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Safeway Considering Sale as Activists Loom

NEW YORK (TheStreet) - Safeway (SWY) said on Wednesday it is in talks concerning a possible sale of the company. The Pleasanton, Calif-based retailer said that it has not reached an agreement on a transaction and "there can be no assurance that these discussions will lead to an agreement or a completed transaction."

Safeway didn't mention who the company's potential buyer is and said it would not comment further on discussions. Separately, the grocery chain said it would distribute its remaining 37.8 million share interest in Blackhawk Network Holdings (HAWK) to shareholders in a tax-free manner. Blackhawk Network Holdings, a prepaid card specialist, is currently over 70%-owned by Safeway.

The disclosure on Wednesday that Safeway could be sold confirms months of speculation that the company was in the process of selling itself. In October, Reuters reported that Safeway had hired Goldman Sachs and was fielding diligence from a handful of private equity firms including Cerberus Capital Management.

Safeway has already been hard at work cutting deals, amid weak profit margins and a stretched balance sheet. In June of 2013, Safeway sold its Canadian operations to Empire Company Limited's Sobey division for $5.7 billion in cash, in a move that allowed the company to pay down $2 billion in debt and buy back $3 billion in stock.

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Some investors, however, argued the company could do more.

In September, activist hedge fund Jana Partners took a 6.2% stake in Safeway and argued that the company should consider reviewing strategic alternatives such as a sale of the company. Safeway adopted a poison pill to defend against Jana and launched a multi-billion dollar stock buyback.

A potential takeover of Safeway, either from private equity buyers or a corporate buyer, would be a major deal. Safeway currently carries a stock market capitalization of nearly $9 billion and a further $3.9 billion in long-term debt.

In fourth quarter earnings released on Wednesday, Safeway also said it would begin to consider selling a 49% stake in Casa Ley, the fifth largest food retailer in Mexico by revenue.

For the fourth quarter of 2013, Safeway reported $100 million in net income from continuing operations, or about 35 cents in earnings per diluted share. Revenue at the company came in at $11.3 billion, a slight increase from year-ago levels. Safeway's same store sales rose 1.6% in the fourth quarter, however, declining fuel sales offset those gains, the company said.

"We are pleased with the progress we made in 2013," Robert Edwards, Safeway's CEO, said in a press release. " In 2013, we generated our best volume growth since 2006, and we had our best identical-store sales growth in the last five years. At the same time, we continue to pursue strategies to enhance momentum and increase shareholder value. We look forward to continuing progress in 2014."

Safeway shares were rising over 4% in after-hours Wednesday trading.

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