Safeway

For the exclusive use of H. Sunaryanto, 2023.
Harvard Business School 9-294-139

Rev. December 1, 1997
SAFEWAY, INC.’S
LEVERAGED BUYOUT (A)
by
Karen Hopper Wruck and Steve-Anna Stephens*
Closing the Dallas division
On April 3, 1987, seven months after Safeway went private in a $4.3 billion leveraged buyout (LBO), the
company announced the closing of its Dallas division. The division employed 8,476 people. The
company’s press release stated:
Safeway Stores, Incorporated announced today that, in keeping with the company’s
restructuring plan to achieve cost competitiveness, it will be closing its 144-store Dallas
Division on April 24, 1987.
More than half of the stores have been committed for sale to a number of food retailers
and wholesalers currently operating in the market. The company expects that the
remaining stores will be sold by the closure date.
Counseling sessions for non-union employees are scheduled to begin on Monday, April
6. [The union set up job counseling offices to help union employees cope with job loss and
find new jobs. (Halkias, Dallas Morning News, 4/6/87)] Such employees will receive
severance allowances, extended group health care benefits, individual career counseling
and outplacement assistance—all at company expense. A career counseling center will be
open for at least 30 days to provide outreach services, message referrals, resume writing
and typing support, and job-search reference materials. In addition, representatives of
some of the firms acquiring Safeway’s stores will be interviewing certain employees for
prospective managerial and staff positions.
Safeway officials will be meeting with leaders of the labor unions representing the
company’s union employees to discuss effects of the closure.
* Professor Karen Hopper Wruck and Research Associate Steve-Anna Stephens, MBA 1991, prepared this case as the basis for
class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Research
Associates Donna Feinberg and Perry Fagan, MBA 1993, provided assistance on case revisions. Some of the numbers and
division identities in Table 7 of the case have been disguised to preserve confidentiality.
Copyright © 1994 by the President and Fellows of Harvard College. To order copies, call (617) 495-6117 or write the
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This document is authorized for use only by Hans Sunaryanto in ACCY 532 Coursepack Fall 2023 taught by OKTAY URCAN, University of Illinois - Urbana-Champaign from Sep 2023 to Mar
2024.
294-139 SAFEWAY INC.’S LEVERAGED BUYOUT (A)
The United Food and Commercial Workers’ Union (UFCW) represented most of Safeway’s unionized
employees. Harry J. Carter, president of the UFCW’s Dallas Local 386, expressed his view of employee
reaction to the closing and the union’s response:
The employees were very concerned obviously…They felt betrayed by the company they
helped build for so many years.
I reviewed with the members what position we will be taking with the companies that
buy the stores. We will demand that they keep the employees. We intend to do
everything legally in our power to persuade them to hire these employees.
We aren’t going to allow people to be displaced and we plan to do it in business-like

negotiations. I trust that responsible people in each of these companies will be willing to
discuss with us the hiring of these employees in an arena that serves the best interest of
this community and membership and everyone coming out of this with minimum
turmoil. But if not, we will start boycotts and the whole ball of wax. (Halkias, Dallas
Morning News, 4/6/87)
In talking with reporters, employees expressed their views of the company’s decision (Blackistone, Dallas
Morning News, 4/4/87):
We’ve been expecting it. I’ve been working for Safeway since I was 16 years old and
made a career out of it and now they say “you’re gone.”
—Clerk at the Safeway on Webb Chapel Road in Dallas,
It’s just to put more money in the big guys’ pocket and kick down the little guy. The non-
union companies don’t really want to have you because you’re trouble—you ask for too
much. Kroger is the only other unionized grocery store chain in the Dallas area.
—15-year Safeway maintenance engineer,
We’re very down right now. It seems they could have done something else than shut us
down. Some of us have been with the company for a number of years. What are we going
to do now? Sell roses on the street?
—Meat cutter at the Safeway on Columbus Avenue in Dallas,
We’re just unclear about a lot of things.

—Clerk at the outlet on Abrams Road in Dallas,
I was looking for a job when I got this one. So I’m looking again.
—Clerk at the Turtle Creek Village Outlet.
Safeway’s history, 1915-1980
The first store of what would become the Safeway chain was built in 1915 in American Falls, Idaho.
Marion Barton (M.B.) Skaggs loaned his father, a Baptist minister, the money to build the 576 square foot
store. Guided by his motto “Distribution without Waste”—a motto that became a permanent part of
Safeway’s stated mission—the minister adopted an innovative new strategy: customers selected their
own merchandise from the shelves, brought it to the counter, and paid in cash. At other stores, customers
gave their orders to clerks who collected the items to fill the order. These stores also provided credit. By
reducing labor costs and not extending credit, the minister was able to offer lower prices than his
competitors.
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SAFEWAY INC.’S LEVERAGED BUYOUT (A) 294-139
The “cash-and-carry” philosophy proved successful, and M.B. decided to buy the store from his father for
$1,088. He developed the Skaggs United Stores chain by opening hundreds of stores in Montana and
other western territories.
Meanwhile a group of investors led by Charles E. Merrill, founder of Merrill Lynch, bought a chain of
food stores in Southern California. Lacking experience in the operation of retail food chains, Merrill
approached Skaggs with a business proposition: would Skaggs agree to merge his chain with Merrill’s
California chain and manage the operations in exchange for partial ownership of the resulting company?
M.B. commented on his negotiations with Merrill:
Two things stand out in my memory of the negotiations. One was that Charlie Merrill
asked me if I would be willing to personally guarantee the fantastic profit figures I had
represented. I told him “yes” if he would agree that I was to have any amount over and
above my estimate of profits for the period. He waved his hands —a typical gesture of
his—and let it go. On my part, I insisted on having actual stock control of the merged
company since the responsibility for management was mine. Merrill conceded me control
and a voting trust agreement was set up to give me control for five years. I wondered
later how he could have felt such confidence in me. The agreement was dissolved less
than two years later since I soon learned that if management was good, control was
axiomatic. (SAFEWAY News, March 1966, p. 7)
The union of Merrill’s stores and Skaggs United Stores was incorporated in 1926 as Safeway Stores, Inc.
The Safeway chain then consisted of 766 stores; M.B. was named president.
Around the same time, Charlie Merrill’s daughter Doris married Robert A. Magowan. Magowan, son of a
railroad stationmaster, worked his way through Harvard University by reporting college news for the
Boston Globe and the New York Times, among others. After a stint in advertising, Magowan joined Safeway
and began a special training program. In 1938, he left Safeway at his father-in-law’s request to join Merrill
Lynch. In 1955, Robert Magowan returned to Safeway as Chairman of the Board and CEO where he
served in that capacity until he retired in 1971.
Robert Magowan’s son, Peter, joined Safeway in 1968 as a real estate negotiator in Washington D.C. He
worked his way through various jobs including store manager, district manager (Houston), retail
operations manager (Phoenix), and vice president and division manager (Tulsa). He then supervised all
the company’s international operations, and later the company’s largest region (Arizona, California, and
Nevada). In January of 1980, after 12 years of service, 38-year-old Peter Magowan became Safeway’s
chairman and CEO.
Magowan was by no means the only employee with a long family history at Safeway. A commitment to
long-term employment with Safeway pervaded the organization. It was not uncommon for several
members of the same family and their friends to have life-long careers at Safeway.
Magowan’s early years as CEO, 1980-1985
The supermarket industry is a highly competitive, low-margin business—profit margins around 1% of

sales are typical. In 1980, Safeway’s strategy revolved around its four pillars: superior quality, superior
selection, superior service, and competitive prices. Management focused on growth in sales, profitability, and
number of stores as key performance measures. The same measures were used to assess divisional
performance. Overall performance was judged by comparing Safeway’s sales and profits to the sales and
profits of other national grocery chains. Sales, net income, and number of stores for the 10 largest
publicly-traded national chains are presented in Table 1.
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Table 1
Sales, Net Income, and Number of Stores for Top Ten Publicly Traded National Grocery Chains
(in order of 1980 Sales)
1980 1980 Net Income as
Sales Net Income a percentage of Number of
Chain Name ($ billion) ($ million) Sales Stores in 1980
Safeway $15.1 $119.3 .79% 2,439

