fareastwarriors Posted June 13, 2013 Share Posted June 13, 2013 http://www.bloomberg.com/news/2013-06-12/empire-s-sobeys-to-buy-safeway-canada-for-5-7-billion.html Link to comment Share on other sites More sharing options...
sampr01 Posted June 13, 2013 Share Posted June 13, 2013 Analysts are having a bad or what?. calling this deal as mediocre deal, and even some downgrading SWY. :) http://blogs.wsj.com/moneybeat/2013/06/13/safeway-sells-canada-for-a-lot-but-gives-up-a-lot/?mod=WSJ_qtoverview_wsjlatest Safeway Inc. SWY +9.18%, the grocery-store chain, has made its latest restructuring move in selling its Canadian operations for $5.7 billion, nearly equal to Safeway’s entire market cap on Wednesday. ... That the sale was even higher has some analysts gushing Thursday. (Safeway expects to collect closer to $4 billion after taxes, still, that’s about 70% of its current market cap.) ... Link to comment Share on other sites More sharing options...
LC Posted June 13, 2013 Share Posted June 13, 2013 They figure that Safeway will be going out of business, or at least losing money, hence the asset sale. Link to comment Share on other sites More sharing options...
Yours Truly Posted June 13, 2013 Share Posted June 13, 2013 Anyone know what SWY will be doing with this new found cash? combination of debt repayment and share buybacks? $6 billion market cap with $5.7 billion coming in screams undervalued to me Link to comment Share on other sites More sharing options...
Sportgamma Posted June 13, 2013 Share Posted June 13, 2013 I've never been so disappointed to see one of my largest positions go up so much... Why not just buy another 30 or 40% of shares outstanding and THEN sell the Canadian division?? Guess you don´t have to be that disappointed after all. Link to comment Share on other sites More sharing options...
FCharlie Posted June 13, 2013 Author Share Posted June 13, 2013 I've never been so disappointed to see one of my largest positions go up so much... Why not just buy another 30 or 40% of shares outstanding and THEN sell the Canadian division?? Guess you don´t have to be that disappointed after all. Ha! Your post makes me smile... To be honest, I hated the deal at first when the stock was up at $29 after hours yesterday. Now it's not so bad. $2 billion share repurchase at $29= 68 million shares repurchased. $2 billion share repurchase at $24= 83 million shares repurchased. It makes a difference going forward. Amazing that the current market cap for Safeway is equal to the sale price of the Canadian division. They also own $1 billion of BlackHawk. The market seems to be saying the U.S. division is worthless. Link to comment Share on other sites More sharing options...
rmitz Posted June 13, 2013 Share Posted June 13, 2013 I've never been so disappointed to see one of my largest positions go up so much... Why not just buy another 30 or 40% of shares outstanding and THEN sell the Canadian division?? Guess you don´t have to be that disappointed after all. Ha! Your post makes me smile... To be honest, I hated the deal at first when the stock was up at $29 after hours yesterday. Now it's not so bad. $2 billion share repurchase at $29= 68 million shares repurchased. $2 billion share repurchase at $24= 83 million shares repurchased. It makes a difference going forward. Amazing that the current market cap for Safeway is equal to the sale price of the Canadian division. They also own $1 billion of BlackHawk. The market seems to be saying the U.S. division is worthless. None of that cash comes in until Q4 though, so they won't be repurchasing for a while, unless they use FCF. Anything can happen in that time. Link to comment Share on other sites More sharing options...
rmitz Posted June 13, 2013 Share Posted June 13, 2013 Anyone know what SWY will be doing with this new found cash? combination of debt repayment and share buybacks? $6 billion market cap with $5.7 billion coming in screams undervalued to me Only C$4b after taxes, but yeah. And yes, roughly half and half is their allocation strategy, plus some amount to "growth opportunities", which I think they just threw in there as a hedge in case something else came along. Link to comment Share on other sites More sharing options...
Sportgamma Posted June 13, 2013 Share Posted June 13, 2013 I've never been so disappointed to see one of my largest positions go up so much... Why not just buy another 30 or 40% of shares outstanding and THEN sell the Canadian division?? Guess you don´t have to be that disappointed after all. Ha! Your post makes me smile... To be honest, I hated the deal at first when the stock was up at $29 after hours yesterday. Now it's not so bad. $2 billion share repurchase at $29= 68 million shares repurchased. $2 billion share repurchase at $24= 83 million shares repurchased. It makes a difference going forward. Amazing that the current market cap for Safeway is equal to the sale price of the Canadian division. They also own $1 billion of BlackHawk. The market seems to be saying the U.S. division is worthless. Lets assume an average price of $26, that would equal 32.5% of shares outstanding and we´re only talking about the share repurchase. So much about this stock surprises me. Every time I see an analyst quoted about the stock there always a mention about how they are not growing or that they are loosing market share but when you read what the management is saying they seem to be more concerned about developing spin-off businesses with low capital requirements and allocating capital to shareholders in an efficient way. I think BlackHawk and PDC are a testament on how well they are allocating capital. I´m just going to sit back and enjoy the ride. Link to comment Share on other sites More sharing options...
