THE SPARK: Reuters reported Tuesday that a handful of buyout firms, including private equity firm Cerberus Capital Management LP, are exploring a full or partial buyout of Safeway. The report, citing unnamed sources familiar with the matter, said it could potentially shape up to be one of the largest leveraged buyouts since the financial crisis.
THE BIG PICTURE: Safeway, based in Pleasanton, Calif., declined to comment on the report.
The company, like many mainstream grocers, is facing intense competition from dollar stores and big-box retailers such as Target Corp. and Wal-Mart Stores Inc., all of which increased their emphasis on food amid the recession.
Safeway adopted a plan in September to prevent a hostile takeover after it learned that Jana Partners disclosed that it had amassed a 6.2 percent stake in the company.
The company has made a number of changes to try and keep its edge, such as its recently announced plans to sell off its Dominick's stores in Chicago. It sold its Canadian unit for $5.7 billion in a deal that is currently pending, and took its gift and prepaid card unit, Blackhawk, public in March.
THE ANALYSIS: Cantor Fitzgerald analyst Ajay Jain said that Safeway's urgency to sell its assets reflects a rapid deterioration in its core business. The analyst said that after the Safeway Canada sale and Blackhawk spinoff, he felt it was increasingly likely that management would try to dispose of other parts of the business at a faster rate.
Jain said that while Safeway is not in the same distressed state that one-time competitor Supervalu was in when it was sold to a group of investors led by Cerebus, the company's fundamentals are suffering. Investor sentiment remains strong, despite an ongoing slide in core earnings and margins, the analyst said. So he has difficulty seeing how the stock price might improve in the long run.
"We feel that the key consideration for the stock right now is whether Safeway can generate enough proceeds from disposals to actually generate incremental value. In this context, we still fail (to) see how the math adds up."
SHARE ACTION: Investors remained optimistic on the buyout possibilities, sending shares up nearly 9 percent to $35.76 in early afternoon trading. Its stock is up more than 80 percent so far in 2013.
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