A customer buys flowers at a Safeway store in Mountain View, Calif., in this file photo.

Paul Sakuma/AP

Investors and analysts are betting Loblaw Cos. Ltd. may take a run at the Canadian assets of Safeway Inc. now that it has the tantalizing prospect of spending the money that will come in from an initial public offering of Loblaw's real estate holdings. But there's no guarantee that Loblaw would get Safeway, as rival Metro Inc. would likely be willing and able to pay up for Safeway's stores.

Loblaw has a lot of things going for it since the announcement of its planned real estate investment trust IPO. There's the prospect of roughly $700-million in new cash, based on analyst estimates of the proceeds of an IPO. There's the possibility of shifting debt off the operating grocery company's balance sheet to the REIT, freeing up borrowing capacity. There's the bigger new multiples that Loblaw is now trading at thanks to anticipation of the REIT spinoff, which make a possible deal for Safeway more accretive.

Finally, by transferring the real estate that Safeway owns in western Canada into the REIT, which is likely to trade at a much higher multiple than the operating company, Loblaw can engineer an even higher multiple.

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It all makes a compelling case that Loblaw could take a run at Safeway, should it ever come up for sale in Canada. And there's an argument that it will, because Safeway's management in the U.S. is in transition, the company has a lot of debt, and the proceeds from a Canadian sale would go a long way to solidifying the balance sheet. If the people that take over the company believe the future for Canada is anything like what happened to groceries in the U.S. – endless margin killing competition from new entrants into food sales everywhere from department stores to dollar stores – then selling now might seem like the best call rather than waiting to watch value erode.

The price, some investors estimate, would be somewhere in the $5-billion to $6-billion range. Loblaw, with an enterprise value of almost $17-billion, would not have trouble with that on the face of it.

But don't forget Metro. The Quebec-based company is much smaller, at an enterprise value of $7-billion. But it trades at strong valuations, giving it the ability to come close on accretion (though it lacks the REIT angle), and has a clean balance sheet. Metro's total debt has been steadily coming down and is now just under $1-billion, or about 1.2 times earnings before interest, taxes, depreciation and amortization in the past 12 months. Loblaw, by comparison, has a debt to Ebitda ratio that's closer to 3 times.

There's also history: Metro has shown before that it's willing to pay up to expand outside its Quebec base. In 2005, it outbid Sobeys Inc. for the Canadian stores of A&P. That gave it a presence in Ontario. But the rest of the country is still wide open for Metro. There's no doubt that going for Safeway would be a big reach, but one that Metro's management would have to consider. Once it's gone, the main consolidation of Canada's grocery chains will be done. There just aren't many options left for Metro.

As for Sobeys, it's the long shot. The chain is owned by Empire Co., which would no doubt covet Safeway's Canadian stores as well. Sobeys has a decent position in much of Western Canada, with one big exception. The company has next to no presence in British Columbia, something that Safeway would fix. But the owner of Sobeys doesn't have the valuation to enable it to compete. On basically every multiple, Empire Co. trails Metro and Loblaw.

(Boyd Erman is the Globe and Mail's Capital Markets Reporter & Streetwise Columnist.)

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