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(B)(N) EMP.A Empire Company Limited

June 12, 2013

Deal Book. The Empire Company Limited has offered to buy the Canadian operations of the U.S.-owned Safeway Incorporated stores in Canada for a cash deal valued at CDN$5.8 billion (US$5.7 billion). Empire Company anticipates financing the deal through cash and equity and the company currently has 68 million shares outstanding but a small float of less than 30 million shares of the Class A non-voting stock and the balance held (essentially) by the Sobey family of Nova Scotia as the Class B voting stock.

Sobey's

Courtesy: Sobey’s Incorporated, Pictou County, Nova Scotia, 1939

This is a pretty big deal for the Empire Company which has total assets of about $7 billion, shareholders equity of $3.6 billion, and total liabilities of $3.3 billion as well as sales of about $16 billion per year.

The company issued 2.7 million of the non-voting Class A stock in 2009 at $50 per share for net proceeds of about $129 million and this deal will roughly double the size of the company which has its much smaller roots in the 19th century.

The current stock trades for $68 and has been in the Perpetual Bond™ since 2009 at $50 and currently pays a dividend of $0.24 per share per quarter or $32 million per year for a current yield of 1.4%.

Our estimate of the downside in the stock price due to the demonstrated volatility is minus ($5) per share so that we would not be surprised by any price between the current $68 and $63 to $73 and we can afford to set the stop/loss at $63 since there are no options for the stock.

In contrast, Safeway Incorporated had sales of $44 billion last year of which $7 billion and about 20% of its $2.3 billion in operating profits came from the Canadian operations and its story is also hopeful but still more complicated as it re-focuses on its U.S. business.

Exhibit 1: (B)(N) EMP.A Empire Company Limited – Risk Price Chart

(B)(N) EMP.A Empire Company Limited

(B)(N) EMP.A Empire Company Limited

Empire Company Limited is engaged in the food retail, real estate, and corporate investment activities in Canada. The company distributes food products through store formats, such as full service, fresh service, community service, discount service, and so forth.

(Please Click on the Chart to make it larger if required.)

From the Company: Empire Company Limited engages in the food retail, real estate, and corporate investment activities in Canada. The company distributes food products through store formats, such as full service, fresh service, community service, discount service, and convenience service formats, as well as retail gas locations. It owns or franchises approximately 1,500 retail stores under various banners, including Sobeys, IGA extra, Thrifty Foods, IGA, Foodland, and FreshCo, as well as Lawtons Drug Stores. The company also owns, manages, and operates a portfolio of commercial real estate; and develops residential land principally in Ontario, western Canada, and the United States. In addition, the company has interests in oil and gas properties in Alberta; and operates as a movie exhibitor with an interest in 383 screens in 50 locations. The company was founded in 1907, has 47,000 employees and is headquartered in Stellarton, Nova Scotia, Canada.

Exhibit 2: (B)(N) SWY Safeway Incorporated – Risk Price Chart

(B)(N) SWY Safeway Incorporated - June 2013

(B)(N) SWY Safeway Incorporated – June 2013

Safeway Incorporated operates a retail food and drug chain in the U.S. and Canada. The Company also has a network of distribution, manufacturing, and food processing facilities.

(Please Click on the Chart to make it larger if required.)

Safeway Incorporated together with its subsidiaries, operates as a food and drug retailer in North America. Its stores offers a selection of food and general merchandise; and features various specialty departments, such as bakery, delicatessen, floral, seafood, and pharmacy, as well as Starbucks coffee shops, and adjacent fuel centers. The company also owns and operates online grocery channels, including Safeway.com and Vons.com; and purchases, produces, and processes private label merchandise comprising milk, bakery goods, ice cream, cheese, meat products, soft drinks, fruits, vegetables, cakes, and sandwiches. It offers its products under various brands, including the Safeway, O Organics, Eating Right, Open Nature, Bright Green, Safeway SELECT, Signature Café, Rancher’s Reserve, Primo Taglio, Waterfront BISTRO, Debi Lilly, Lucerne, Refreshe, the Snack Artist, and Pantry Essentials. As of December 29, 2012, Safeway Inc. operated 1,641 stores. The company was formerly known as Safeway Stores, Incorporated and changed its name to Safeway Incorporated in February 1990. Safeway Incorperated was founded in 1915, has 171,000 employees, and is based in Pleasanton, California.

The Price of Risk

The calculated Risk Price (SF) is a provably effective estimate of the “price of risk” which is “the least stock price at which the company is likeable” (Goetze 2009) and “likeability” is determined by the demonstrated factors of “risk aversion” – we want to keep our money and obtain a hopeful return above the rate of inflation – and the properties of portfolios of such stocks. Stock prices that are less than the price of risk can be said to be “bargain prices” but with the risk attached that the company might never get a higher price other than that due to ambient volatility or “surprise”; on the other hand, investors who are willing to pay the “full price” above the price of risk, and buy and hold the stock at those prices, must also be confident, and have reason to believe, that the company will produce those values, absent new information.

Please see our Posts, The Price of Risk, August 2012 and The Nash Equilibrium & Its Stock Price, October 2012, for more information on the theory.

To see what else “risk averse” investing can do for us, please see our recent Posts, The Wall Street Put, April 2013, and earlier Posts such as The Dow Transports, March 2013, or The Risk Adjusted Dow, March 2013, or The Canada Pension Bond, February 2013, and for a more colorful description of investment risk and the application of the “price of risk” to mergers & acquisitions, please see our Post, Bystanders & Collateral Damage, April 2013.

Postscript

We are The RiskWerk Company and care not a jot for mutual funds, hedge funds, “alternative investments”, the “risk/reward equation” and every other unprovable artifact of investment lore. We have just one product

The Perpetual Bond™“
Alpha-smart with 100% Capital Safety and 100% Liquidity”
Guaranteed
With No Fees and No Loads on Capital

For more information on RiskWerk, please follow the Tags or Categories attached to this Letter or simply enter Search for additional references to any term that we have used. Related data may be obtained from us for free in a machine readable format by request to RiskWerk@gmail.com.Disclaimer Investing in the bond and stock markets has become a highly regulated and litigious industry but despite that, there remains only one effective rule and that is caveat emptor or “buyer beware”. Nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock or bonds of any public company at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability. We can only tell you what we do and why we do it or have done it and we know nothing at all about the future or the future of stock prices of any company nor why they are what they are, now. The author retains all copyrights to his works in this blog and on this website. The Perpetual Bond®™ is a registered trademark and patented technology of The RiskWerk Company and RiskWerk Limited (“Company”) . The Canada Pension Bond®™ and The Medina Bond®™ are registered trademarks or trademarks of the Company as are the words and phrases “Alpha-smart”, “100% Capital Safety”, “100% Liquidity”, ”price of risk”, “risk price”, and the symbols “(B)”, “(N)” and N*.

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