When constructing a portfolio, an investor should consider the utility of the company he or she is planning on buying. Food, of course, is a staple of our existence, so companies that produce or market food and other kinds of groceries should be at or near the top of the list.
The grocery business in Canada is a highly competitive one, what with discount stores becoming thriving concerns since the last recession hit (has it really let go?) and this week, the competition got at least a little tighter.
Among the major players in the industry is the Sobeys grocery chain based out of Stellarton, Nova Scotia, whose parent company is Empire Company Limited (TSX: EMP.A), and who this week announced a definitive agreement to purchase with Safeway Inc. (NYSE:SWY) to purchase all the assets of Canada Safeway for $5.8 billion.
Besides solidifying Sobeys’ position out West, the buy entails: 213 full-service grocery stores under the Safeway banner in Western Canada, as well as nearly 200 in-store pharmacies with market leading productivity; dozens of fuel stations, 10 liquor stores, four distribution centres and wholesale firms, and 12 manufacturing facilities.
Said Empire President and CEO Paul Sobey, "The acquisition of Canada Safeway represents an excellent strategic fit, strengthening our presence in Western Canada with the addition of great employees, excellent stores and exceptional real estate."
"Canada Safeway," according to the news release announcing the deal on Wednesday, "has an exceptional store network totaling approximately nine million square feet in sought-after locations of which over 60% is located in Vancouver, Calgary, Edmonton and Winnipeg." For the last fiscal year, which ended in March, Canada Safeway generated approximately $6.7 billion of sales and $513 million of adjusted Earnings Before Interest, Taxes, Deprecation and Amortization (EBITDA).
The closing of the deal needs the government go-aheads, all of which the two parties should have by the fall of this year.
But, consumers should think twice before getting too excited about what this will mean for their food prices, experts say.
"The western market is high-priced and we have been predicting for a couple of years that prices would begin to fall as Target builds out grocery square footage and Wal-Mart keeps pressing forward with stores," CIBC analyst Perry Caicco said, adding "this deal brings lower cost-of-goods to Sobeys-Safeway and better allows them to compete. (But) we do not see this deal, in and of itself, triggering any price wars," Caicco said.
Investors were buzzing about the deal on Thursday, however, sending stock prices for Empire to a new 52-week intraday high of $77.00, before settling at $74.77, a solid 10.6% higher than the previous session. The 52-week low of $53.45 was plumbed in the third week of June last year.
