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Safeway Drops on $9B Merger Deal

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Immediately after the release of its merger news, the share price of prominent supermarket chain Safeway Inc. fell 3.06% in yesterday’s after-market trading reflecting discontent among the investors about the deal price. As was hinted during its fourth quarter 2013 earnings release, Safeway announced that it will merge with Cerberus Capital Management LP’s Albertsons for a deal valued at approximately $9.0 billion.

The deal is expected to close in the fourth quarter of 2014 subject to certain customary closing conditions. However, if the merger agreement fails to close, AB Acquisition, the owner of Albertsons, would pay Safeway $400 million.

As per the terms of the agreement, each shareholder of Safeway will receive $32.50 in cash plus $3.65 per share of other contingent consideration and $3.95 per share of Blackhawk, representing a total value of $40.10 per Safeway share. However, since the merger speculation was disclosed two weeks back, the stock gained 14.0% to reach $39.47 on yesterday’s close. Perhaps, the expectation of the deal price was much higher than what the company finally arrived at.

Currently, the deal price reflects just 1.6% premium from yesterday’s close. This premium does not look too enticing to attract fresh investment.

Rumor of Acquisition Bid by Kroger

According to a recent Bloomberg report, leading U.S. grocery chain The Kroger Co. (KR - Free Report) recently expressed interest to buy part of Safeway’s business. Perhaps, even after the declaration of this deal with Cerberus, this supermarket leader approached Cerberus to buy some of Safeway’s stores.

However, according to Safeway, during the "go-shop" period of 21 days, if any other bidder makes an offer, Safeway has another 15 days to continue discussions on the bid.

Impending Post-Merger Scenario

The last fiscal remained quite eventful for Safeway. The company was in news several times due to the Blackhawk IPO, its exit from the Canadian market, the decision to sell off its Dominic stores and to exit the Chicago market by fiscal 2014, along with its decision to voluntarily recall many of its products. Amid a challenging macroeconomic environment, due to uncertainties related to unemployment rates, energy prices, difficulties in the banking and financial services sectors, and dwindling consumer confidence leading to reduced consumer spending, Safeway continued to experience poor identical stores (ID) sales. Moreover, the sluggish non-fuel ID sales growth guidance for 2014 failed to bring about any positive indication about an improvement in the economy.

However, the company expects to fight back after the completion of the merger deal. After the closure of the agreement, a diversified network will be formed by Albertsons-Safeway with more than 2,400 stores, 27 distribution facilities, 20 manufacturing plants and 250,000 employees. 

Safeway is looking forward to this possible sellout/merger which it expects will improve the merged entity's position in the competitive niche, especially among stalwarts like Kroger and Wal-Mart Stores Inc. (WMT - Free Report) . The combined company is expected to offer more competitive prices and better customer service in a fiercely competitive and dynamic retail market. Notably, Kroger is also expanding its business through inorganic means like acquisitions. Earlier this year, the company acquired regional grocer Harris Teeter Supermarkets for around $2.5 billion.

Currently, Safeway retains a Zacks Rank #5 (Strong Sell). However, retail-supermarket stock Etablissements Delhaize Fr is expected to do well with a Zacks Rank #2 (Buy).

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