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[14 comments]

Safeway Seen as Takeover Target

April 20, 2012

Sentiment among gamblers on Wall Street is that Safeway can be bought on the cheap, at least for a company with earnings above $1 billion, and that Kroger or some other party may move in to acquire the company.

"I wouldn't be surprised to see vultures circling Safeway to see if the wounded prey has any value to it," Todd Lowenstein, a fund manager for Highmark Capital, told Bloomberg News. "They have some good assets and it's been a tough environment. When good assets get priced as if they're in the bargain bin like this, for both strategic and financial buyers, it hits their radar."

Talk about a possible takeover was fueled earlier by Safeway's recent announcement that it was moving to a "double trigger" option where top executives would be required to stay with the company through a buyout to qualify for fully vested payouts.

For its part, Safeway said it was just following "best practices in corporate governance" in adopting the vesting mechanism.

FINANCIALS:     [NYSE:SWY]

Discussion Questions:

Discussion Questions: What are your thoughts on Safeway as a takeover target? Are there likely suitors that you think make the most sense in this scenario?

While we value unfettered opinion, we urge you to show respect and courtesy for people or companies about whom you comment. Keep in mind that this is a public, professional business discussion. RetailWire reserves the right to edit or refuse the publication of remarks that we deem unsuitable. We may also correct for unintended spelling and grammatical errors.

Instant Poll:

How likely is Safeway to be acquired?

Comments:

Clearly they would be in the crosshairs of anybody interested in buying a supermarket chain. The issue, as always, is price.

As to suitors, look around, there aren't that many left.

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Ryan Mathews, Founder, ceo, Black Monk Consulting

I agree with Ryan -- there aren't too many suitors left. Kroger and private equity firms pretty much wrap it up. And the debt burden is too great to make that really work well for say, Kroger.

I don't see a take-over. When the economy begins to recover a bit more, we'll see new vigor in Safeway.

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Liz Crawford, VP, Strategy & Insights, Match Drive

Another shake up in the Grocery Industry is not unusual in this environment today. Safeway for now has some bottom line profits, but the future especially in their home base of California looks very difficult, with the competition stiffening out there. High labor/benefit costs will continue to eat up their bottom line, so I could see a buyer if the price was right.

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Tony Orlando, Owner, Tony O's Supermarket & Catering

According to store counts at supermarketnews.com, Kroger, their ranking of number two and Safeway, their ranking of number five, a take-over by Kroger would put Kroger at approximately 5,336 stores. In comparison, Walmart's store count is 4,750.

Any potential take-over by Kroger would likely throw up an FTC flag and obstacle. Prior smaller take-overs by Kroger have and this one would as well by the nature of its size and impact on the industry. A proposition like this requires the suitor to take the "good" with the "bad." In this case, that is another deterrent.

With respect to the "double trigger" requirement, this is a very normal best practice and is not an indicator of buyout or take-over activity. I think a takeover is unlikely. Safeway will be left to stand or fail on their own. Any potential suitor would have to ask the question, yes the price may be right, but how much do you pay for a losing proposition?

'Scanner'

Mergers and acquisitions are last resort for ultimate survival and/or profitability. However, in my opinion, the larger these national supermarket chains become, the less effective they are on a local level, to offer the consumer what she really wants and needs. In my opinion, this is particularly true when a large retailer such as Safeway, Kroger, or Supervalu, takes over regional banners; it seems that something gets lost in translation.

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David Biernbaum, Senior Marketing and Business Development Consultant, David Biernbaum Associates LLC

For the reasons already mentioned, I don't see this as likely. Maybe a division of Safeway, but not the whole enchilada. Personally, I've noticed a fair amount of nonsensical buzz about Safeway lately from several securities analysts who should know better, and I've wondered about their motivation.

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Warren Thayer, Editor & Managing Partner, Frozen & Refrigerated Buyer

This feels to me like the institutional investors are trying to stir the pot. Safeway share prices are at an ebb and speculators would like to see a bump.

A huge lesson for the supermarket business is that increased size no longer increases rate of profit. Empire building is an act of corporate ego (and it creates activity in the stock market) but in the end, scale economies and buying power are largely nullified by operational complexity and the increased effective distance between HQ and the customers.

David Biernbaum says as much in his commendable comment here. He's right -- the most admired supermarket companies are regional players. Bigger chains don't have better performing stores.

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James Tenser, Principal, VSN Strategies

Everyone likes to mention Kroger because they are one of the few plain vanilla sterile grocery chains that hasn't gone broke yet. Kroger isn't stupid. They know as well as anyone that when you make an acquisition you can expect a 15% decline in sales as you go through the learning curve. Safeway typically performs well below market average in sales per square foot in most of their markets except in California. Why would Kroger want buy below average stores only to see them lose even more volume?

Safeway has been humiliated by many of their past acquisitions. They were run out of Philly and became an industry laughing stock in Illinois and Texas. To distract from their failures they like to send out press releases about health care reform and green initiatives, things that don't increase sales but keeps them in the papers. Perhaps a private equity group could buy the company and break it up. I've been in this business for over 30 years and for the most part Safeway has been closing stores by the bushel. Iowa, Kansas, Nebraska, Oklahoma, Texas, Philly, etc. The only way they have been able to grow is through failed acquisitions.

David Livingston, Principal, DJL Research

"Sentiment," "gamblers" and "may" does not a solid offer make; this sounds like a story in search of reality. Nevertheless, should it find it with Kroger, keeping the West Coast stores and ditching the rest might make some sense, since -- as David notes -- Safeway does (relatively) well here, and K's presence is weak.

'notcom'

Ryan's right -- there are not many suitors left. If someone wants the real estate and Safeway locations then there is value. The question is -- for whom?

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Camille P. Schuster, Ph.D., President, Global Collaborations, Inc.

As Jamie pointed out, store counts don't always lead to profit and I'll add that this is particularly true in grocery, where the mechanics of leveraging site-to-store scale haven't been worked out (for now).

It seems to me that a Kroger/Safeway merge could also raise regulatory flags.

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Carol Spieckerman, President, newmarketbuilders

Like Best Buy, Safeway is susceptible to a takeover bid. Given the empowerment of the digitally connected consumer, retailers, and yes even grocers are finding that their technical infrastructure, associates are simply not equipped and/or innovative enough to deal with the seismic shift that is occurring in the marketplace. The status quo is certainly a walking dinosaur. If enterprise brand retailers are not questioning their brick and mortar relevance and developing strategies to address the reality and speed of the connected consumer, they will be vulnerable to others that will leverage and react to the opportunities.

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Adrian Weidmann, Principal, StoreStream Metrics, LLC

Safeway's Canadian operation has had takeover rumours in the past. And they don't seem to care to much about their Canadian arm as they list their 75 stores in the province of British Columbia as being in the city of Vancouver. Sobey's/Empire Ltd. could increase their western Canada presence with a takeover.

'geohans'

Safeway has huge pension liabilities that may really hurt in the future. Safeway's California assets are what is valuable. Some other random scatterings of good stores in Washington and a few other spots but other than that, this is a chain that has priced itself out of many markets and has become very top heavy and arrogant toward both its customers and those down in lower and middle management positions that have tried to oppose the failed California strategies the company keeps pushing upon markets that are very unlike California... hence all of the failed acquisitions, the low volume stores in Colorado, Arizona, and various other places.

Safeway is the new Albertsons.

'storewanderer'

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