Kroger 10.3 94.4 .92 1,245
A&P 6.8 90.5 1.33 1,322
Lucky Stores 6.5 51.6 .79 212
American Stores 6.3 (43.0) —NM— 760
Winn-Dixie 5.4 92.0 1.70 1,151
Jewel 4.2 55.9 1.33 771
Grand Union 3.5 34.3 .98 840
Albertson’s 3.0 41.6 1.39 384
Supermarkets General 2.6 26.1 1.00 111
Average† $6.4 $67.3 1.14% 924

NM=not meaningful.
†Average for Net Income and Net Income as a percentage of Sales excludes American Stores.
Source: Progressive Grocer, April 1981.
When Peter Magowan began his tenure as chief executive, Safeway’s operating performance showed
signs of trouble. Safeway’s net income as a percent of sales had fallen to .79% from 1.51% in 1975.
Operating and administrative expenses had grown from 16% of sales in 1974 to 20% in 1980. Management
felt that too much emphasis on private label products, under-sized and outdated stores, and excessive
labor costs caused Safeway’s profitability to lag that of its major competitors. (Magowan, Address at
Stanford University Business School, 10/11/88).
To make matters worse, with the exception of American Stores, all the top 10 publicly traded national
chains out-performed Safeway in 1980. The average of net income as a percent of sales for these chains
was 1.14%. Of the four top chains with more than 1,000 stores, Safeway was dead last. Kroger, A&P, and
Winn-Dixie’s net income as a percent of sales ran .92%, 1.33%, and 1.70%, respectively. While Safeway
ranked near last in profitability, it was first in sales by a wide margin. Safeway’s 1980 sales were
$15.1 billion; Kroger’s sales were $10.3 billion—a distant second. Few of the large national chains out-
performed regional operators like Bruno’s and Food Lion who produced 1980 net income equal to 1.88%,
and 2.81% of sales, respectively.
Pre-LBO restructuring
In response to deteriorating margins, Safeway’s management began a vigorous campaign to cut costs and
restructure operations. They hired McKinsey & Company to advise them on means to improve operating
efficiency. Between 1982 and 1985, Safeway sold six divisions comprised of 222 stores—149 from overseas
operations and 73 from U.S. operations (see Table 2). Geographical dispersion was reduced by selling
some of its overseas operations. In addition, the company rid itself of some of its poorest performing
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stores. The buyers were primarily other retail chain operators; only the Omaha division was broken up
and sold piecemeal.
Table 2
Divisional Sales at Safeway, Inc. between 1982 and 1985
Number of
Division Year Sold Stores Buyer
Memphis 1982 5 Malone & Hyde, and Independents†

Omaha 1982 65 Stores sold piecemeal
Australia 1985 124 Woolworth
Pennsylvania 1985 3 Independents†
Toronto 1985 22 Oshawa
West Germany 1985 3 Wehran
†An “independent” is a single store operator.
Source: Safeway, Inc.
Of the 222 stores sold, 70 stores representing two divisions were sold in 1982. No divisions were sold in
1983 or 1984. In December 1984, the Wall Street Journal’s column “Heard on the Street” reported that
supermarkets were becoming attractive takeover candidates. Mentioned as possible targets were Pantry
Pride, Safeway Stores, Giant Food, Mayfair Supermarkets, Pueblo International, Shopwell, Supermarkets
General, and Waldbaum. In 1985, the company sold an additional four divisions comprised of 152 stores.
By the end of 1985, Magowan’s divestiture and restructuring program began to have an effect on
performance as illustrated in Table 3 (see also Exhibit 1 for Safeway’s stock price performance).
Magowan gave an overview of the company’s performance improvements:
In the 1982-1985 time period, we sold our operations in Toronto, Australia, Memphis,
Butte, and Pennsylvania. As for cost control, we reduced distribution expense every year
from 1979 to 1985. Our U.S. non-store headcount was reduced by 22% from the end of
1979 to the end of 1985. We consolidated our U.S. divisions from 21 in 1979 to 15 in 1985;
in fact, it was these improvements in ridding ourselves of underperforming stores and
reducing expense that allowed us to more than double our earnings from 1981 to 1985,
from $108 million to $231 million. (Magowan, California Management Review, Fall 1989)
Consumer research and market price surveys monitored the effectiveness of Safeway’s change effort. The
company’s pricing strategy kept prices within 5% of its major competitors and used selective discounts to
establish Safeway’s price image. Larger stores with specialty departments (bakeries, delis, pharmacies)
and updated scanning systems attracted customers and helped earnings grow at a compound annual rate
of 11.7% from 1980 to 1985. Net Income as a percentage of sales increased from .79% in 1980
($119.4 million /$15.1 billion) to 1.17% in 1985 ($231.3 million/ $19.7 billion). Safeway’s dividend
increased five years in a row from $1.30 per share in 1980 to $1.625 in 1985.
Even after its pre-LBO restructuring, Safeway remained the largest supermarket company in the United
States, generating almost $19.7 billion in annual sales on a base of over 2,365 stores. The company’s
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remaining operations were located in the U.S., Canada, the U.K. and Mexico. (Value Line Investment
Survey, Grocery Store Industry, 8/29/86).
Table 3
Selected Financial Data For Safeway Stores
1981-1985
(numbers in millions except per share figures, per share figures adjusted for 1980 2-for-1 split)
1980 1981 1982 1983 1984 1985
Sales $15,103 $16,580 $17,633 $18,585 $19,642 $19,651
Cost of sales† 11,817 12,946 13,628 14,250 15,005 14,872
Gross profit 3,286 3,634 4,005 4,335 4,638 4,778
Operating and administrative expenses†† 3,001 3,363 3,654 3,921 4,214 4,351
Operating profit 285 271 351 415 423 428
Net income 119 108 160 183 185 231
EBITDA††† 567 513 620 700 745 811
Cash dividends per share of common $1.30 $1.30 $1.33 $1.43 $1.53 $1.63
stock
Average shares of common stock 52.2 52.2 52.3 56.2 59.2 60.4
outstanding
Stock price annual low $13.000 $12.500 $13.125 $21.250 $21.250 $26.875
Stock price annual high 18.125 18.875 25.125 30.000 29.250 37.625
Working capital $113 $113 $218 $231 $325 $302

Capital expenditures (additions to $378 $363 $512 $541 $702 $622
property)
Number of employees at year end (000s) 150 157 156 162 169 164
Number of stores opened 160 159 153 145 195 114

