Cerberus Capital Management LP reached an agreement to buy Safeway Inc. SWY -0.03% for more than $9 billion, in a deal that would represent the private-equity firm’s latest acquisition of a big U.S. grocery chain.
A Cerberus-led group is paying just over $40 a share for Safeway, according to a statement from the companies Thursday. No total price for the deal was announced, but based on 235 million diluted shares outstanding for Safeway, the merger would value the Pleasanton, Calif., company at about $9.4 billion.
The deal, which was first reported by The Wall Street Journal, brings together Cerberus’s Albertsons chain—the fifth-largest U.S. grocery store banner by market share, according to research firm Euromonitor International—with Safeway, the second largest. It would create a network of more than 2,400 stores with more than 250,000 employees and give the combined company a much larger footprint and heft. Traditional food sellers like Safeway and Albertsons have been under pressure from low-price entrants, including Wal-Mart Stores Inc., and higher-end players like Whole Foods Market Inc.
Cerberus had faced potential competition from Safeway’s larger rival, Kroger Co. KR -0.71% , which as recently as Wednesday was considering its own bid for part or all of the company, people familiar with the matter said then. Kroger could still mount a competing bid, as the Cerberus deal includes a so-called go-shop provision, meaning Safeway and its bankers at Goldman Sachs Group Inc. will seek other offers for the company. Should another bidder ultimately prevail, it would have to pay a breakup fee to Cerberus of $150 million or $250 million, depending on how soon any such deal is reached.
One factor Kroger would have to contend with should it mount a competing bid for Safeway: Such a deal would marry the nation’s two largest grocery chains and would be expected by analysts and bankers to draw a hard look from antitrust regulators.
Cerberus is paying $32.50 per share in cash. It will also give Safeway shareholders the right to receive proceeds from asset sales that could be worth another $3.65 a share. The deal price also includes an estimated $3.95 worth of shares in gift-card company Blackhawk Network Holdings Inc. that Safeway has already said it would distribute to its investors.
Safeway has more than 1,300 stores in the U.S., located in the West, Southwest, Rocky Mountain and mid-Atlantic regions under a number of banners including its namesake and Vons, Randalls and others.
Cerberus and Safeway have been holding talks for months about a possible deal, according to people familiar with the matter. Safeway said in February that it was in discussions about a possible sale of the company. Cerberus, with Albertsons, was widely considered one of the most likely buyers.
Cerberus already has a sizeable presence in the grocery-store industry through other acquisitions, namely last year’s purchase of Supervalu Inc. SVU -1.75% ‘s Albertsons stores and four of its other chains, including Chicago’s Jewel-Osco and New England’s Shaw’s. An investment group led by Cerberus in 2006 acquired more than 650 Albertsons stores for about $1.1 billion. At the time, Supervalu took a separate chunk of the Albertsons Inc. supermarket empire. Supervalu struggled, and last year sold its Albertsons stores and other chains—as well as a stake in itself—to Cerberus. The deal brought Albertsons supermarkets back under single ownership.
Last year, Cerberus tried to buy higher-end grocer Harris Teeter Supermarkets Inc. but lost out to Kroger, which agreed to pay $2.4 billion for the chain.
Safeway’s shares closed at $39.47 Thursday after The Wall Street Journal reported that a deal had been reached. The shares have risen 28% in the past month on investor expectations that the company would be bought for a premium price.
Cerberus has over $25 billion under management. Outside the grocery industry, the private-equity firm has a number of investments in companies, including bus manufacturer Blue Bird Corp., DynCorp International Inc. and specialty pharmaceutical company Covis Pharma.
Greenhill & Co. advised Safeway on the deal along with Goldman. Citigroup Inc. was lead financial advisor to the Cerberus group, which was also advised by Bank of America Merrill Lynch and Credit Suisse Group AG.
—Annie Gasparro contributed to this article.