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Cerberus-Backed Albertsons to Buy Safeway for $40 A Share

NEW YORK (TheStreet) -- Safeway (SWY) said on Thursday it has agreed to be acquired by privately-held supermarket chain Albertsons for $40 a share, in a major consolidation of the supermarket industry. The deal also means private equity firm Cerberus Capital Management is pushing headlong into the supermarket industry after buying Albertsons from Supervalu (SVU - Get Report) in early 2013.

Cerberus-backed Albertsons will offer Safeway shareholders $32.50 a share in cash, in addition to a contingent consideration worth an estimated $3.65 a share and a distribution of stock in Blackhawk Network Holdings (HAWK) worth $3.95 a share. The latter distribution was announced in February as part of Safeway's 2014 outlook.

Overall, the deal represents a cash payment to Safeway shareholders at a discount to current market prices and little overall upside from current share prices. Safeway closed Thursday trading at $39.47.

AB Acquisition, the parent of Albertsons, plans to fund its Safeway acquisition with debt financing of approximately $7.6 billion, in addition to equity contributions from its investor consortium. controlled by Cerberus Capital Management, which also includes Kimco Realty Corporation KIM, Klaff Realty, Lubert-Adler Partners and Schottenstein Stores Corp.

The deal stipulates that Safeway will conduct a 45-day "go shop" to seek a higher bid than AB Acquisition's $40 a share offer. Supermarket giant Kroger (KR - Get Report) has been reported as a possible buyer of Safeway, however, a deal may raise antitrust concerns. 

In mid-February, Pleasanton, Calif-based Safeway said it was in talks concerning a possible sale of the company and disclosed a plan to distribute its remaining 37.8 million share interest in Blackhawk to shareholders in a tax-free manner.

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The disclosure of a deal on Thursday ends months of speculation that the company was in the process of selling itself. In October, Reuters reported that Safeway had hired Goldman Sachs (GS) 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.

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.

Now, Safeway has a takeover deal on the table from Albertsons' parent, AB Acquisition.

Thursday's deal will offer Safeway shareholders a cash payment of less than the company's stock price, and a small overall premium. Safeway shares, however, have gained over 21% as speculation of a deal mounted. Shares are also up over 60% over the past 12 months as the company repaired its balance sheet and began to field takeover offers.

The contingent portion of the deal will rely upon the sale of some Safeway real estate assets and the monetization of its 49% equity stake in Mexico-based food and general merchandise retailer Casa Ley.

"If the sales of PDC and/or Casa Ley are completed prior to the closing of the Merger, the net proceeds from these sales will be paid to shareholders at or before the closing of the Merger in a special dividend," Safeway and Albertsons said in a joint statement.

If the PDC sale and/or Casa Ley sales are not completed by the closing of the Merger, Safeway shareholders will receive non-transferable contingent value rights that mature in two years and four years, respectively. Both companies gave no assurances that Safeway would be able to sell either or both of those assets.

"This Merger is one of several actions we have taken in recent months as a result of our strategic business review. The combined value of the transactions described above is expected to deliver a premium to Safeway's shareholders of 72% from one year ago, and 56% over the share price six months ago," Robert Edwards, Safeway's CEO said in a statement.

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.

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