LC Posted June 13, 2013 Share Posted June 13, 2013 Anyone know what SWY will be doing with this new found cash? combination of debt repayment and share buybacks? $6 billion market cap with $5.7 billion coming in screams undervalued to me Remember they have about 5b of debt, including an underfunded PBO. I'm not sure what they plan on using the cash for. I would hope they pay off a bit of debt (at least anything related to the Canadian operations) then keep buying back more stock. Their last five years of buy backs have been impressive. I think cash from US operations should be enough to cover their interest and pension issues. I will say their Canadian ops have been far superior to their US ops, probably due to less competition. The revenue split was 85-15 between the US and Canada, but the operating income split was 67-23 Link to comment Share on other sites More sharing options...
sampr01 Posted June 13, 2013 Share Posted June 13, 2013 Questions is what is the ultimate value of SWY after this sale. They are said they will pay off debt $2b and buyback shares with rest. Anyone know what SWY will be doing with this new found cash? combination of debt repayment and share buybacks? $6 billion market cap with $5.7 billion coming in screams undervalued to me Remember they have about 5b of debt, including an underfunded PBO. I'm not sure what they plan on using the cash for. I would hope they pay off a bit of debt (at least anything related to the Canadian operations) then keep buying back more stock. Their last five years of buy backs have been impressive. I think cash from US operations should be enough to cover their interest and pension issues. I will say their Canadian ops have been far superior to their US ops, probably due to less competition. The revenue split was 85-15 between the US and Canada, but the operating income split was 67-23 Link to comment Share on other sites More sharing options...
mcliu Posted June 13, 2013 Share Posted June 13, 2013 Yeah, I was wondering the same. Does anyone know what the remaining U.S. EBITDA looks like post-transaction? Link to comment Share on other sites More sharing options...
LC Posted June 13, 2013 Share Posted June 13, 2013 well...you have a US operation which will (i'm guesstimating) will generate around 600m of FCF. Safeway generated 900m in FCF last year. Canada generated 23% of their op. inc. last year, so if you take that percentage you're looking at US ops generating $690m of FCF....but let's be conservative and say $600m) then you're looking at 4.9b of long term debt...if they pay that down with 2b, you can cut interest payments from ~260m per year to ~155m per year. This adds about $65m to the bottom line after tax So now if you're running at $665m of FCF, and you have about 2 billion of cash for buybacks, the market is only pricing your operations at 6.0x free cash flow. If you take the split as per their share of operating incomes ($693m FCF + $65m of interest savings), the market is assigning a FCF multiple of 5.3x Link to comment Share on other sites More sharing options...
FCharlie Posted June 13, 2013 Author Share Posted June 13, 2013 well...you have a US operation which will (i'm guesstimating) will generate around 600m of FCF. Safeway generated 900m in FCF last year. Canada generated 23% of their op. inc. last year, so if you take that percentage you're looking at US ops generating $690m of FCF....but let's be conservative and say $600m) then you're looking at 4.9b of long term debt...if they pay that down with 2b, you can cut interest payments from ~260m per year to ~155m per year. This adds about $65m to the bottom line after tax So now if you're running at $665m of FCF, and you have about 2 billion of cash for buybacks, the market is only pricing your operations at 6.0x free cash flow. If you take the split as per their share of operating incomes ($693m FCF + $65m of interest savings), the market is assigning a FCF multiple of 5.3x LC, You're estimates are very close to my estimates. I have been thinking $600 million free cash flow excluding Canada. I'm thinking $4.8 billion for debt at year end 2013 so $2.8 billion after using proceeds from this transaction. I'm also thinking $65 million interest expense savings after tax from debt repayment. If we assume $2 billion of share repurchase at $26, then add in a couple hundred million more for share repurchase from 2014 free cash flow you end up with about 150 million total shares outstanding when the dust settles. That would be a 16% free cash flow yield on today's stock price. We'll have to wait for further information about how much real estate is being sold in this transaction. As of now Safeway has about $37 per share of land & buildings at cost. They will probably lose over 100 owned locations but most of the PDC property is domestic so we may see real estate per share actually rise dramatically because of this transaction. Overall, I don't like the transaction. Just my opinion. I say just continue doing business as usual and continue to buy back stock. If the market wants to value domestic Safeway at next to nothing so be it. The market is there to be taken advantage of and the best way to take advantage would be simply buying back stock. Link to comment Share on other sites More sharing options...
