Reorganization Likely In the Near Future: Safeway Inc. (SWY)

Long-Term Prospects and Likely Outcome

2012 was a difficult year for many supermarket chains. Although consumer spending has improved dramatically, many North American shoppers appear to have switched their shopping allegiances from regional food-centric supermarket chains owned by companies like Safeway and SUPERVALU INC. (NYSE:SVU) to big-box discounters like Wal-Mart Stores, Inc. (NYSE:WMT) and Target Corporation (NYSE:TGT) .  Giants like Wal-Mart and Target, with sales of $464 billion and $71 billion, are able to source food products in larger quantities and receive lower per-unit costs in many cases.  Compared to Supervalu, operating margins at Wal-Mart and Target are about 3x larger.

Supervalu’s recent near-liquidation at the hands of Cerberus Capital Management is the most visible example of the declining health of many old-line supermarkets. However, it’s clear that Safeway’s apparent desire to divest from its non-core Blackhawk brand is linked to this trend as well. In fact, the chain’s earnings have dropped by at least 15 percent since 2010. As Wal-Mart and Target continue to expand their grocery and dry-goods offerings, traditional supermarket companies will need to adapt. Absent such flexibility, a wave of consolidation could rock the industry.

It is clear that Safeway’s shareholders approve of this proposed spin-off. News that a deal was in the works has caused the company’s shares to rise from early-September lows near $16 per share to $19.50 per share as of early February. For long-term Safeway stockholders, this represents a premium of about 22 percent.

Absent a pending spin-off, it is likely that Safeway’s shares would be headed on a steady downward trajectory. As such, the Blackhawk issue appears to be helping the company to a tremendous degree. Opportunistic investors who wish to profit from this news-driven price appreciation and get in on the ground floor of Blackhawk’s potential IPO would do well to watch Safeway at these levels.

The article Reorganization Likely In the Near Future originally appeared on Fool.com and is written by Mike Thiessen.

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