Empire, the operator of Canadian grocery chain Sobeys, said it is acquiring Safeway's assets in Canada for $5.7 billion, in a move that will nearly double its reach in the country's western provinces.
The deal—$5.8 billion in Canadian dollars and the country's biggest this year— resulted in generous premiums for Safeway, which said it would use the proceeds to pay down debt and buy back shares. Its shares shot up after the deal was announced Wednesday. (For Safeway's latest stock price, click here.)
Empire will gain control of 213 full-service grocery stores, cementing its position as Canada's No. 2 grocer behind Loblaw at a time when competition from U.S. retailers Wal-Mart Stores and Target is heating up.
"We think it is a game-changing deal for Empire," said Barry Schwartz, a portfolio manager with Baskin Financial, which owns more than 100,000 shares in Empire.
"This is a huge win for [Empire's] shareholders, and we expect a significant uptick in the stock tomorrow" he said Wednesday.
Safeway's Canadian arm generated sales of C$6.7 billion and over C$500 million in adjusted earnings before interest, taxes, depreciation and amortization in the 12 months ended March 23.
The deal is expected to boost Empire's earnings immediately following the close of the transaction late this year.
The company expects roughly C$200 million in annual savings within three years following the close of the deal by integrating distribution networks and reducing procurement, administration and marketing costs.
The all-cash transaction will be financed through equity and debt offerings, along with a lease-back deal on some real estate assets being acquired.
In addition to the grocery stores, it is acquiring about 200 in-store pharmacies, along with some liquor stores, fuel stations and distribution centers.
Empire also said it has identified roughly C$1 billion in noncore assets sales that could that potentially be used to help pay back bridge facilities and other debt.