Monday, June 17, 2013

Sobeys Leaps To The Top In Oil Rich Alberta, Acquires 213 Grocery Stores From Safeway (market share Loblaws)

        June 12th was a big day for Nova Scotia's biggest company Empire Company Limited (tsx:emp.a).  On that day, Safeway (nyse:swy) agreed to sell it 213 grocery stores for C$5.8 billion.  Sobeys last major move was a 1999 deal involving the Oshawa Group, that takeover only cost the company $1.5 billion but added more than $4 billion in annual sales and increased the number of locations by a factor of two.
The Safeway deal makes sense for Sobeys on a couple fronts. 
1) cost savings !  synergies of $200 million per annum averaged over the next three years.
2) Gives it grocery stores in sought after locations
3) Sobeys becomes a truly national grocery chain (large format supermarket locations go from 3 to 78 in British Columbia) 4) Gives it a leading market share position in Alberta which is significant for a couple reasons  i) Alberta's population growth is the highest among Canadian provinces ii) Alberta household income is some $15,000 higher than the national average meaning consumers could be more open to buying higher priced premium items (private label organic products have a higher profit margin).   July update - Sobeys parent company Empire Co exits the theater business by selling 44 theaters housing 349 screens for $255 million cash.  24 cinemas in Atlantic Canada (179 screens) will go to Cineplex for $200 million.  Landmark Cinemas is paying $55 million for the 20 Empire theatres in the rest of Canada (170 screens).  This is consistent with Empire Company's original plan to use $1 billion from asset sales to pay for Safeway (at fiscal 2013 year end the company had only $455m in cash).

The facts
- Sobeys pro forma annual revenue goes from $16 billion to $24 billion.
- 168 of the 223 Safeway stores (213 grocery, 10 liquor) are in British Columbia (75) and Alberta (93).  49 in Saskatchewan (33) and Manitoba (16).  Another 6 are in Ontario.
- Sobeys also gets 10 liquor stores (already has 29 lcbo stores most in Alberta) and 12 manufacturing facilities.  199 in store pharmacies, 62 fuel stations.
- Fuel business is growing !  189 gas stations in Quebec, 71 in Atlantic Canada and now 62 more in Western Canada.
- In the first half of 2013 $515.1m of the $780.5m in new revenue came from gas sales.  Boosting sales of gas is an effective way to increase revenue and cash flow. 
- As large a deal as it is, the Safeway acquisition doesn't give the company any additional market share in Quebec, and doesn't make much of a difference in Ontario (6 Safeway locations).  All of Ontario's grocery market share is held by Loblaws, Metro Inc, and Sobeys.  Sobeys needs organic growth there, acquisitions are not really an option.

A Next Move For Sobeys

Sobeys is in an enviable position.  Target (nyse:tgt) is allowing Sobeys to sell its own Compliments branded items at new Target stores across Canada.  Sobeys leads in grocery market share in Atlantic Canada, and discount chain FreshCo is having a lot of success competing with Loblaws and No Frills in Ontario.  Sobeys arguably runs a more diversified business than Loblaw Companies and that makes it a great investment.  Loblaws does have something Sobeys doesn't, a clothing business, but with pressure on apparel suppliers in Bangladesh to spend more refurbishing factories, increasing wages, profit margins may also be under pressure.
  •  Lawtons can compete with Shoppers Drug Mart on a national scale.