DBRS Places Sobeys Ratings Under Review with Negative Implications

DBRS has today placed the ratings of Sobeys Inc. (Sobeys or the Company, rated BBB) Under Review with Negative Implications following the Company’s announcement that it has reached a definitive agreement with Safeway Inc. (Safeway, rated BBB) to acquire substantially all of the assets of Canada Safeway Limited (Canada Safeway) for approximately $5.8 billion in an all-cash transaction (the Transaction). The closing of the Transaction is subject to customary closing conditions, including the approval of Competition Bureau Canada, which is expected to occur in the fall of 2013.

The Transaction is expected to be financed through a combination of: (1) a $1.825 billion term loan and the issuance of $800 million in unsecured notes by Sobeys; (2) a $1.5 billion Empire Company Limited equity offering; (3) a planned $1.0 billion sale-leaseback of acquired real estate assets; (4) other real estate and non-core asset sales; and (5) available cash-on-hand. As some of the above-listed financing sources may not be available or completed by the time of the Transaction’s closing, Bank of Nova Scotia has provided Sobeys with fully committed credit facilities for the full purchase price plus Transaction expenses required for closing.

The assets to be purchased by Sobeys from Safeway include:

(1) A total of 213 full-service grocery stores under the Safeway banner, located predominantly in Western Canada. These locations include 199 in-store pharmacies and 62 co-located fuel stations. Approximately half of the acquired store locations include owned unencumbered real estate with an estimated aggregate third-party appraised value of $1.8 billion.

(2) Ten liquor stores.

(3) Four primary distribution centres and the related wholesale business.

(4) A total of 12 manufacturing facilities, which manufacture private labels for Canada Safeway and other third parties.

Sobeys expects to realize significant cost synergies through integrating its distribution networks, reducing costs in procurement, administration and marketing, and leveraging the Company’s IT infrastructure. The Company believes it can achieve full-run rate synergies of approximately $200 million over a three-year period.

The Negative Implications of the review status reflect DBRS’s concern that the acquisition may heighten the financial risk profile of Sobeys beyond levels appropriate for the current credit rating category for some period of time. That said, DBRS believes that the Transaction, combined with an adequate deleveraging plan, could likely result in Sobeys’ credit risk profile remaining consistent with an investment grade rating.

In its review, DBRS will focus on: (1) assessing the business risk profile of the combined entity, including the benefits to scale and geographic diversification; (2) the risks associated with achieving synergy potential and integration within the context of an intensifying competitive environment; and (3) Sobeys’ financial risk profile on a pro forma basis and its financial management intentions going forward (particularly with respect to the magnitude and pace of any deleveraging).

DBRS will proceed with its review as more information becomes available and aims to resolve the Under Review status by Transaction closing.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodology is Rating Companies in the Merchandising Industry, which can be found on our website under Methodologies.