Empire Company Ltd., the parent company of Canadian grocery chain, Sobeys Inc., announced late on Wednesday that it will be acquiring Safeway Inc.’s (NYSE: SWY) business in Canada in deal valued at $5.7 billion. The acquisition would allow Sobeys to almost double its presence in the western region of the nation.
Empire said that the purchase of Safeway’s Canadian operations would bring under its control 213 full-service grocery stores in western provinces of Canada along with 4 distribution centers and 12 manufacturing plants. The deal also includes a purchase of real estate, which is estimated at around C$1.8 billion. The deal comes at a time when competition in the Canadian retail industry is intensifying. By acquiring Safeway’s Canadian business, Sobeys will cement its position as the second largest grocery chain. Loblaw Companies Ltd is the largest chain in Canada with U.S. retailers such as Target Corp and Wal-Mart Stores some of the prominent competitors.
The deal is expected to close towards the end of this year. Empire said that the acquisition of Sobey will have an immediate impact on its earnings.
Besides, Empire also expects to save roughly C$200 million, annually, within three years as the acquisition is expected to bring cost synergies. The Company expects substantial reduction in administration, marketing, procurement and distribution costs.
Speaking to Reuters over the deal, Barry Schwartz, a portfolio manager with Baskin Financial which owns in excess of 100,000 shares in Empire said, “We think it is a game changing deal for Empire, “This is a huge win for (Empire Company Ltd) shareholders, and we expect a significant uptick in the stock tomorrow.”
The deal, which is the biggest in terms of value in Canada this year, offers huge premium to Safeway.
Meanwhile, Safeway said that it will use this proceeds towards paying up its own debt and the rest for shares repurchase.
Shares of Safeway rallied almost 30% in afterhours trading.
For the 12 months period ended March 23, Safeway’s Canadian unit reported sales of C$6.7 billion and non-GAAP earnings of C$500 million.
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