Off-Price Safeway Shares Find Buyers : Retailing: Analysts said the 10 million shares were priced well below what had been anticipated.
Safeway Inc. found a ready market Thursday for the 10 million shares that it sold at a discount in its first public offering since its leveraged buyout by Kohlberg Kravis Roberts & Co. in 1986.
The shares, representing 10% of the company, were priced at $11.25, sharply below the selling range of $13 to $16 anticipated when Safeway announced the offering two months ago.
All 10 million shares were placed with institutional subscribers to the offering at $11.25. The first trade on the New York Stock Exchange on Thursday morning was at $11.625. By the 4 p.m. close in New York, the per-share price had risen to $12.375, with more than 2.1 million shares trading hands.
Safeway, a 1,117-store supermarket chain based in Oakland, was converted to private ownership by Kohlberg Kravis Roberts & Co. in 1986. KKR made an investment of only $175 million but heaped $5.8 billion worth of debt onto the retailer in a so-called leveraged buyout.
Since then, Safeway has sold off inefficient operations, reduced its debt to $3.1 billion and steadily improved its operating performance. Operating profit as a percentage of sales rose to 3.2% in 1989 from 2.3% in 1986. Sales last year were $14.3 billion. However, the company still has a negative net worth as a result of the debt load.
The past few weeks have been tense for Safeway officials and underwriters attempting to drum up interest in the offering. They encountered resistance from institutional investors disenchanted with KKR and leery of companies overloaded with debt.
Goldman, Sachs & Co., the lead underwriter, was forced to slash the price late Wednesday to $11.25 a share.
The reduced price made the offering more palatable, analysts said.
“What it reflects (is that) it’s not adequate in today’s market to provide the stub of an LBO and expect investors to value it at a premium in anticipation of de-leveraging the balance sheet and (having good) earnings four years down the road,” said John B. Kosecoff, an analyst with the First Manhattan Co. investment firm in New York.
“The alternative would have been to not make the offering at all,” Kosecoff said. Reducing the price was viewed as preferable.
The brisk trading “sure shows that there’s a large buying interest from someone,” said Suzanne McGrath, an analyst with Black & Co., an investment firm in Portland, Ore. The offering came in a little low, she said, “but not massively so.”
Nevertheless, she added, “We think it’s worth quite a bit more than that.”
Safeway said in its prospectus for the offering that it plans to use the proceeds to make capital improvements, such as remodeling or opening new stores. However, the money raised in the offering is only a fraction of the $3.2 billion the company has said it plans to spend on capital improvements through 1994.
A successful offering was seen as crucial to help mend the tattered reputation of KKR, which has been damaged of late by declines in the market for high-yield, high-risk junk bonds, used in many of its buyouts.
Neither KKR nor Safeway executives, who bought shares initially for $2 each, are selling stock in this offering, but they will be free to sell shares on the open market in 180 days.
