DBRS Confirms Safeway’s Ratings After Sale of Canadian Operations

DBRS has today confirmed the Issuer Rating and Senior Unsecured Debt rating of Safeway Inc. (Safeway or the Company) and the Second Series Notes rating of Canada Safeway Limited (Canada Safeway; guaranteed by Safeway Inc.) at BBB and the Company’s Commercial Paper rating at R-2 (middle). All trends are Stable. The confirmation follows the Company’s announcement that it has entered into an agreement to sell its Canadian operations through a sale of the net assets of Canada Safeway to Sobeys Inc. (rated BBB, Under Review with Negative Implications) for $5.8 billion in cash (approximately $4.0 billion in proceeds after taxes and expenses (the Transaction)).

Based on Canada Safeway’s historically stable operating performance, DBRS views the consideration received to be an attractive valuation. In the last 12 months ended Q1 2013, Canada Safeway generated approximately $6.7 billion in revenue and $544 million in EBITDA. While the Transaction reduces the Company’s size and geographic diversification somewhat (Canada Safeway represented approximately 15% of the Company’s consolidated revenues), Safeway’s ratings continue to be supported by its strong brand, large relative scale and geographic diversification in the United States. The ratings also continue to reflect the intense competitive environment, Safeway’s lack of format diversification, sensitivity to economic cycles and high cost structure.

On Dec. 1, 2011, DBRS confirmed Safeway’s long-term rating following the announcement of its accelerated share repurchase program based on the expectation that higher leverage levels would be temporary and should recover to levels that are more appropriate for the current rating (i.e., lease-adjusted debt-to-EBITDAR of approximately 2.8 times) by the end of 2013. The Company was expected to achieve this through a combination of growth in operating income, the monetization of certain assets and the application of an appropriate level of free cash flow toward debt reduction. As of Q1 2013, DBRS believed Safeway still had the capability to achieve requested credit metrics, but noted it would be more challenging than originally anticipated due primarily to weaker-than-expected operating income.

In terms of the Transaction, Safeway has indicated that proceeds will be used to repay approximately $2 billion of existing indebtedness with the remainder available for share repurchases and investment in growth opportunities. DBRS notes that the divestiture and associated debt repayment will significantly improve the Company’s ability to meet or even exceed original leverage targets. DBRS therefore believes that at the completion of Safeway’s deleveraging plans, expected by the end of 2013, the Company’s financial profile will be well placed within the current rating category. As such, any rating action going forward would likely be based on material improvement or deterioration in operating performance.

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.