Number of stores closed 169 98 176 92 131 320
Number of stores at year end 2,416 2,477 2,454 2,507 2,571 2,365
†Cost of sales includes cost of product (˜94%), and manufacturing and distribution expense (˜6%).
††Operating and administrative expenses includes non-manufacturing and distribution wages and benefits (˜60%), and other
expenses (˜40%).
†††Earnings before interest, taxes, depreciation and amortization, 1985 EBITDA excludes a one-time gain on the sale of
foreign operations of $49.0 million.
Source: COMPUSTAT financial database, Safeway Annual Reports.
Wage parity problems
While successful in other areas, the pre-LBO restructuring program had little effect on Safeway’s wage
structure. Labor costs comprised approximately two-thirds of a store’s non-merchandise operating
expenses, so increased wages cut sharply into profitability. In the 1980s, union membership in the grocery
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industry averaged 54% of store employees. Increased competition from regional nonunionized chains was
driving that percentage downward. The lower labor costs of non-unionized chains began to threatened
the survival of unionized national chains such as Safeway, Kroger, and A&P in many markets. Not only
did national, unionized grocery chains have a labor cost disadvantage, but they had little, if any, cost
advantage over regional chains in purchasing goods for sale in their stores. The Robinson-Patman Act
(1936) prohibited national chains from seeking product discounts from suppliers over and above those
available to regional chains. Discounts applied at the truckload level, so national chains could not secure
significant purchasing advantages over regional or independent operators.
Table 4 shows that between 1980 and 1985, Safeway’s average hourly employee costs rose relative to the
industry average. The hourly wage premium Safeway paid above the industry average increased from
13% in 1980 to more than 33% in 1985. Magowan commented on the labor cost problem:
Labor is the biggest controllable cost in the supermarket. It is by far the most important
cost we had to deal with. The industry has a profit margin of about 1%, so you don’t have
to have very much in the way of a labor cost advantage to really put pressure on those
with a disadvantage.
Table 4
Safeway’s Hourly Employee Cost
Relative to the Industry
Year Percent Premium
1980 13.3%
81 20.9
82 26.3
83 30.4
84 30.3
85 33.3
Note: These premia are somewhat overstated as Safeway’s
operations tend to be in higher-than-industry-average labor
cost locations.
Source: Estimates provided by Safeway, Inc.
Struggling to remain competitive, national chains focused on mitigating labor cost disparities and
relaxing work rules. In union negotiations, management stressed the importance of reducing hourly
employee costs to obtain “wage parity” with local competitors. While Safeway was willing to pay some
premium for more productive workers, according to management the current wage structure was not
economically sustainable even with substantial productivity improvement.
Magowan addresses the UFCW
On February 15, 1985, Magowan addressed a Florida meeting of the executive board of the United Food
and Commercial Workers Union (UFCW), the largest union of grocery store employees. Over 90% of
Safeway’s 164,000 employees were union members. As mentioned earlier, the majority of Safeway’s union
employees belonged to the UFCW, however other employees were represented by the Teamsters, the
Longshoremen, and the Electrical Workers’ Union among others. During his talk Magowan expressed
concern for Safeway’s future:
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There are some serious problems developing which I think are of vital concern to both
your union and Safeway Stores, Incorporated.
In city after city where we operate…the market share held by unionized employers is
shrinking and the market share held by nonunion employers is growing. Strikes—and we
have taken more than our share of strikes—accelerate the process because the nonunion
employer is not affected and many of the customers that are driven to the nonunion
employer by pickets at the union employer’s premises never return when the strike is
over.
If the employer determines that the competitive situation won’t allow him to take a strike,
he also accelerates the process. To avoid the strike the employer must accede to demands
which further increase the competitive disparity between his labor costs and the labor
cost of the nonunion competitor. This enables the nonunion competitor to offer lower
prices or more service or both and the shift of the market share to the nonunion
competitor is as certain as it would be if the unionized employer were on strike.
In some markets the process is virtually complete. Approximately four years ago,
Safeway withdrew from the Omaha market…I have just learned that the last remaining
unionized chain in Omaha, Hinky Dinky, has also decided to withdraw. Omaha is now,
for all intents and purposes, a totally nonunion market. The same forces are at work in all
of the other markets in which we operate…We currently employ more than 94,000 people
represented by the UFCW. Nothing would please me more than to employ 100,000 or
150,000. But we cannot do it if we are not competitive and that will require your help, not
your opposition.
Also in his address, Magowan described in detail the increasing presence of non-union operators in
Safeway’s regional markets. For example, he commented:
Kansas City is an excellent example of the trends I am talking about. In 1979 there were
233 union stores doing 63% of the business and 162 nonunion stores doing 37%. Now
there are 153 union stores—80 less union stores—and 235 nonunion stores—73 more
nonunion stores. Now [1985] the union stores do 36% of the business versus 63% in 1979.
The nonunion did 64% versus 37% in 1979. Kroger has left. A & P has left. Milgrams has
been sold. Safeway is the last hope of the union in Kansas City—and yet even with
concessions that we were finally able to get, we must operate with [wage] rates and
[work rule] restrictions above what little remains of our union competition, to say
nothing of the discrepancy that exists with our nonunion competitors. And our union
competition—like Dillons—operates significant portions of their business nonunion. They
are nonunion (except meat) in their 14 stores in Wichita. They are nonunion in Topeka,
Emporia, Newton, El Dorado, Hutchison, Salina, Junction City, Manhattan and Derby.
He described similar situations in the Northern and Southern California, Little Rock, Austin, Dallas,
Houston, Salt Lake and Oklahoma divisions. In addition to paying lower wage rates and offering fewer
benefits, non-unionized chains were not constrained by strict union work rules. For example, one work
rule required a unionized meat cutter to cut and wrap meat exclusively. If there was no meat to cut and
wrap, the worker was entitled to remain idle even if the manager wanted the worker’s help with other
tasks. Another rule established in the 1940s required overtime pay for work on Sundays. When the rule
was adopted most stores were closed on Sundays because consumers shopped on weekdays. As
demographic changes increased demand for weekend shopping, many stores bound by the work rules
could not afford to offer weekend shopping. Magowan explained:
Often a work rule means we can’t afford to do the work. Sunday is now our third busiest
day in many areas yet we are forced to provided minimal service or be heavily penalized
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by time and a half or even double time. With more two-career families we do more
business in the evening yet we are often penalized for doing it. The specialty departments
that are part of one-stop shopping are labor intensive, but if the cost per hour is too high
we just can’t afford to provide such departments. I could go on and on.
The point is, neither the union or our company can afford to ignore the changing face of
the marketplace. We must change too or change will pass us by. The nonunion companies
are able to grab opportunities—and they will do so. If they grab the opportunities and we
don’t we will be less competitive and we, Safeway and the UFCW, will both suffer.
(Magowan, Address to Executive Committee of UFCW, 2/15/85).
Safeway’s national competitors responded to lower margins and upward pressure on wages by assuming
an unyielding stance in union negotiations. Kroger, for example, pulled out of Pittsburgh, Kansas City,
Washington, and Chicago when the unions refused to move toward wage parity. Safeway had its share of
difficult union negotiations, suffered several long and difficult strikes, and exited from markets in
Pennsylvania, Nebraska and Tennessee where it couldn’t compete. On a number of occasions, unions
granted concessions to Safeway’s competitors, but not to Safeway. For example, in December 1986, the
meat cutters’ union in Houston agreed to a $1.50 per hour pay cut by Kroger, but refused to grant the
same cut to Safeway. (Houston Chronicle, 12/3/86). Even through these difficult times, Safeway
management believed they made every attempt to maintain union relations and the high level of
employee dedication and loyalty that were Safeway traditions.
The fight for control of Safeway, 1985-1986
An unwelcome offer
Around the time of Magowan’s 1985 UFCW address, the Belzberg brothers (well-known Canadian
financiers and takeover specialists) were making open market purchases of Safeway’s common stock. On
February 1, 1985, Safeway’s stock was trading at $28 per share. By February 15, it had risen to $31.50—a
12.5% increase. Magowan brought this stock market activity to the attention of union leaders in his
speech:
What was the reason for this increase? We would like to think that it was the release of
our annual earnings, which while basically flat, were ahead of the analysts’ predictions.
But the real reason was renewed speculation that the Belzberg brothers of Canada were
preparing to make a tender offer to acquire Safeway.
Now why would anyone like the Belzbergs seek to acquire Safeway? I think the answer is
common knowledge and that is that Safeway could be purchased with borrowed money
and that large chunks of the company would then be liquidated for prices which would
allow all the borrowings to be paid back and still leave a hefty speculators’ profit besides.
How can this be done? For the very simple reason that Safeway’s assets—primarily the
real estate value of our store locations—are worth more than the stores are worth as
performing assets to Safeway.
…It is clear to see what would happen if such a takeover was to take place. One more
time we would have foreign ownership of a major U.S. corporation. The company would
be substantially shrunk down to its most profitable parts. It would be a shadow of itself.
Hundreds of stores would close. Thousands of jobs would be lost—irretrievably lost. It is
hard to see how this is in anybody’s interest.
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An offer from the Belzbergs never materialized, but on June 13, 1986, a little over a year after Magowan’s
address to the UFCW, the Dart Group (a Maryland-based corporation controlled by the Haft family)
announced it had acquired a 5.9% interest in Safeway Stores. In a press release issued three days after
Herbert Haft’s announcement, Safeway expressed its determination to remain independent, stating it
would take all steps necessary to block the takeover advance, including the adoption of a poison pill (an
anti-takeover amendment to its corporate charter). Safeway’s poison pill defense was triggered if anyone
purchased 20%, or a tender offer was made for 30% of the company's common stock. The terms of the pill
allowed Safeway shareholders to purchase $200 of the surviving concern’s common stock for $100.
Safeway’s board had already adopted a “golden parachute” severance package valued at $17.5 million for
its top managers in February of 1985. The following week Safeway filed a lawsuit accusing Haft of
floating acquisition rumors to selected Wall Street arbitrageurs. The lawsuit claimed that Haft was not
really interested in acquiring Safeway, but rather threatened the takeover to secure a “greenmail” payoff.
Haft countered by filing a lawsuit against Safeway alleging that in adopting a poison pill, Safeway
managers had violated their fiduciary duty to shareholders.
On July 8, Haft made a $58 a share tender offer for 100% of Safeway’s 61.1 million common shares—a
total purchase price of $3.54 billion. On May 8, just 2 months prior to Haft’s offer, Safeway’s stock traded
at $37.75 per share—a total market capitalization of $2.3 billion. When that offer was rebuffed, Haft made
a proposal of $64 a share ($3.9 billion) contingent on Safeway’s agreement to a friendly merger. In the
event Safeway rejected the friendly offer, Haft stood prepared to proceed with his $58 a share hostile bid.
Safeway management viewed the company as a civic-minded family enterprise. This view played an
important role in their response to the Haft tender-offer. Magowan commented:
We considered all the various alternatives. We certainly knew we didn’t want to be

