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Sobeys already owns or franchises 1,300 stores under various banners across Canada.Simon Hayter/The Globe and Mail

In a $5.8-billion deal that will reshape Canada's grocery industry, Sobeys Inc. is buying Safeway Inc.'s Canadian division to beef up its western business and take on intensifying competition.

The deal, announced late Wednesday, will solidify Sobeys' position as the country's second-largest grocer and put pressure on Loblaw Cos. Ltd., the leading player in the sector, which has struggled to make gains over the past several years.

"The acquisition of Canada Safeway represents an excellent strategic fit, strengthening our presence in Western Canada," said Paul Sobey, chief executive officer of Sobeys' parent company Empire Co. Ltd.

The agreement comes at a time of growing competition in food retailing as discount giant Wal-Mart Canada Corp. rapidly adds more grocery aisles to its stores and U.S. rival Target Corp. opens its first outlets in this country, raising the competitive stakes for everyone.

Major rivals Loblaw and Quebec-based Metro Inc. have also eyed a takeover of Safeway Canada, which has for years been seen as a potential acquisition target.

The deal puts Sobeys on firmer ground in the grocery wars but it faces the risk of getting distracted in the work of folding its newly acquired operations into its own.

"Now comes the hard part," summed up Perry Caicco, retail analyst at CIBC World Markets.

The deal, which is slated to close in the fall, is expected to boost Empire's bottom line (adjusted net profit per share) immediately, generating $200-million of savings annually within three years and half of that within the first 12 months, Mr. Sobey told a conference call.

As a reflection of how much Sobeys hankered after Safeway, Mr. Sobey revealed that he's been circling his U.S. rival since 2000.

"We've been looking at Canada Safeway, as with other opportunities, since a long, long period of time," he said. "We've very familiar with the assets."

Kevin Grier, senior market analyst at the agri-business think tank George Morris Centre in Guelph, Ont., said the Sobeys takeover will provide it with much-needed critical mass and buying savings from its suppliers.

"This is likely to change the western competitive environment," he said. "It has been a high-priced region with grocers keeping their powder dry and not stirring each other up too much."

The landscape is in stark contrast to the lower-priced Ontario market, he said. "Western consumers might start to see some of the deals that Ontarians have been seeing over the past year or so."

The acquisition would add 213 stores to the Sobeys chain, which already owns or franchises 1,300 stores under various banners including IGA, Foodland and FreshCo. Combined, the two chains will have annual revenue of approximately $24-billion compared with about $31-billion at Loblaw.

Marc Poulin, president of Sobeys, said the savings are expected to come from integrating and updating Safeway's distribution and information technology systems and reducing buying, administration and marketing costs.

In addition to the grocery stores, Stellarton, N.S.-based Sobeys will add 199 in-store pharmacies, 62 gas stations, 10 liquor stores, four distribution centres and 12 manufacturing facilities. Safeway is predominantly a western chain, with 60 per cent of its properties in Vancouver, Calgary, Edmonton and Winnipeg.

Sobeys will pay for the deal through a series of equity and notes offerings, as well as $1-billion it plans to earn by selling Safeway's real estate and then leasing it back. Crombie Real Estate Investment Trust – which Empire spun out to handle its real estate – has the right to make first offers on the buildings, Sobeys said.

Safeway Canada's U.S. parent has struggled amid tighter competition south of the border, with Wal-Mart even a bigger player in its home base and Safeway's profitable Canadian division a good way for it to raise money.

Safeway CEO Robert Edwards said the offer was unsolicited and "extremely attractive" to the company, whose profit margins have been squeezed in the fight for market share.

The company said it would earn about $4-billion from the deal after taxes, and will use half of that to pay down debt and buy back stock and the rest to finance other initiatives.

Follow Marina Strauss on Twitter: @MarinaStraussOpens in a new window

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