Will Recent News Take Safeway Higher?

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With shares of Safeway (NYSE:SWY) trading around $38, is SWY an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Safeway is a food and drug retailer in North America that operates over 1600 stores. The company’s United States retail operations are located principally in California, Hawaii, Oregon, Washington, Alaska, Colorado, Arizona, Texas, the Chicago metropolitan area, and the Mid-Atlantic region. In support of its retail operations, Safeway has a network of distribution, manufacturing, and food processing facilities. Safeway also owns and operates GroceryWorks.com, an online grocery channel doing business under the names Safeway.com and Vons.com. Safeway also has a 49 percent interest in Casa Ley, S.A. de C.V., which operates 195 food and general merchandise stores in Western Mexico.

Cerberus Capital Management finally has its deal secured. The private-equity firm will buy grocery store chain Safeway in a tie-up valued at $9.4 billion. Cerberus and Safeway’s deal was disclosed late Thursday, and Reuters reported the news Thursday night. The publication highlighted that Cerberus’s offer price of $40 per share represents a premium of 1.3 percent to Safeway’s Thursday closing stock price of $39.47 on the New York Stock Exchange.

It was earlier in February when we first heard rumors that Safeway was considering a sale to Cerberus. The second largest U.S. mainstream grocery store operator has performed well as of late, with its stock climbing more than 60 percent over the past year, but its investors — particularly hedge funds like Jana Partners LLC — have urged Safeway to trim its store count and return capital to investors. That’s where Cerberus comes in. Cerberus is a seasoned investor in the grocery business, and last March, it already acquired a group of grocery chains from Supervalu Inc. (NYSE:SVU), including Albertsons and Jewel-Osco, for $3.3 billion. Now, the New York, New York-based private equity firm can combine Safeway with its Albertsons chain and create a dominant grocery franchise on the West Coast, without shutting any Safeway stores. That will create a grocery network of more than 2,400 stores and 250,000 employees, as reported by Reuters.

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