"The western market is high-priced and we have been predicting for a couple of years that prices would begin to fall as Target builds out grocery square footage and Wal-Mart keeps pressing forward with stores," CIBC analyst Perry Caicco said in a research note.
"This deal brings lower cost-of-goods to Sobeys-Safeway and better allows them to compete. (But) we do not see this deal, in and of itself, triggering any price wars," Caicco said.
The purchase, announced after markets closed Wednesday, will make Sobeys a leading player in Western Canada while consolidating the Nova Scotia-based company's second-place ranking in the Canadian grocery retail space.
Shares of Sobeys parent Empire Co. (TSX:EMP.A) and Safeway Inc. (NYSE:SWY) were both up sharply on the news.
Empire closed up $7.16 or 10.59 per cent at $74.77 on the Toronto Stock Exchange, while Alleyway advanced $1.71 or 7.4 per cent to $24.82 on the New York Stock Exchange.
RBC analyst Andrew Calder called the acquisition big, but not a "game changer."
"The new, bigger Sobeys will have 1,538 stores and $24 billion of revenue (Loblaw has 1,058 stores and $32 billion of revenue)," Calder said in a note.
"But is unlikely to have a meaningful impact on overall competitive dynamics in the sector, in our view, considering what is likely to be a close review from the Competition Bureau and Sobeys’ focus on post-transaction integration and deleveraging," he said.
Calder noted the deal requires approval under the federal Competition Act, which can take up to four to five months for complex transactions.
He said he expects the Competition Bureau will take a market-by-market approach to it review, which could make for a long review given the scale and number of markets involved.
Sobeys' concentration appears heaviest in Alberta and Manitoba and it might have to sell some of the assets it will get from Safeway, Calder said.
"Divestitures would present opportunities for the other operators like Loblaw and Metro. We presume Sobeys considered this impact."
Sobeys is already the second-largest grocery retailer in Canada after Loblaw Co. (TSX:L) and will solidify that position by adding 213 Safeway stores from Thunder Bay, Ont., to British Columbia.
RBC Capital Markets analyst Irene Nattel said competitor Metro Inc., considered a possible buyer for the Safeway stores, will look for other ways to create value for its shareholders.
"In our view, Metro's share price could come under pressure short term as investors digest the shift in size and scale in the Canadian food retail landscape," Nattel said in a note.
But Nattel noted that Metro (TSX:MRU) continues to enjoy industry-leading profitability and has a long track record of returning capital to shareholders.
"Metro's top priority for free cash flow is reinvestment in the business, but with the largest potential food retail candidate now out of play, we believe Metro will look for alternative ways to return capital and create value for shareholders.
Sobeys currently owns or franchises more than 1,300 stores across Canada under such banners as Sobeys, IGA, Foodland, FreshCo and Thrifty Foods.
It has not yet decided if it will keep the Safeway name.Suggest a correction