controlled by Haft. He had run a small regional drug chain and had no experience in
running either a large, complex organization or a retail food business. We felt there was a
very good chance that all he really wanted to do was to buy the company for, say $4
billion, and then liquidate it entirely for, say $5 billion. Clearly that would not be in the
best interest of the employees or the communities we served. (Magowan, Address at
Stanford University Business School, 10/11/88)
Finding a “white knight” was one alternative, but potential buyers were interested only in pieces of the
company. A second option was to pay “greenmail” to Haft—buying back his shares at a premium over
market in return for a standstill agreement. This was not likely to solve the takeover problem
permanently: although a standstill agreement would stop Haft, it couldn’t stop takeover attempts by
other investors. Another alternative was to do a recapitalization, borrowing money and/or selling assets
to finance a large dividend to shareholders. Indeed, several years later when Haft threatened to make a
hostile offer for Kroger, that company chose to undertake a leveraged recapitalization instead of a
leveraged buyout. (Hymowitz, Wall Street Journal, 9/14/88) The final option was a leveraged buyout.
Prior to Haft’s offer, Kohlberg Kravis and Roberts (KKR) had approached Safeway about going private,
but the company rejected the proposal. Shortly after Haft’s investment in Safeway became public, rumors
surfaced that Safeway was discussing the possibility of an LBO with an undisclosed third party.
The leveraged buyout
On August 27, 1986 Safeway announced it had reached an agreement with KKR to go private in a
$4.3 billion LBO transaction. Magowan explained why Safeway didn’t choose the leveraged
recapitalization option:
The risk with a recapitalization is that you end up with a much weaker company in terms
of the leverage we take on, with the continuing disadvantage of being a public company.
It becomes harder to stand up to the difficult decisions that have to be made. Are you
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going to take a strike in a weakened financial condition? Are you going to react to a price
war when you are still a public company and you have shareholders out there that don’t
want you to do anything wrong to hurt the short-term value of those shares? And you are
extremely constrained, much more constrained than we were with our (LBO) capital
structure, on new investment. (Transcript of interview with Wall Street Journal reporter
Susan Faludi, 5/2/90)
He also commented on his discussions with KKR partner George Roberts:
George never asked me whether or not I thought the deal made sense on paper. He
wanted to know if I was tough enough to say goodbye to some assets, whether I could
run a smaller company. Safeway had been the largest supermarket chain in the country.
We were a family business, we were proud of our size and it was hard to let go. But the
way things stood 40% of our stores were subsidizing the other 60%. We had to rethink
both our size and our strategy. I told Geroge I was ready to do it.
Table 5 presents information on Safeway’s financial structure following its LBO. The LBO investor group,
which included KKR and a number of Safeway’s managers, paid $3.1 billion ($69 per share in cash) for
73% of Safeway’s common stock. They exchanged a package of junior subordinated debt and warrants for
the remaining 27% (identified as merger debentures and warrants in table 5). The junior subordinated
debt had a 20 year term and a face value of $1.025 billion (˜$61.60 per share). The warrants had no stated
value and gave holders the right to purchase 5% of Safeway’s common stock if the LBO company later
went public.
To raise the cash necessary to facilitate the LBO transaction, investors borrowed $2.5 bllion from a 41-
bank syndicate, contributed $130 million in cash to buy 100% (65 million shares) of the common stock of
the LBO firm. In addition, $750 million in senior subordinated notes, $250 million in subordinated
debentures, and $45 million in preferred stock were issued to the public. All these issues were
underwritten by Drexel Burnham Lambert. Valuing the merger debentures at face value, Safeway
shareholders received a 78.3% premium ($1.8 billion) over its $2.3 billion market value on May 8, 1986.
Haft dropped his pursuit of Safeway in exchange for an option to purchase a 20% stake in the post-LBO
Safeway. In October 1986 Haft sold his option back to Safeway for $59 million, bringing the total profit on
his investment in Safeway to an estimated $153 million. Haft’s profits were estimated based on the
assumption that Haft purchased his 3,631,000 shares at the average price prevailing between May 15 and
June 12, 1986 ($43.00) and sold his shares back to Safeway for $69.00 (the cash LBO price) for a total
estimated profit on Safeway shares of $94 million. Adding the $94 million to the $59 million option price
yields total estimated profit of $153 million.
The LBO transaction was completed in November 1986. At the close of the deal KKR and its limited
partner investors owned 96.4% of the common stock (65 million shares). As part of the LBO agreement,
KKR insisted that members of the top management team buy stock for $2 per share. Managers who could
not afford to purchase the shares could borrow money from the company, but they would have to repay
the loan with interest.
At the close of the LBO, Peter Magowan owned 0.9% (600,000 shares). Executive Vice President Harry
Sunderland owned 0.3% (200,000 shares), other executive officers as a group owned 1.4% (973,000
shares), and non-executive officers as a group owned 1.0% (655,000 shares). In addition, managers were
granted options to purchase additional shares after the close of the LBO. The options allowed managers to
buy approximately 150% more shares for $2 per share. Soon after the deal closed, management bought or
pledged to buy additional stock, increasing their ownership to 10% in accordance with the LBO
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agreement. Prior to the LBO, managers and directors as a group controlled 0.6% of the company’s
common stock.
Table 5
Financial Structure of Safeway
following its November 1986 Leveraged Buyout
($ millions)
Percentage
Security $ Amount of Total
Bank Financing $2,505.0
Merger Debentures and Warrants $1025.0
Senior Subordinated Notes $750.0
Subordinated Debentures $250.0
Total New Debt: $4,530.0 76.4%
Pre-Existing Debt Assumed in the LBO

