Particulars and Players in Canada Safeway $5.8 Billion Deal

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safewayM&A activity has picked up recently in the Food Retail sector. Taking all things into account, it seems strategic buyers, management and private equity firms are willing to bet multi-billion-dollars on this sector. That kind of money always gets investors’ attention so we wanted to learn all the particulars we could on the recent Safeway sale of its 200 Canadian stores for $5.8 billion (CDN), or about $5.6 billion (US).

Last month, when Sobeys, a wholly owned subsidiary of Nova Scotia-based Empire Company Limited (Toronto: EMP.A), announced a definitive agreement to acquire substantially all of the assets of Canada Safeway Limited for a cash purchase price of $5.8 billion (CDN), they stipulated it would be subject to a working capital adjustment, plus the assumption of certain liabilities. That announcement disclosed Sobeys’ intent to partially finance the acquisition through a $990 million sale leaseback of 68 Safeway stores in western Canada to Crombie REIT, also of Nova Scotia. The Sale Leaseback Transaction announced this week concluded the negotiation process. Proceeds from this transaction will be used to assist in financing of the 200 Canada Safeway stores.

Empire also committed to purchase $150 million of Crombie Class B Limited Partnership shares.

Sobeys, as tenant, will enter into fully net leases for each of the properties. The aggregate annual basic rent under all the Sobeys leases is $57.1 million, a 5.8% cap rate based on income, increasing annually by 1.5% per year, with such increases phased in over time and applied to 20% of the properties in each year following the closing. Being fully net to the landlord, Sobeys shall be responsible for all taxes, insurance, maintenance and structural repairs during the term of the lease. Each lease will be based on an initial term of three years and thereafter alternate between successive terms of two years and three years until an outside date for each property is between 15 and 20 years with options of up to ten consecutive years and further options of five years each.

Crombie REIT has announced that in order to partially finance the Sale Leaseback it entered into an agreement to sell a syndicate of underwriters on a bought deal basis approximately $225 million of options convertible into Crombie REIT trust shares, and $75 million principal amount of extendible convertible debentures exchangeable into Crombie REIT trust shares.

Meanwhile, Empire announced that it has entered into an underwriting agreement to sell 21.1 million options, at a price of $76 per share, for aggregate gross proceeds of $1.6 billion, to a syndicate of underwriters, co-led by Scotiabank and BMO Capital Markets and including CIBC, National Bank Financial Inc., RBC Capital Markets, TD Securities Inc., Desjardins Securities Inc. and Barclays Capital Canada Inc. Empire has also granted the Underwriters an over-allotment option, exercisable in whole or in part at any time until 30 days following the closing of the Offering, to purchase up to an additional 3.2 million shares for additional gross proceeds of up to $240.54 million to cover over-allotments, if any, and for market stabilization purposes.

Empire also reached two separate agreements during this process to sell 46 movie theaters that it owns in Canada. Shares of Empire were up by 31.54% in the first half of the year, to close at $81.70 on August 2.

Sobeys owns or franchises more than 1,300 stores across Canada under several banners that include Sobeys, IGA, Foodland, FreshCo, and Thrifty Foods.

Since Safeway (NYSE: SWY) agreed to sell its Canadian operations for $5.8 billion Safeway’s stock rose by 27.67% in the first half of the year closing at $25.37 on Friday August 2.

Experts in the field such as Andrew Wolf, an analyst with BB&T Capital Markets remarked with full certainty on the sector, “Overall, things are getting ‘less worse’ for the industry with the economy improving.”  Still to come is the potential sale of all or part of Tesco’s Fresh & Easy chain in the Southwest.