Could Cerberus pay more for Safeway than the $9.4 billion it has offered? Based on the A.&P.-Pathmark merger in 2007, the synergies could be worth well over $5 billion to Cerberus, since it plans to combine the chain with its Albertsons operations. In theory that leaves room for a higher offer. But competition from the likes of Walmart means cost savings may need to go to shoppers, not investors.
Both Safeway and Albertsons executives said in their conference call with investors that there would be significant cost savings, but they didn’t quantify them. A.&P.’s purchase of Pathmark seems a reasonable guide. Though smaller, Safeway and Albertsons are otherwise similar - mature grocery chains facing tough times because of rising competition. That merger generated $150 million a year in synergies, or about 1.4 percent of combined sales of $10.9 billion.
Revenue at Cerberus’s grocery arm and Safeway combined is some $54.7 billion, according to Jefferies research. At this percentage rate, annual savings would run about $750 million. Taxed at 30 percent and put on a multiple of 10, that’s a present value bigger than $5 billion.
Yet even including all the components of the deal - some of which don’t offer certain value - Safeway shareholders are only getting a 17 percent premium, or about $1.4 billion in all, over where their shares traded last month before the company said it was in sale negotiations.
On typical merger logic, that would leave room for a higher bid. Yet although Safeway has an initial three weeks to hunt for one, it’s no certainty.
Kroger, another grocer, would also be able to reap synergies and news reports suggest it showed some interest in Safeway. Yet it is busy digesting its purchase of the Harris Teeter chain. And if any private equity shops think they can do better, even without synergies, they’d better hurry and make a bid. The break-up fee on the deal with Cerberus rises from $150 million to $250 million for bids that come in after the 21-day “go shop†period.
And Cerberus-Albertsons or another industry buyer might not feel able to pay more, anyway. Walmart, the nation’s biggest grocer, has gained market share with cheap prices.
Safeway’s executives made clear that many of the savings from the merger will be plowed back into lower prices. Cerberus may end up snagging Safeway, but customers could be winners, too.
Robert Cyran is a columnist for Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.
