Empire acquiring 51% of Longo’s

Empire Company, Canada’s second-largest grocery supermarket chain, is growing through the acquisition of 51 per cent of Longo’s.

Empire’s acquisition of Longo’s fits its strategy of growing its market presence in Ontario.

Stellarton, Nova Scotia-based consumer goods stock Empire Company (TSX—EMP.A), with yearly sales of $28.4 billion, operates the country’s second-largest Canadian supermarket chain. It trails Loblaw Companies’ sales of $52.7 billion, but its sales exceed the nearly $18 billion generated by Metro Inc.

Empire’s acquisition of Safeway in Western Canada several years ago was poorly executed. But its performance has improved substantially since then. Now Empire has agreed to pay $357 million to acquire 51 per cent of specialty grocery chain Longo’s and its electronic commerce division Grocery Gateway. We expect this acquisition to pay off.

Longo’s generated $1.1 billion

Family-built Longo’s operates 36 stores in the GTA (Greater Toronto Area) and southwestern Ontario. In the year to February 28, it generated sales of about $1.1 billion. The company continues to grow. It opened 10 stores in the last five years. Longo’s plans to open more stores over the next five years. Its online Grocery Gateway currently has 70,000 customers. The company’s also known for its excellent private-label offering and strong customer service.

Empire president and chief executive officer Michael Medline said: “Empire has strong momentum and we are laser-focused on our Project Horizons growth plans in key markets like the GTA, both in bricks and mortar and e-commerce. . . . Longo’s has built one of the most successful and sought-after brands in the GTA and southwestern Ontario. Longo’s is a crown jewel of grocery.” After the fifth anniversary of the transaction, likely in 2027, Longo’s shareholders can sell an interest of 12.25 per cent each year. Empire can also buy and we expect it to eventually own all of Longo’s.

The acquisition of Longo’s fits with Empire’s strategy of growing its market presence in Ontario. Longo’s will build on Empire’s Ontario brands of Sobeys, Foodland, FreshCo, Farm Boy and e-commerce initiative Voila. With many grocery stores operating in Ontario, there’s little chance that competition regulators will block the transaction.

Empire will pay for Longo’s mostly through a combination of shares and cash. It will issue up to $125 million in Class A non-voting shares. The company will pay cash of $197 million and take on debt of $35 million. One positive aspect of this financing is that it maintains Empire’s financial flexibility. In addition it’s unlikely to dilute the stake of existing shareholders for long. That’s because the company intends to buy back “a number of shares higher than those issued through this transaction”.

We expect Empire’s acquisition to succeed

Some might worry that Empire will do a poor job of integrating Longo’s, as it did with Safeway. Our view is more optimistic. For one thing, president and chief executive officer Anthony Longo and his management will continue to run the company they know so well. For another thing, Longo’s can benefit from the transaction. Empire writes: “Although managed separately, Longo’s will benefit from Empire’s infrastructure and capabilities, in areas such as Sourcing, Logistics and Real Estate.”

In fact, the acquisition is expected to “unlock non-customer-facing synergies and other benefits”. Empire expects the acquisition to add to its earnings per share “in the first fiscal year after closing”. It expects the transaction to close in the first quarter of fiscal 2022. Since Empire’s fiscal years end on May Day, it expects to complete the acquisition between May 1 and August 1, 2022. A year later, its earnings per share growth should accelerate.

Even before that, Empire’s earnings are expected to rise. In the year to May 1, 2021, it’s thought to have earned $2.56 a share. This would represent respectable earnings growth of 15.8 per cent from $2.21 a share, the year before. In fiscal 2022, the company’s earnings are expected to advance by nine per cent, to $2.79 a share.

Empire’s earnings and dividends are up

While Empire raises its dividends, we would like to see them go up more quickly. After all, the current dividend of 52 cents a share yields a modest 1.37 per cent.

Empire remains a buy for long-term share price gains and modest, but growing dividends.

This is an edited version of an article that was originally published for subscribers in the April 2, 2021, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.

The Investment Reporter, MPL Communications Inc.
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