The Case for LBOs: The Safeway Experience

by Peter Magowan

Fall 1989

Volume 32
Issue 1

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In early 1986, Safeway was reporting record results in sales and net income for the previous year. Nevertheless, the company was subjected to a hostile takeover attempt due partly to Safeway's status as the largest company in an industry that has become attractive to LBO firms. Ultimately, Safeway's Board of Directors reached a friendly agreement with LBO specialists and the stockholders were bought out in a highly leveraged buyout. Since the buyout, the company sold some 1,200 stores, reduced its outstanding debt by $2.6 billion in two years, and improved the retail operating income over the record pre-LBO results. Improved retail profits were accomplished in spite of (and perhaps because of) becoming more price competitive and offering improved service in the stores. Having reduced the debt to manageable levels, Safeway is now increasing its capital spending levels and has changed its focus from tactical to strategic.

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