position in any stocks mentioned. The Motley Fool recommends Whole Foods Market. The Motley Fool owns shares of Whole Foods Market. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.