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. 

Grocery Stocks On The Move Carrefour Group CA, Sysco SYY, Sobeys

Food stocks Sysco syy, Carrefour Group and Empire Company Limited provide opportunity for investors at a time when there's not much to be enthusiastic about. 

In Canada a weaker dollar is akin to an interest rate cut discouraging spending in that country.
In the mining industry, weaker gold and silver prices cut into profit margins last year, leading to weaker results (eight of the world's tens largest gold companies reported a drop in earnings last year).

Weak jobs numbers in the United States affects the world's biggest consumer market, making companies involved in the clothing industry riskier investments, and now bank stocks could be hit as a result of ongoing uncertainty in Cyprus.  Confiscating people's bank accounts will undoubtedly cause many in Europe to keep their money out of banks since many of Europe's largest financial institutions are based in Italy and Spain, two countries that could follow Cyprus's example if the Troika's new bailout rules are instituted elsewhere.  Will banks like Banco Santander allow money from client account to be taken in order to pay down national debts ?

 But Grocery Stocks Are Different!

People don't have a choice when it comes to eating.  Stockpiling food isn't something most will be considering either since people are increasingly health concious which makes them reliable on perishable foods (since the alternative is food that's loaded with unhealthy preservatives). 

Grocery stocks have grown nicely over the last year despite the inability of many to hike prices in step with price inflation (Tesco for example reported +1.8% increase in same-store sales for the three months ended January 5, 2013 despite lower market share and lower sales of frozen food).  Also in the UK: grocery industry market growth +3.7% lags general inflation +4.3%.

This month, Empire Company Limited (emp.a) reported a drop in gross profit margin (24% to 23%) and a 32% decline in cash equivalents as well as 6% decline in net earnings but the stock remained in positive terroritory despite that (+12% last three months). The food division, Sobeys profited 8% more but that was because the food division includes gas stations (236 Shell gas stations purchased last year). Sobeys is the second largest grocery retailer in Canada but third largest in Canada's biggest market, Ontario.


Carrefour Group (euronext:ca) is another example of a solid growth stock.  In 2012 the food retailer profited 3.3 times more than the previous year (€1.233 billion) despite a sales increase of just 0.5% and a decline in ebit of -1.6%.  It turns out the company's assets are more valuable that people think !  CEO Georges Plassat has been been busy steering the company in a more profitable direction.  He thought that operating in 30 countries was too demanding and so Carrefour started selling off assets, starting with Greece.  Competition in the countries Carrefour has been exiting is high and that makes its businesses attractive to potential buyers.  Colombian operations were sold for $2.5 billion which represents 20 times enterprise value/ebitda, investors liked the return and the stock moved higher.  In 2012 Carrefour pulled out of five countries.  The money from the asset sales helped the company pay down net debt (€6.9 billion to €4.3 billion).  The next country Carrefour is contemplating leaving is Turkey and you be sure the return it will get for assets there will be at a premium.
Carrefour also has an insurance division that has exposure to South America (35% of 1b net banking income is from Argentina and Brazil).  Carrefour stock price +10.85% last three months, +32.31% last six months.