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Exclusive: Cerberus, others explore deal for Safeway - sources

A sign hangs in the local Safeway grocery store in Arvada, Colorado October 14, 2010. REUTERS/Rick Wilking
A sign hangs in the local Safeway grocery store in Arvada, Colorado October 14, 2010. REUTERS/Rick Wilking

By Olivia Oran and Soyoung Kim

NEW YORK (Reuters) - A handful of buyout firms, including Cerberus Capital Management LP, are exploring a deal for all or part of supermarket chain Safeway Inc , according to people familiar with the matter, in what could potentially shape up to be one of the largest leveraged buyouts since the financial crisis.

Safeway, the second-largest U.S. mainstream grocery store operator with a market value of over $8 billion, is not running an auction currently, but is aware of the buyout interest and reviewing options with advisor Goldman Sachs Group Inc , the people said on Tuesday.

They asked not to be named because the matter is confidential. Safeway, Cerberus and Goldman declined to comment.

The interest from private equity firms comes at a critical time for Pleasanton, California-based Safeway.

Activist investor Jana Partners LLC reported a 6.2 percent stake in Safeway in September, saying the company's shares are undervalued, and it held talks with Safeway management about reviewing strategic alternatives.

In response to Jana's disclosure, Safeway had adopted a so-called poison pill to prevent an unwanted takeover of the company. Its board also had authorized $2 billion in stock repurchases and announced plans to exit the Chicago market.

Deliberations over a potential buyout are at an early stage, and it remains unclear if a bid will materialize for Safeway.

But private equity's interest in Safeway underscores how buoyant debt markets have encouraged more firms to consider larger deals approaching $10 billion, which had largely remained elusive since the financial crisis.

In the most striking example this year, Blackstone Group LP , KKR & Co LP , Carlyle Group LP and Singapore's state investor Temasek Holdings Ltd joined forces to make an unsuccessful $11 billion bid for Life Technologies Corp.

Cerberus is no stranger to the supermarket sector. In January, a Cerberus-led investor group acquired a group of grocery chains from Supervalu Inc , including Albertsons and Jewel-Osco, for $3.3 billion.

Prior to that transaction, Cerberus already owned 650 Albertsons locations as a result of 2006 deal under which the chain was acquired and its stores broken up between the private equity investor, Supervalu and CVS Caremark Corp .

Safeway was in the hands of private equity before. KKR took Safeway private in 1986, and then sold its stake in 1999 to make more than $7 billion on its original investment.

GROCERY DEALS ON THE RISE

Safeway and other mainstream U.S. grocery retailers have faced mounting pressure from competitors such as Whole Foods Market Inc at the high end, and from dollar stores and mass retailers such as Dollar General Corp and Wal-Mart Stores Inc at the lower end.

This pressure has driven deals in the grocery sector.

In July, Kroger Co acquired regional grocer Harris Teeter Supermarkets Inc for $2.5 billion, while grocery distributor Spartan Stores Inc acquired Nash Finch Co to become the largest food supplier to U.S. military stores.

In May, Belgium-based food retailer Delhaize sold three U.S. supermarket chains to rival Bi-Lo Holdings for $265 million.

Even before Jana's activist campaign, Safeway was looking to streamline by selling off non-core businesses. The company spun off its gift card provider, Blackhawk Network Holdings Inc , into a separate publicly traded company, selling a 19 percent stake.

It also sold off its Canadian operations to Empire Co Ltd , the operator of Canadian retailer Sobeys, for $5.8 billion in cash in June.

(Reporting by Olivia Oran and Soyoung Kim in New York. Editing by Andre Grenon)

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