Activist investor Jana Partners reported a 6.2 percent stake in Safeway in September, saying the company's shares are undervalued, and it held talks with Safeway management about reviewing strategic alternatives.
In response to Jana's disclosure, Safeway had adopted a so-called poison pill to prevent an unwanted takeover of the company. Its board also had authorized $2 billion in stock repurchases and announced plans to exit the Chicago market.
Deliberations over a potential buyout are at an early stage, and it remains unclear if a bid will materialize for Safeway.
But private equity's interest in Safeway underscores how buoyant debt markets have encouraged more firms to consider larger deals approaching $10 billion, which had largely remained elusive since the financial crisis.
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In the most striking example this year, Blackstone Group, KKR & Co, Carlyle Group and Singapore's state investor Temasek Holdings joined forces to make an unsuccessful $11 billion bid for Life Technologies Corp.
Cerberus is no stranger to the supermarket sector. In January, a Cerberus-led investor group acquired a group of grocery chains from Supervalu, including Albertsons and Jewel-Osco, for $3.3 billion.
Prior to that transaction, Cerberus already owned 650 Albertsons locations as a result of 2006 deal under which the chain was acquired and its stores broken up between the private equity investor, Supervalu and CVS Caremark.
Safeway was in the hands of private equity before. KKR took Safeway private in 1986, and then sold its stake in 1999 to make more than $7 billion on its original investment.
Grocery deals on the rise
Safeway and other mainstream U.S. grocery retailers have faced mounting pressure from competitors such as Whole Foods Market at the high end, and from dollar stores and mass retailers such as Dollar General and Wal-Mart at the lower end.
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This pressure has driven deals in the grocery sector.
In July, Kroger acquired regional grocer Harris Teeter Supermarkets for $2.5 billion, while grocery distributor Spartan Stores acquired Nash Finch to become the largest food supplier to U.S. military stores.
In May, Belgium-based food retailer Delhaize sold three U.S. supermarket chains to rival Bi-Lo Holdings for $265 million.
Even before Jana's activist campaign, Safeway was looking to streamline by selling off non-core businesses. The company spun off its gift card provider, Blackhawk Network Holdings, into a separate publicly traded company, selling a 19 percent stake.
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It also sold off its Canadian operations to Empire Co, the operator of Canadian retailer Sobeys, for $5.8 billion in cash in June.