Capital Lease Obligations $649.0
Long Term Debt $573.9
Total Pre-Existing Debt: $1,222.9 20.6%
Total Debt:
Preferred Stock $45.0
Common Stock $130.0
Total Equity $175.0 3.0%
Grand Total: $5,927.9 100%

1985 Earnings Figures
1985 Net Income $231.3
1985 EBIT† $477.5
1985 EBITDA†† $810.9

†Earnings before interest and taxes.
††Earnings before interest, taxes, depreciation, and amortization. Excludes a

one-time gain on the sale of foreign operations of $49.0 million.
Source: Safeway LBO Prospectus, November 1986. Includes issuances of new
securities planned at the time of the LBO, but which took place a few months
later.
Downsizing Safeway, 1986-1987
With Haft out of the picture, the LBO group faced a formidable restructuring challenge. The company’s
operating cash flow was not enough to service its heavy debt burden. Management would be forced to
sell assets. Michael Tokarz, a KKR associate, described the situation:
The company had stable earnings. They had a five year history of creating records year
after year. They had spent $2.9 billion dollars on their capital program in the previous
five years, improving their operations, remodeling the stores, and becoming more
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competitive and aggressive. The business was set so that they did not have to spend
massive amounts to catch up. They had undervalued real estate. A lot of properties that
the company owned, or leased at advantageous rates, were valued on their books for far
less than what we are able to realize commercially in a sale or through higher utilization
of that property. They had highly saleable business segments that we were able to
capitalize on very quickly. They also had an excellent market position in each of their
markets. The company was one or two in virtually every market in market share.
(Mergers & Acquisitions, Sept./Oct. 1987)
After the LBO offer was accepted, KKR and Safeway management focused on the challenge of selling
assets to pay down debt. In addition to the $4.5 billion in new borrowings associated with the LBO, the
company had assumed $1.2 billion in capital lease obligations and pre-existing Safeway debt. This
brought total borrowings to $5.7 billion. Based on preliminary estimates, proceeds from asset sales would
have to total $2.2 billion. Safeway’s lack of wage parity in local markets presented a serious problem for
asset sales. Even unionized buyers were not interested in paying top dollar for a division with a non-
competitive compensation structure. Management decided it was crucial to renegotiate union contracts
before a store or division was sold. This required the UFCW’s cooperation. The renegotiations could be
messy; Safeway’s labor contracts were written on a divisional or smaller (group of stores) basis; the
company had 1,300 labor contracts in place. Magowan explained:
We went to the unions prior to the LBO. They didn’t want to give us any concessions.
They pointed to our annual report and they said your annual report says 20% per year
improvement in your profit. Your annual report says a tripling of stock price. Your
annual report says you have raised the dividend four years in a row.
I went to them asking for concessions to get parity and never got them because the union
is a democratic organization. It elects its leaders from the membership ranks. The leaders
do not tend to do very well on the election platform, when they get up and say “we
believe it’s a good idea to give back to management all these things we have won in the
last 10 years from management,” when the other guy is saying “we enjoy the kind of
wage increases we have been getting in the past, the company seems to be doing well, we
want more.” With these two people up for vote, who’s going to win? That was our
problem. (Transcript of interview with Wall Street Journal reporter Susan Faludi, 5/2/90)
Safeway management wanted the union’s cooperation throughout the asset sale process. They told the
union they would try to retain as many employees as possible. If a division had to be sold, management
would try to sell it intact to a union buyer. This would allow employees to maintain their jobs, even if
they no longer worked for Safeway. Piecemeal sales of assets to non-union buyers were a last resort.
Magowan explained:
The union would not play ball with us until we did the LBO. Once we did it, the union
knew things were going to change. They said, “now we are willing to give you
concessions.” We said, “that’s fine, but in a very real respect it’s too late. We now have
$5.7 billion of debt—with or without concessions we are going to have to sell a lot of
stores to pay down that debt.”
We told the UFCW they could determine with us how much of the company was sold. If
we get good prices for our assets we won’t have to sell as much. The way to get good
prices for the assets is to give the buyer labor parity in the marketplace. Then he can
afford to pay more for the assets. If he gets labor parity, he will agree to stay union. So
you will get the benefit of keeping the employees unionized, they won’t be out of a job,
they will just have a new owner, and the new owner will have a chance to get a good
return on his investment and Safeway will have gotten a high enough price for its assets
that it won’t have to sell all its assets. But if there is a bunch of conflict here, and you
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don’t give us concessions, then Safeway will be forced to take another tack. We will sell to
nonunion buyers who will pay lower prices and we will sell a lot more of our assets. And
those people will then be out of work. So if the union cooperated with us when we faced
these two choices it was definitely to their advantage to do so. (Transcript of interview
with Wall Street Journal reporter Susan Faludi, 5/2/90)
Harry Sunderland, Executive Vice-President and union negotiator for Safeway continued:
Safeway and the UFCW became partners out of necessity. The union leadership was
willing to cooperate with us because they understood that it was in the long term interest
of their members. We had a common interest—to preserve the employee base. The sum
total of the bids for parts of the Salt Lake division exceeded the Borman’s offer by
$13 million, but we didn’t want to sell the division that way. Selling the division in parts
would not protect the union employment base. We had told the union we would try to
preserve its presence in the stores we sold if at all possible. We accepted the lesser bid.
I want to stress that our partnership with the UFCW was unique. We both had a lot to
gain or lose.
To facilitate the restructuring process, management initiated a system under which each division was
evaluated and placed into one of two “tiers.” Divisions with labor costs equal to the local competition
were denoted “tier 1” and would likely be retained. Divisions with wage rates higher than their local
competitors were denoted “tier 2” divisions. All tier 2 divisions were candidates for sale. Magowan
commented:
Once we made the decision to go private, we knew asset sales were imminent—the debt
couldn’t be serviced from existing cash flow. We initially targeted U.S. areas where
Safeway’s labor costs—wages and benefits—were higher than our competitors’. These
operating units would have an inherent disability going forward in carrying the extra
debt burden.
Once this rough cut was made, a more thorough analysis was undertaken and negotiations with the
union began. Safeway developed computer software to estimate the value of work rule and benefit
concessions. The union requested and was allowed access to this program. Once satisfied that it was
accurate, the union accepted the use of the program in negotiations. Exhibit 2 presents a company memo
from Magowan and Jim Rowland, the company’s president, to retail division managers explaining the