LC Posted June 13, 2013 Share Posted June 13, 2013 FCharlie, I agree with just about your entire post. I don't think it was a bad deal, I think it was a fair deal. The reason I say that is that I believe increased competition in western Canada will have a reductive effect on the margins of those stores. So if we say something like 300m of FCF from Canadian ops, at a price of 5.7b you're looking at 19x FCF before tax or 13.3x after tax. I think that is a fair price. And if margins do wind up eroding in Canada, they will have made a good deal. Why the market doesn't seem to care is beyond me, but I agree that the best thing they can do is simply buy back shares at excellent yields. Link to comment Share on other sites More sharing options...
mcliu Posted June 14, 2013 Share Posted June 14, 2013 Is your FCF figure after-tax and cash interest? So, free cash flow to equity holders? Link to comment Share on other sites More sharing options...
LC Posted June 14, 2013 Share Posted June 14, 2013 Is your FCF figure after-tax and cash interest? So, free cash flow to equity holders? I took cash from operating activities and added back the after tax effects of cash from the sale (4bln) and after tax interest savings from debt reductions. Link to comment Share on other sites More sharing options...
fareastwarriors Posted June 14, 2013 Share Posted June 14, 2013 It's still trending down. That's amazing. I guess the market is pessimistic on the U.S. operations. Link to comment Share on other sites More sharing options...
mcliu Posted June 14, 2013 Share Posted June 14, 2013 Thanks LC. Are you guys adding in the amount of FCF generated between now and closing? ~$600M? What do you think should be a fair multiple given the declining profits? Link to comment Share on other sites More sharing options...
LC Posted June 14, 2013 Share Posted June 14, 2013 I figure 600m is a conservative estimate of FY2013 free cash flow. Add 65m of after tax interest reductions and you have 665m FCF. Market cap is 5.9 bln....less 2 bln of buybacks...3.9 bln. The market puts their operations at 5.9x FCF. Kroger's FCF was 750m in 2012...yet their market cap is 18bln. Krogers seems to be a better run organization, but Safeway seems way more undervalued by the market. Link to comment Share on other sites More sharing options...
krazeenyc Posted June 14, 2013 Share Posted June 14, 2013 Why is everyone focusing on Market Cap as opposed to EV? EV is fairly high taking into account the debt and pension shortfall. As long as things stay status quo this investment will be great. But if rates spike and business deteriorates faster what does the downside look like? Also : Management is saying they are basically not going to do buybacks until after the deal closes and they plan to use the FCF generated this year as well as 2 of the 4 billion they generate to pay down debt. And the other 2 billion to do buybacks. Link to comment Share on other sites More sharing options...
mcliu Posted June 15, 2013 Share Posted June 15, 2013 Yes, by the time the deal closes, you're probably looking at a market cap of ~3.2 billion vs. a FCFE of ~$550-570 million. Debt levels should be around 3.2x EBITDA, consistent with pre-transaction, although it will be relatively higher vs. equity. I can't seem to get to the $600M FCFE though, it seems like without Canada, FCFE will be closer to $500M than $600M. Ultimately, as a minority shareholder, what you're getting is the FCFE, so that's a better metric for returns. Although, for comparable purposes, it's probably better to look at the firm unlevered. Link to comment Share on other sites More sharing options...
LC Posted June 15, 2013 Share Posted June 15, 2013 How did you come to the 500-570m FCF? I got to the 600m number by dividing 2012 FCF by the breakout of operating income in US vs CA. Actually when I broke out FCF per each country's share of Op Inc, it breaks down into aprox 690m FCF in the US...so I was conservative by estimating 600m. Am I missing something? Link to comment Share on other sites More sharing options...
mcliu Posted June 16, 2013 Share Posted June 16, 2013 I'm getting ~$760M in TTM FCFE and then I'm backing out around ~$250M in Canada FCFE (assuming that capex is somewhere close to depreciation). Link to comment Share on other sites More sharing options...
Rabbitisrich Posted June 16, 2013 Share Posted June 16, 2013 I think that FCF should add cash from asset dispositions to the capex figure. Those cash flows are not recurring from core operations. There should also be some adjustment for the pension gap in either the FCF calculation, or when comparing it to EV. The higher contributions in 2012 and 2011 are partly repayments of the 2010 deferral. Using the company's method of calculating FCF mixes in some financing activities. Link to comment Share on other sites More sharing options...
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