Safeway’s new owners disclosed Monday that they will sell $1 billion in low-grade bonds this fall to complete the financing of their $4.25-billion acquisition of the world’s largest food retailer.
In addition, the owners reaffirmed plans to sell “the stock or assets of certain subsidiaries” of Safeway. But they did not say what assets might be sold. For weeks, competitors, workers and union officials have speculated about what assets might be sold. Some of them say they think that the company’s Southern California stores might be sold.
The $1-billion bond announcement came in documents filed with the Securities and Exchange Commission by the New York investment firm Kohlberg Kravis Roberts & Co. KKR is acquiring Safeway in a leveraged buyout and has formed a new company, SSI Holdings, to handle the acquisition.
In a leveraged buyout, a company is purchased by borrowing against its assets, and the debt is repaid with cash generated by the firm.
“No decision has been made as to when such sales would occur, no assets have been identified for sale and no such decision will be made or assets identified until after completion of a detailed evaluation by (SSI) Holdings and its subsidiaries of Safeway’s assets and operation,” the firm said in the filing.
A spokeswoman for Safeway in Oakland said of the filing: “It was filed by SSI Holdings, an affiliate of KKR. We are unaware of the filing and no one is available to handle calls at Safeway.”
She referred calls to a representative for KKR, who declined comment.
KKR recently acquired 73% of Safeway’s common stock for a total of $3.105 billion. It will exchange some securities for the rest of Safeway.
KKR successfully outbid a hostile takeover attempt by Dart Group, the Washington-based owner of Crown Books and Trak Auto. As part of its agreement to withdraw, Dart was granted an option to buy 20% of SSI as well as a chance to buy some of Safeway’s assets.
The filing said that KKR and Dart will negotiate “in good faith to reach an agreement as to the identity of certain assets to be sold to Dart for a mutually satisfactory price after the merger.”
Drexel Burnham Lambert will be the underwriter for the $1 billion in new bonds that will be issued in two offerings and come due in 1996 and 1998. The subordinated debentures, commonly known as “junk” bonds, are considered higher in risk because they typically carry a low credit rating.
The filing said about $680 million of the bond proceeds will be used to partially repay the bank financing and $320 million will be used to repay in full other loans.
To finance the Safeway stock purchase, KKR said it used $2.72 billion under its bank credit agreement, $320 million in other loans, and another $130 million was raised by the sale of some common stock. Of the $3.17 billion total, $3.105 billion was used to pay for Safeway’s stock and $65 million for fees and expenses.
KKR said about an additional $585 million will be borrowed under its bank credit agreement when the merger is completed, which is expected in mid-November.