LBO’s effect on operating priorities.
Return on market value (ROMV)
Tackling the problem of which divisions to sell forced Safeway to develop a new way to assess divisional
performance. Management knew Safeway owned a great deal of valuable real estate, but they didn’t
know how valuable. Merrill Lynch, Safeway’s financial advisor, strongly recommended that Safeway
management have their properties appraised. Prior to that appraisal, managers only had reliable data on
historical costs. Magowan explained:
A good illustration of our problem with historical cost and real estate is the San Francisco
waterfront store. It was one of our most profitable stores and sat on a piece of property
with a book value of $2 million. We found out that the market value of that property was
actually many times that. It became clear to everyone that we had to evaluate that store
differently than we had in the past. Sure, the store was profitable, but was it profitable
enough to justify sitting on a piece of property worth many times its book value?
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We looked at all our stores in all our divisions in this way, and while we decided to keep
the San Francisco store—it is a flagship store for us—we decided not to keep a number of
others.
Management decided not to rely exclusively on sales, profitability or growth for divisional performance
measurement. As the asset sale process evolved, they developed a measure called “return on market
value” (ROMV). ROMV was calculated as pre-tax annual cash flow divided by appraised asset value. In
addition, ROMV was used to set bonus targets for the new incentive compensation plan adopted
following the LBO.
Magowan explained:
We went out and appraised every operation at market value. Because we had started this
process prior to the LBO, we were able to finish all the appraisals in three weeks—in time
to meet with the banks to finalize the LBO offer. Then we set a target for every business
unit. These targets averaged 20% pre-tax return on market value of assets. New units
were asked to achieve a 25% return. We compared what kind of returns we were getting
to the targets that were established. If the returns weren’t satisfactory, we looked at what
needed to be done. For example, how much capital would it take to put the asset into
fully competitive position from a facility point of view? We have pretty good numbers on
how specific investments affect sales and profitability, so we know what kind of
performance to expect from new stores and remodels. If there was a problem with labor
costs, we looked at our chances of getting a concession for the buyer. Finally, we looked
at the potential sale price for the operation. We went forward with asset analysis on this
basis.
At the time of the buyout we didn’t know what our return was on a division by division
basis. We just didn’t know. Now I think that traditional performance measures can lead
you straight to mediocrity. We used to measure ourselves against other national chains.
KKR taught us to measure ourselves against the best food retailers in the country—most
of those are regional.
Downsizing corporate headquarters
One of the first things management did after the close of the LBO was to reduce headcount at
headquarters by 300—about 20%. Safeway paid each laid-off employee one week’s salary for each year of
service up to a maximum of eight week’s compensation. Magowan estimated annual savings from these
lay-offs at headquarters to be $15 million. He stressed:
It was not the fault of the employees that they were let go. It was not because they had
done a bad job. They did a good job. We let them go because we knew we were going
from over 2,000 stores to just over 1,000 stores and we simply could not afford to have
corporate expense associated with that many employees at that much lower level of sales.
Selling the U.K. and Salt Lake City divisions
Safeway completed its first post-LBO asset sale in February of 1987. It sold its highly successful U.K.
Division with 132 stores and four plant facilities to U.K.-based retailer, Argyll Group PLC for £664 million
(just under $1 billion U.S.). According to a January 1987 Safeway press release:
The sale price reflects a considerable premium over book value of £127.9 million and
represents a price-to-earnings ratio of 24.5 times [1986’s] after-tax earnings of £27.1
million. Under the terms of the agreement, Argyll will have the right in the U.K to the
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Safeway name. It is expected that Argyll will convert many of its existing Presto
Supermarkets to the Safeway name and format. Safeway U.S. expects to retain a friendly
relationship with the U.K. organization.
Magowan elaborated on the sale:
The sale of the U.K. division was intended to send a signal to Safeway’s U.S. employees
that we would do everything in our power to retain as much of our U.S. operations as
possible—even if that meant selling a high performance overseas division. After selling
the U.K. division, we turned our attention to selling underperforming operations in the
U.S.
The Salt Lake division, with 60 stores and over 3000 employees, was the first U.S. division sold. It was the
poorest performing division in the company. In Salt Lake City, Safeway ranked fifth in market share
behind Buttrey, Albertsons, Smiths and Harmons. Each of these competitors had at least some nonunion
stores. As Magowan explained, fifth was unacceptable:
In a typical market, the number one store has a market share of 25-30%, number two gets
15-25%, and number three generally gets under 15%. The rest pick up what little is left.
Several buyers expressed interest in the division. Borman’s, a Michigan-based supermarket operator,
wanted to buy the entire division. A number of local wholesalers and independent operators were
interested in smaller groups of stores. Harry Sunderland and George Marshall, union negotiators for
Safeway, worked with the UFCW to obtain wage concessions to bring labor costs in line with local, non-
union competitors. Even though the sum of the bids for the smaller groups of stores exceeded Borman’s
bid for whole division, Safeway sold the division to Borman’s for $75 million. Union workers kept their
jobs.
Selling the Dallas division
The 144-store Dallas division was the next asset slated for sale. The Salt Lake division sale went smoothly,
and Safeway hoped to replicate this process in Dallas. As early as December 1986, union leaders in Dallas
expressed concern about their members’ future. The following excerpt from the Houston Chronicle
describes their unease:
Safeway Stores Inc. wants a meeting with its store clerks in Dallas and Fort Worth to
propose cuts in wages and benefits that amount to about $5 an hour, according to the
clerks’ union president. Harry J. Carter, president of Local 368 of the United Food and
Commercial Workers International Union, said the cuts, proposed for 4800 clerks in the
Dallas-Fort Worth area alone, would save Safeway about $13 million a year.
Local Safeway officials declined comment on Carter’s report. In Houston, the contract for
local clerks does not expire until February.
Carter said the chain has threatened to sell part or all of the Dallas division, which
employs about 6000 union clerks, if labor costs are not cut substantially. The cuts would
mean a 35% reduction in the store’s current $11.50 average on all wages and benefits for
clerks. (Houston Chronicle, 12/3/86)
Safeway management had a different justification for the cuts. Sunderland reflected on his discussions
with potential buyers:
Without wage concessions buyers were not interested. Of Safeway’s top five Dallas
competitors only Kroger was unionized. The other four—Tom Thumb, Albertson’s,
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Minyards, Winn-Dixie—were nonunion. Safeway’s wage premium in Dallas was

