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Safeway shares surge after Sobeys deal as grocery wars escalate

These are stories Report on Business is following Thursday, June 13, 2013.

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Safeway climbs
Shares of Safeway Inc. surged today, after the U.S. grocer agreed to sell its Canadian operations to Sobeys Inc.

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As The Globe and Mail's Marina Strauss and Steve Ladurantaye report, Sobeys and Safeway unveiled the $5.8-billion deal late yesterday, one that will make the former a king in western Canada and tops in Alberta.

The sale also adds pressure to Loblaw Cos. Ltd. and comes amid heightened competition in the industry given the heft of Wal-Mart Stores Inc. and Target Corp.

Loblaw and Metro Inc. had both looked at an opportunity for Canadian Safeway.

"It certainly catapults them to be more dominant everywhere between British Columbia and Ontario," analyst Joe Feldman of Telsey Advisory Group," told Bloomberg News.

"Safeway has a leadership position in a lot of the markets up in Canada."

The deal gives Sobeys more than 200 western grocery stores, many gas stations and a dozen manufacturing plants.

"Safeway did not hold an auction for its Canadian assets," said Desjardins analyst Keith Howlett, calling the deal a "major move in the grocery wars chess game."

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"It had a good appreciation of the potential bidders, what they might be willing to pay and how steep the Competition Bureau hurdles for each might be."

For Safeway, which plans to use half of the sale proceeds to eat away at its debt, and buy back shares, the sale is an opportunity to focus on its home base as the new chief executive officer, Robert Edwards, gets up and running.

For Empire Co. Ltd., which owns Sobeys, analysts see it as a positive deal, particularly for earnings in 2015 and 2016.

The Safeway assets fit well with Sobeys, said Mr. Howlett, noting the exceptional level of competition in the industry.

"Given Costco's plans to expand to 110 stores in Canada (from 85 stores today), Wal-Mart's ongoing roll-out of supercentres, Target's inclusion of pantry food sections in almost every store and the possibility of Amazon bringing online groceries to Canada, we do not anticipate the Competition Bureau will have substantial objections to the Empire-Safeway transaction," Mr. Howlett said.

RBC Dominion Securities analyst Andrew Calder, however, isn't so sure.

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He expects a "close review" from antitrust regulators and "meaningful" divestitures to be forced in Alberta, where Sobeys will now own three times the number of stores as its next-largest rival, Loblaw.

Harper pitches trade deal
Canada's prime minister pitched the British parliament on the merits of a Canada-EU trade deal today, saying such an agreement would be a "monumental" step, The Globe and Mail's Paul Waldie reports from London.

"For Canada, and for Great Britain as a member of the EU, this will be a historic step – a monumental one," Stephen Harper said in his prepared remarks.

"A joint Canada-EU study has shown that a commercial agreement of this type would increase two-way trade by 20 per cent."

The two sides are now negotiating.

Mr. Harper also praised his British counterpart's austerity efforts in the post-crisis era.

"I acknowledge and applaud your own leadership in taking tough decisions to rein in spending," he said.

Wilson sold shares under plan
The chairman of Lululemon Athletica Inc. sold almost $50-million (U.S.) of shares a few days before the two-day rout that bloodied the yoga wear retailer's stock, The Wall Street Journal reports today.

Chip Wilson's sales were prearranged under a U.S. trading scheme, 10b5-1. In his case, the plan is to sell more than 5.5 million Lululemon shares over the course of a year and a half, the report said.

A spokesperson for the Vancouver-based company was not immediately available for comment, but the news organization quoted the Lululemon founder's assistant as saying Mr. Wilson had "no influence on trades" done by Merrill Lynch, which oversees the plan.

As the Journal notes, Merrill Lynch, not Mr. Wilson, control the timing of such sales. And, of course, he still owns more than 25 per cent of Lululemon.

"It's reasonable to assume that anyone who owns this much of a company want to diversify his holdings," University of Colorado Boulder professor Alan Jagolinzer told the newspaper.

According to the Journal, Mr. Wilson's selling has been ongoing since May, though the latest, of some 607,545 at $81.50 each, appeared to be the heftiest.

Citing data from InsiderScore, the Journal said some 2 million of his shares were sold between May 10 and June 7, at an average $81.57 each. Such selling has been done in past years, as well, so such sales are not new.

The latest sale was on Friday, the report said, the same day the board of directors was told that Christine Day planned to quit as chief executive officer.

Her plan to leave, as soon as her successor is named, was announced by the company after markets closed Monday, along with Lululemon's strong first-quarter earnings report.

Then on Tuesday, the stock plunged some 17 per cent in reaction, followed by a decline of more than 5 per cent yesterday. Shares rose marginally today.

Analysts are advising investors to wait for the fallout to abate, and for Lululemon to fill Ms. Day's post and get a new team in place. Some have slashed their price targets on the stock, sand some say they expect the shares to rebound.

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About the Author
Report on Business News Editor

Michael Babad is a Report on Business editor and co-author of three business books. He has been with Report on Business for several years, and has also been a reporter and editor at The Toronto Star, The Financial Post and United Press International. His articles have appeared in major newspapers around the world. More

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