Customers leave a Safeway store on March 5, 2014 in San Francisco, California.
Running a traditional US supermarket chain is an increasingly tough business. Shoppers are looking for convenience, are harder to please - flocking to discount outlets or those selling high-quality organic produce - and have become less loyal customers.
But companies such as Safeway - which agreed on Thursday to be acquired by a Cerberus Capital Management-led consortium for $9bn - still provide the steady cash flows and valuable property portfolios that attract investment groups.
( Read more: How the least-loyal generation is shaping retail)
Private equity companies have long been interested in the supermarket sector. Safeway was itself taken over in an 1986 leveraged buyout by a group led by KKR, which made $7bn on an initial investment of $100m. Cerberus and Supervalu together bought and divided Albertsons in 2006, then Cerberus last year bought the rest of the chain from its partner.
The most recent deal for California-based Safeway - which will combine its stores with Albertsons - is one of the biggest leveraged buyouts since the financial crisis and underscores how the prevalence of cheap debt financing has encouraged private equity firms to consider larger deals. More from the FT
Cerberus leads $9 billion bid for Safeway
Safeway - three is a crowd
Safeway 'poison pill' boosts shares
But the transaction is also strategic and combines two competitors to create the third-largest grocery retailer by revenues after Walmart and Kroger, amid an industry-wide shake-up in response to changing consumer shopping habits.
"There are a number of struggling grocery stores and as public companies they are difficult to turn around because of the hard decisions they have to make, such as shuttering stores," said Joseph Agnese, analyst at S&P Capital IQ. "To compete with lower priced competitors most aggressively it is better to make adjustments to the business model out of the Wall Street spotlight."
( Read more:Winners and losers in Safeway deal)
Cerberus has proven to be a highly-effective operator at Albertsons and hopes to turn round the fortunes of Safeway, which has been under longstanding investor pressure to improve earnings.
The grocery retail sector is crowded by players from warehouse club operators like Costco and discount shops such as Dollar General to upscale chains such as Whole Foods Market. Corner stores and farmers markets are pulling in more customers.
Safeway snatched up by PE firm
"As competition heats up and customer needs change we have to adapt," said Bob Miller, chief executive of Idaho-based Albertsons on a conference call. He highlighted the multitude of ways and frequency with which Americans are now shopping.
Cerberus and its partners plan to combine its roughly 1,000 Albertson's stores with Safeway's more than 1,300. In a business where scale is key the deal would boost the retailer's bargaining power with food manufacturers and drive down costs through more efficient supply chains. The combined company would have more than $60bn in revenues - Kroger has $100bn.
Analysts said the terms of the deal looked favourable to Cerberus, indicating that buyers for Safeway were few and far between. "We believe the current offer undervalues Safeway," said Deutsche Bank analyst Karen Short, who estimates Safeway's store portfolio alone is worth $8bn.
( Read more: More M&A activity to come: Scaramucci)
The deal includes a "go-shop" period, during which Safeway can actively solicit other offers. Kroger has been reported as a potential counter bidder. But analysts say it is probably interested in any asset disposals as a result of the proposed deal, rather than making a rival offer that could lead to even greater antitrust issues.
Running a traditional US supermarket chain is an increasingly tough business, but companies such as Safeway still provide steady cash flows.
Original Post by: http://ift.tt/1fRYDaL
http://ift.tt/1fRYDaL