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Why Safeway Shares Surged

Friday - 6/14/2013, 2:56pm  ET

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Safeway were looking fresh today, climbing as much as 19% on word that it would sell its Canadian operations, including 213 stores, to Sobey's for $5.7 billion.

So what: The deal looks like a major win for new CEO Robert Edwards, who came on just a month ago, as Safeway's market value was only $5.5 billion before the news broke. The supermarket chain said the sale proceeds will amount to about $4 billion after taxes, and it will use $2 billion of that money to pay off part of its $5.2 billion debt burden. The rest will go to share buybacks and potential growth opportunities. Only about 13% of Safeway's total locations were north of the border

Now what: Shares were up as much as 30% after hours yesterday after the deal was announced, but steadily fell since then to close out today up just 7.4%. Fitch Ratings was among those throwing cold water on the deal, as it said it would maintain its BBB- credit rating with a negative outlook, pointing out that the Canadian stores brought in a higher profit margin so the sale will hurt profitability. Safeway still faces an uphill battle in the supermarket industry, as retail giants like Wal-Mart and Target continue to focus on groceries, but today's move certainly looks like a smart one.

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This article was originally published as Why Safeway Shares Surged on

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