Will Kroger Cut Cerberus in the Checkout Line for Safeway?

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Private-equity firm Cerberus Management LP is trying to secure its more than $9 billion deal to acquire the grocery store chain Safeway (NYSE:SFY), but there’s only one thing getting in its way: Kroger (NYSE:KR). According to the Wall Street Journal, the firm had hoped it was a done deal, offering to pay around $40 per share for Safeway, slightly above its current price, but then Kroger stepped in.

This week, reports indicate that the Cincinnati, Ohio-based company is now considering its own bid for the nation’s second-largest grocery store. It’s not clear whether Kroger is interested in buying all or part of Safeway, and it is still likely that Cerberus will emerge as the victor in a deal, but Kroger’s disruption has delayed Cerberus’s deal with Safeway, and the firm would like to get the show on the road.

Safeway has more than 1,300 stores and is the second-largest supermarket chain in the U.S. after Kroger by revenue, according to the Wall Street Journal. Its shares are currently trading at around $39.48. Safeway’s executives have been urged toward a possible sale of the company by advice from hedge funds like Jana Partners LLC to trim its store count and return capital to investors. Since then, Safeway has listened to investors by guaranteeing that it will exit the Chicago market and sell most of its seventy-two Dominick’s grocery stores, closing the rest.

Safeway’s stock has climbed more than 60 percent over the past year, and Cerberus sees it as high time to acquire the company. As mentioned before, Cerberus is offering to pay around $40 per share for Safeway, slightly above its current price, which values the deal at more than $9 billion. That would make for one of the largest supermarket mergers in recent years, the Journal says.

Cerberus already bought Supervalu’s (NYSE:SVU) Albertsons stores and four of its other chains last year. Considering that a deal between Cerberus and Safeway would represent the latest big supermarket takeover for the New York-based firm, Kroger isn’t sure it wants to give Cerberus that much power. The deal would put Cerberus in a good position to upset much of Kroger’s business.

To intervene, Kroger might throw a bid at Safeway, even though antitrust legislation would likely arise. Nonetheless, Safeway is still Kroger’s rival, and with Safeway’s willingness to accept bids, Kroger would be crazy to not at least give it a go — that is, if the company can afford it.

Kroger and Safeway’s businesses are both in insecure positions thanks to the current state of the grocery industry. Studies show that an increasing number of consumers are getting their groceries at big-box retailers like Wal-Mart (NYSE:WMT) and Target (NYSE:TGT), or going the expensive route and going to places like Whole Foods Market (NYSE:WFM). The room for grocery success is slowly shrinking. It’s important that the two companies have a game strategy. The grocery industry is only expected to get more crowded, and there’s not much room at the top.

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