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Safeway Shares Surge on $5.7B Canada Sale

Stocks in this article: SWY KR SVU WMT

NEW YORK ( TheStreet) -- Safeway (SWY) shares were surging to a new five-year high after the nation's second-largest supermarket chain sold its Canadian operations to Empire Company Limited's Sobey unit for about $5.7 billion in cash.

Safeway's sale of its Canadian business will allow the company to pay down $2 billion of debt and increase its stock buyback authorization by about $3 billion, the company said in a statement.

Shares in Safeway surged over 16% to $27 in early Thursday morning trading, signaling a positive reaction from investors as the company works to deleverage its balance sheet and return cash to shareholders.

For new CEO Robert Edwards, who took the reins of the company on May 14, the deal may mark a shift in strategy to simplify Safeway's business and increase its financial flexibility, amid competition from the likes of supermarket chains Kroger (KR) and SuperValu (SVU) and newer entrants to the space such as Wal-Mart (WMT).

"We believe a significant factor in the strategic rationale for this sale was the need to de-lever the balance sheet," Ajay Jain, a Cantor Fitzgerald analyst, wrote in a client note reacting to the deal. "Now the focus for investors will be the core U.S. operations, which continues to lose market share."

As of its most recent quarter, Safeway had over $6 billion in long-term debt.

Safeway is selling a strong performing business in Canada that accounts for about 15% of the company's overall $44 billion in annual revenue and an even greater share of profits. In 2012, Safeway Canada's $268 million in net income was about half of the company's overall annual profit.

"We are pleased to enter into this agreement with Sobeys in order to realize the higher multiples attributed to Canadian supermarket companies," Edwards, said in a late Wednesday press release announcing the deal.

"The substantial cash proceeds from this transaction will allow us to create value for Safeway stakeholders and contribute to the growth of the ongoing business."

-- Written by Antoine Gara in New York

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