Safeway Seen Gaining From Market Exits.

Safeway-store1

PLEASANTON, Calif. — Safeway’s decision to sell its Dominick’s division in Chicago is apparently one more step in a concerted turnaround strategy to gain more financial traction, industry observers told SN last week — with the possibility of more asset sales to come.

With the divestiture of Genuardi’s last year, the pending sale of Safeway Canada and the current effort to sell the Chicago stores, “it’s clear Safeway hopes to gain traction,” Neil Stern, senior partner at McMillanDoolittle, Chicago, told SN.

“Safeway is operating profitably but at quite low levels, and it’s just eking out positive comps at the cost of margin. So I see the sale of Genuardi’s and Dominick’s as part of an effort, over the next 12 months or so, of Safeway pulling back to position itself as an equity play or acquisition candidate,” he said.

“Safeway is healthy in Northern California, but the farther out you go from there, the less healthy its assets are. So while the sale of its Canadian stores and the announcement of the sale of Dominick’s may be the end of asset sales for now, Texas remains an outlying area, and the chain’s Eastern division [in the Washington D.C. area] becomes even more isolated.”

Read more: Safeway Cites’ ‘Significant Interest’ in Dominick’s

Karen Short, managing director for Deutsche Bank Securities, New York, also said she believes Texas, among other divisions, “may be under close scrutiny” as an asset sale.

“As Safeway rationalizes its underperforming, less competitive divisions, it will be able to better focus on the markets and regions where it can compete more effectively, especially on the West Coast, which has greater barriers to entry,” Short said.

Chuck Cerankosky, managing director for Northcoast Research, Cleveland, also said he believes Safeway may consider selling additional divisions east of the Rockies “to concentrate on a more contiguous group of stores,” including a possible sale of its eastern division, “which we believe is not generating as much cash as the chain’s stores in the West.”

Scott Mushkin, managing director for Wolfe Research, New York, said the decision to divest Dominick’s is “a great first step” for Safeway in shedding non-core assets so it can invest more in its grocery operations. “We would expect Safeway to continue to divest non-core assets but would also anticipate some purchases that could bolster stronger geographies,” he said.

Safeway President and CEO Robert Edwards

Robert L. Edwards

Talking with analysts earlier this month, Robert Edwards, Safeway’s president and chief executive officer, said the sale of Dominick’s will allow the company to focus “on improving and strengthening our core grocery business.”

Asked by an analyst to define what Safeway regarded as its core markets, Edwards demurred.

“In deciding to exit Chicago, we took action in our lowest-performing division, but past that, I’m not willing to offer any detail.”

Safeway said divesting the Dominick’s operation will generate tax savings of $400 million to $450 million that it will use to offset some of the $1.8 billion capital gains tax it will accrue when it completes the sale of its Canadian assets to Empire Cos.

Because Dominick’s does not have positive cash flow, Safeway will have to sell the 72 Dominick’s stores piecemeal to a variety of buyers, observers pointed out.

“There may be some very strong locations in the chain,” Cerankosky noted, “but Dominick’s as a standalone company has negative EBITDA.”

Industry observers were divided on how successful Safeway will be at finding buyers for all the Dominick’s locations.

John Heinbockel, managing director for Guggenheim Securities, New York, said he anticipates the company may be able to sell 40 of the 72 stores, with proceeds of between $100 million and $150 million.

Cerankosky said he could see up to 30 of the stores going to a single buyer, with between 10 and 20 going to others, “and some may not sell until after they’ve gone dark or else they may end up going to retailers outside the food business.”

He estimated stores might sell for between $1 million and $10 million each.

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