approximately $3/hour, more than 30% over its competitors.
Despite our efforts, the union was unwilling to grant sufficient wage concessions. While
the union leadership at the international level was willing to talk, local UFCW leaders in
Dallas were not. The local leadership claimed that Safeway was calling for a rollback in
wages of almost 50%—we had never asked for that kind of concession. Nonetheless, the
adverse publicity resulting from these claims polarized negotiations at the outset. Our
employees and customers in the Dallas area were well aware of our plans to leave that
market, and morale and sales began to decline.
Table 6 lists the buyers of the Dallas stores. Thirteen stores were closed for lack of a buyer, ten were
transferred to the Houston division, and the remaining 121 stores were sold—many at “bargain” prices.
Only 18 stores remained under union contracts, ten of those were the stores transferred back into
Safeway’s Houston division (which was later sold). Although the company was under no contractual or
legal obligation to do so, Safeway paid each employee in the Dallas division severance compensation
equal to one-half week’s wages for each year of service up to a maximum of eight weeks’ compensation.
The average length of service in the Dallas division was 17 years. Most of the company’s Dallas
employees did not go to work for the new store owners.
Magowan gave his analysis of the Dallas sales and closings:
Someone might argue that about 9,000 jobs disappeared. That is totally wrong. 9,000 jobs
did not disappear because our stores were not boarded up. Somebody took them over.
Somebody remodeled them. Our nonunion competition did not want to hire unionized
employees. And our employees were working for higher rates of pay than those
competitors were paying. So they were afraid of getting their operations unionized.
In my opinion, once those stores reopened, no matter who was working in them, the
prices went down, the service levels went up, and the stores were doing more volume
than when we ran them. So the community had to have benefited. Total employment in
Dallas did not go down as a result of the closing of our operations. And I know it went
up in places where we have a better understanding of what happened, where we’re
continuing to be the private label supplier for some of these assets that were sold.
Dallas was not a happy situation for any of us. It was not a happy situation for the union.
The union lost those jobs. It was not a happy situation for Safeway. We got a poor price
for the assets sold. We were determined after Dallas to see if we couldn’t work with the
unions in such a way that we all came out ahead—the employees, the unions, and the
company—as a result of the lesson learned in Dallas. (Transcript of interview with Wall
Street Journal reporter Susan Faludi, 5/2/90)
In December 1987, the UFCW issued a report commenting on the Dallas closing:
Only one other employer there [in Dallas] is unionized and the others were clearly
[boycotting] former UFCW members. Roughly nine months after the stores closed, only
about 20% of our members have found new jobs. (UFCW Report, 12/20/87).
William J. Olwell, the UFCW’s executive vice president and director of collective bargaining, told the New
York Times:
[I consider] ownership by an investment firm rather than a grocer to be a negative factor.

The KKR philosophy as we understand it is not to acquire a business to grow it, but to
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put it back on firm footing and then spin it public again. They don’t talk to us in terms of
food merchandising; they talk in terms of the financial page, which we never looked at
before. It’s an awful thing. (Fisher, New York Times, 10/21/88).
Table 6
Buyers of Dallas Division Stores
Buyer # of Stores
Non-union buyers (113 stores)
Minyard 24
Affiliated Supermarkets 17
Furrs 14
Tom Thumb 10
Brookshire 7
Other Chain Operators 14
Independent Grocers/Other Uses 27
Union buyers (18 stores)
Kroger 8
Transferred to Safeway’s Houston Div. 10
Summary
Total Stores Sold 131
Unable to Sell 13
Total Stores, Dallas Division 144
Source: Company Data.
What next?
Morale throughout the company fell dramatically after the Dallas sale. Employees worried because they
didn’t know whether their division would be sold—and if it was, whether it would go the way of Dallas.
Magowan believed the company had to proceed quickly with asset sales; there was only a short “window
of opportunity” before even the most loyal employees became discouraged. In addition to these concerns,
management was negotiating a leveraged buyout of the Oklahoma division with buyout sponsors
Clayton & Dubilier. How would the Dallas experience affect this sale? To complicate matters further, the
International UFCW filed a $1 billion-plus fraudulent conveyance lawsuit against Safeway. The union
alleged that Safeway’s LBO transferred value to former shareholders at the expense of employees,
rendering the company insolvent and unable to meet union contract obligations.
Based on other asset sales in the industry, Safeway management and KKR expected their properties to sell
for about six times pre-tax annual cash flow. The question was which assets to sell. It was a critical
decision—the assets kept would determine the firm’s product market strategy, profitability, and
employee relations. Magowan also wondered whether the company had adopted the optimal strategy for
union negotiations thus far.
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Based on a massive amount of divisional performance information, Magowan and his management team
compiled a simple worksheet similar to the one presented in Table 7. As he studied this information,
Magowan wondered how to proceed with assets sales, and what posture Safeway should adopt with the
unions going forward.
Table 7
Partial Listing of Safeway Division Data†
Fiscal Year 1986, After the Sales of the U.K., Salt Lake and Dallas Divisions
Rank of
# of # of Market Annual Book Appraised Projected
Stores Employees Estimated Annual Share Operating Value of Asset Cash
(end of (end of Wage Sales (-) if trend Profit Assets (a) Value†† Flow †††
Division year) year) Premium (millions) declining (millions) (millions) ($ million) ($ million)
Alpha 120 6,367 $4.00 $735 1 6 146 153 20
(-)
Beta 145 8,937 parity 1,174 2 (13) 248 201 18
Gamma 119 9,360 $2.50 991 3 (16) 175 220 5

(-)
Delta 197 15,355 parity 1,752 1 65 270 265 88
Epsilon 77 4,566 $1.50 520 1 3 82 94 11

(-)
Tau 107 6,072 parity 691 1 21 145 146 34
Phi 61 3,367 $3.00 405 1 1 70 60 8

(-)
Chi 112 7,342 parity 761 1 21 133 147 33
Psi 64 4,494 $4.00 534 1 5 110 112 13

(-)
Omega 261 13,129 parity 1,699 5 12 255 422 42
(-)
†Numbers do not add to total figures for the firm because, for reasons of confidentiality, disguised data for a
subset of the divisions are presented.
††Net of current liabilities.
†††Projected cash flow was estimated assuming normal levels of capital spending.
Source: Safeway, Inc.
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Exhibit 1
Value of $1.00 Invested in Safeway Stock on January 1, 1975
versus
Capital Asset Pricing Model Expected Value†
$7
$69 per share LBO
with KKR
August 27, 1986
Haft offers $58 per

$6 share for Safeway
July 8, 1986
Value of $1.00 Invested on January 1, 1975
Haft announces 5.9%

ownership of Safeway
June 13, 1986
$5
Belzbergs trade in
$4 Safeway stock
February 1985
Expected Value of $1.00

Investment
$3
Magowan
becomes CEO,
$2 January 1980
Value of $1.00 Invested in

Safeway Stock
$1
$0
10/79
10/80
10/81
10/82
10/83
10/84
10/85
10/86
1/75
4/75
7/75
1/76
4/76
7/76
1/77
4/77
7/77
1/78
4/78
7/78
1/79
4/79
7/79
1/80
4/80
7/80
1/81
4/81
7/81
1/82
4/82
7/82
1/83
4/83
7/83
1/84
4/84
7/84
1/85
4/85
7/85
1/86
4/86
7/86
10/75
10/76
10/77
10/78
Month Ended
†The value of $1.00 invested in Safeway stock is computed by compounding a $1.00 investment made on
January 1, 1975 at the actual return to Safeway stock including dividends. The expected value of $1.00 investment
is computed according to the Capital Asset Pricing Model as follows: a $1.00 investment on January 1, 1975 is
compounded at the expected rate of return, E(r), = rf+b(rm-rf), where rf (the risk free rate) is the treasury bill
return, rm is the return to the value-weighted market index, and b is the firm's systematic risk.
Source: Chicago Research in Securities Prices (CRSP) financial database and Professor Karen H. Wruck.
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Exhibit 2
Retail Division Managers Peter A. Magowan

