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Originally published June 12, 2013 at 1:48 PM | Page modified June 12, 2013 at 3:01 PM

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Safeway selling supermarkets in Canada

Safeway Inc. is selling its supermarket operations in Canada to food retailer Sobeys for 5.8 billion Canadian dollars ($5.7 billion).

The Associated Press

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Safeway Inc. is selling its supermarket operations in Canada to food retailer Sobeys for 5.8 billion Canadian dollars ($5.7 billion).

Sobeys, a unit of Empire Company Limited, is already the No. 2 grocery operator in the country. It said the deal includes 213 grocery stores under the Safeway banner in western Canada, 62 fuel stations, 10 liquor stores, 12 manufacturing facilities and four distribution centers.

That leaves Safeway with about 1,400 supermarkets in the U.S., many of which are in western states. The company, based in Pleasanton, Calif., operates stores under names including Vons in Southern California and Nevada and Randalls and Tom Thumb in Texas.

"This was an unsolicited offer," CEO Robert Edwards said in a brief call with analysts after the announcement. He noted that the company believed the offer was "extremely attractive."

Edwards, who took over as CEO last month, declined to discuss how the sale would affect the company's strategy for its U.S. business. He said he would field questions on that matter in about five weeks during its next quarterly earnings call.

The deal comes at a time when traditional supermarkets are facing rising competition from big-box retailers like Target, drug store chains and even dollar stores. Kroger Co. has adapted by tweaking store formats and product offerings. But others such as Supervalu have scrambled to keep pace; earlier this year the company sold five of its major grocery chains after struggling for years to turn around its business. Supervalu said it would focus on its Save-A-Lot discount stores, as well as smaller regional chains.

Meanwhile Safeway in the past year has been touting a new loyalty program called "Just For U" as a centerpiece of its plan to beat back competitors and gain market share. Like many other retailers, Safeway believes a sophisticated loyalty program can give it an edge in holding onto customers.

Safeway said proceeds from the deal are expected to be 4 billion Canadian dollars after taxes and expenses. It said proceeds will be used to pay down $2 billion in debt and to buy back stock. It also said some of the proceeds may be used to invest in "growth opportunities."

After the deal was announced late Wednesday, Fitch affirmed its "BBB-" investment-grade rating on Safeway. The ratings agency noted that the company's Canadian stores had higher profit margins and that the sale would therefore have a negative impact on Safeway's operating profitability. It also noted that Safeway had $6.2 billion of debt as of March 23.

Fitch said Safeway's U.S. stores had weaker profit margins because of softer sales trends at established stores open at least a year. Safeway's moves to keep prices low amid competition also impacted margins. Fitch's rating outlook is negative.

The transaction is expected to close in the fourth quarter and is subject to regulatory approvals.

Safeway shares rose $8.06, or 34.9 percent, to $31.17 in after-hours trading.

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