Wal-Mart puts collar on Cerberus price for Safeway
By Robert Cyran
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
Could CerberusÂ pay more for Safeway? Based on the 2007 A&P-Pathmark merger, synergies could be worth more than half the $9.4 billion that the private equity firmâs Albertsons supermarket is paying for its U.S. rival. In theory that leaves room for a higher offer. But competition from the likes of Wal-MartÂ 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 didnât quantify them. A&Pâs purchase of Pathmark seems a reasonable guide. Though smaller, the two companies were otherwise similar â mature grocery chains facing tough times due to rising competition. That merger generated $150 million of annual synergies, or about 1.4 percent of combined sales of $10.9 billion.
Revenue at Cerberusâs 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, thatâs a present value bigger than $5 billion.
Yet even including all the components of the deal â some of which donât offer certain value â 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, itâs 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 Harris Teeter. And if any private equity shops think they can do better, even without synergies, theyâd better hurry â the break fee on the deal with Cerberus rises from $150 million to $250 million for bids that come in after the 21-day âgo shopâ period.
And Cerberus-Albertsons or another industry buyer might not feel able to pay more, anyway. Wal-Mart, the nationâs biggest grocer, has gained market share with cheap prices. Safewayâs 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.