U.S. & Canada James A. Rowland
August 7, 1986
MEMO TO DIVISION MANAGERS
OPERATING PRIORITIES
As you know, Kohlberg Kravis & Co. (KKR) has initiated a tender offer for approximately 73% of Safeway stock, to be
followed by an acquisition of the remaining stock in a merger in which the surviving company will be a subsidiary of KKR.
The Company’s Board has unanimously approved the transaction and recommended the acceptance of the offer by all
Safeway stockholders.
The offer and subsequent merger will take several months to accomplish. In the meantime, we all need to turn our attention
back to operating our business as successfully as we can.
Our operating priorities and actions in the future will have to reflect the new situation facing the company. It will take
some time before we have fully defined what all these changes will be, but there are some directions that are already clear.
1) Store Operations and Marketing One of the things that should not change is our current strategy for serving our
customers. The Four Pillars are as valid today as they have ever been—the key to Safeway’s future is still serving our
customers and potential customers better than our competitors. Our focus needs to continue to be on our stores and
ensuring that they continue to be run to the highest standards we know.
2) Operating Efficiency Our new circumstances will necessitate a far greater emphasis on operating efficiency than ever
before. We must eliminate all unnecessary expenses from our operations. The fact that Safeway will be a private company
should by itself permit some efficiencies, but we must go farther than that. We must reexamine all of our expenses to be
sure that they are producing immediate and tangible results to improve our store operations. If they do not, they are a
luxury we can no longer afford. It is the responsibility of all of us to control and reduce spending to the minimum
consistent with what is necessary.
In this connection we are sending out today our analysis of U.S. Division general administrative expense. This analysis
indicates that there is substantial room to reduce these expenses.
3) Labor Parity The time for talking about labor parity is now over—we must achieve it. Unless we have parity with our
competitors in an operating area, we know we will have difficulty earning a sufficient return to remain in that market. We
cannot afford to subsidize or carry any operation that is not earning its way, and we cannot ask employees in one area who
have parity with our competitors to subsidize those in another who are being paid more than their competitors’ employees.
4) Return on Assets The restructuring of the company will require additional borrowings of over $4 billion and added
annual interest charges of over $450 million per year. Virtually every asset of the company will be covered by debt. We
have to be sure that any asset that we continue to hold is earning money to pay the interest on its share of this debt. Assets
that cannot earn a return and pay their share of the interest will be candidates for sale in order to repay the debt. We will
continue to invest in new stores and equipment that promise a payoff in the future, but we must be getting a return on our
current investments as well. Achieving this return means that we must have labor parity and operating efficiency as well as
the best store operations in each of our markets.
***
The next several months will be a time of transition and change for all of us as we adapt to our new circumstances. We
should not, however, wait to begin taking the actions that will be necessary—we need to begin the process immediately. We
expect each of you to be managing your division according to the four priorities above, beginning today.
PAM/JAR:cy
cc: H.D. Sunderland cc: E.R. Jones
cc: E.N. Henney cc: W.D. Lowe
cc: J.N. Bell cc: J.S. Kimball
21
2024.
References
Blackistone, Kevin, “Safeway Workers Upset, Unsurprised,” The Dallas Morning News,
April 4, 1987.
Fisher, Lawrence M. Fisher, “Safeway Buyout: A Success Story,” The New York Times,
October 21, 1988.
Halkias, Maria, “Safeway Union to Seek Benefits,” The Dallas Morning News, April 6, 1987.
Hymowitz, Carol, “Kroger Unveils Tentative Plan to Restructure,” Wall Street Journal, September 14, 1988.
Magowan, Peter A., “The Case for LBOs: The Safeway Experience,” California Management Review, Vol.
32, No 1, pp. 9-18, Fall 1989.
Magowan, Peter A., Address to the Executive Committee of the UFCW, February 15, 1985.
Magowan, Peter A., Chairman, President and Chief Executive Officer, Safeway Stores, Inc., “Address to
the Stanford Business School Alumni Association,” p.10, October 11, 1988.
March 1966 edition of Safeway’s internal newsletter, SAFEWAY News.
Transcript of Wall Street Journal reporter Susan Faludi’s interview of Peter Magowan, May 2, 1990
provided by Safeway Stores, Incorporated.
“Experiences with Corporate Raids,” UFCW Report, December 20, 1987.
Safeway LBO Prospectus, November 1986.
“Safeway Seeks Wage Cut in Dallas, Fort Worth,” Houston Chronicle, December 3, 1986.
“The $5.3 Billion Buyout of Safeway Stores: Can a Debt-Heavy Food Chain Stay Competitive?,” Mergers
& Acquisitions, pp. 63-65, September/October 1987.
Value Line Investment Survey, Grocery Store Industry, p. 1523, August 29, 1986.
22
2024.

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Harvard Business School 9-294-139

Closing the Dallas division

We aren’t going to allow people to be displaced and we plan to do it in business-like

We’re just unclear about a lot of things.

Safeway’s history, 1915-1980

Magowan’s early years as CEO, 1980-1985

The supermarket industry is a highly competitive, low-margin business—profit margins around 1% of

Safeway $15.1 $119.3 .79% 2,439

Average† $6.4 $67.3 1.14% 924

Memphis 1982 5 Malone & Hyde, and Independents†

EBITDA††† 567 513 620 700 745 811

Working capital $113 $113 $218 $231 $325 $302

Number of stores opened 160 159 153 145 195 114

Wage parity problems

Year Percent Premium

Magowan addresses the UFCW

The fight for control of Safeway, 1985-1986

We considered all the various alternatives. We certainly knew we didn’t want to be

The leveraged buyout

He also commented on his discussions with KKR partner George Roberts:

Pre-Existing Debt Assumed in the LBO

Total Pre-Existing Debt: $1,222.9 20.6%

Total Equity $175.0 3.0%

Grand Total: $5,927.9 100%

1985 EBITDA†† $810.9

††Earnings before interest, taxes, depreciation, and amortization. Excludes a

Downsizing Safeway, 1986-1987

Return on market value (ROMV)

Downsizing corporate headquarters

Selling the U.K. and Salt Lake City divisions

Magowan elaborated on the sale:

Selling the Dallas division

Minyards, Winn-Dixie—were nonunion. Safeway’s wage premium in Dallas was

Magowan gave his analysis of the Dallas sales and closings:

[I consider] ownership by an investment firm rather than a grocer to be a negative factor.

Gamma 119 9,360 $2.50 991 3 (16) 175 220 5

Epsilon 77 4,566 $1.50 520 1 3 82 94 11

Phi 61 3,367 $3.00 405 1 1 70 60 8

Psi 64 4,494 $4.00 534 1 5 110 112 13

Haft offers $58 per

Haft announces 5.9%

Expected Value of $1.00

Value of $1.00 Invested in

Retail Division Managers Peter A. Magowan

March 1966 edition of Safeway’s internal newsletter, SAFEWAY News.

“Experiences with Corporate Raids,” UFCW Report, December 20, 1987.

Safeway LBO Prospectus, November 1986.

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