Sobeys parent company Empire agrees to buy majority stake in Longo’s for $357 million,
With $357M Longo’s deal, Empire adds 36 Ontario stores to growing collection
The Empire is growing.
Sobeys’ parent Empire Co. announced Tuesday that it has reached an agreement to buy 51 per cent of independent grocery chain Longo’s and its online service Grocery Gateway in a deal worth $357 million.
The deal adds Longo’s 36 Ontariobased stores to Empire’s growing collection of brands, including Sobeys, Farm Boy, Foodland and FreshCo.
Voila, Empire’s online grocery delivery service, will continue as a separate brand. The deal also includes Longo’s distribution centre as well as its commissary kitchen.
Longo’s and Grocery Gateway will continue to be run as separate brands, and will be operated by current Longo’s management, including Longo’s CEO Anthony Longo.
“You’ve partnered with that brand for a reason. There’s no way we’re going to screw up that brand value. Longo’s is a jewel,” Empire CEO Michael Medline said in a joint interview with Longo.
“The trick to integrating something like this is that you don’t integrate.”
Longo said his father Tommy, and uncles Gus and Joe would have never envisioned what the single fruit stand they started at Yonge Street and Castlefield Avenue in 1956 would someday become.
“I think they’d be very proud of what we’ve done today. There are three generations of the family working here, and we’re excited about the future,” said Longo.
The company wasn’t formally for sale, even though Longo said plenty of suitors had come calling over the years.
“Over the last 20 years, people have called, but the calls were very short, because we weren’t for sale,” said Longo, who wouldn’t identify any of the callers.
Investors gave a lukewarm thumbs-up to the deal, judging by trading on the TSX. At closing, Empire shares were up 72 cents to $38.49.
The deal came about as Medline and Longo developed a friendship after Medline took over as Empire CEO.
As a longtime Canadian Tire executive without any grocery experience, he valued Longo’s advice on the industry. Eventually, the topic of a potential partnership came up.
“We said, “What would it look like if we came together?’ ” said Longo, adding talks began in earnest over the past year, during the global COVID-19 pandemic.
Retail industry analyst Lisa Hutcheson said the deal is a good fit for Empire and, with Grocery Gateway’s 70,000 customers, gives them a significant advantage over bigger rival Loblaw in the growing online grocery market.
“This makes a lot of sense. E-commerce is now a clear competitive advantage for them, and when I look at their bricks and mortar stores, there’s really not a lot of overlap, geographically,” said Hutcheson, managing partner at retail consultancy J.C. Williams Group.
The deal is another body blow for independent grocery stores and smaller grocery chains, says Sylvain Charlebois, director of the agri-food analytics lab at Dalhousie University.
“Empire has done a good job with Farm Boy. But Canadians have been concerned for a while about independent grocery stores,” said Charlebois, who said the deal will also hurt United Groceries Inc., a collective procurement arm for independent grocers.
“This is not a good day for UGI, because they’ll now lose the extra buying power that Longo’s gave them. And for Empire, it means that the Longo’s stores will be more profitable because they get Empire’s buying power,” said Charlebois. Metro Inc. is UGI’s biggest member grocery, so by extension, Tuesday’s deal hurts Metro, Charlebois said.
In an email, the federal Competition Bureau said it would be reviewing the deal. Under the Competition Act, all takeovers valued at $93 million or more, where the combined companies are valued at $400 million or more, must be reviewed by the Bureau.
In a late November speech to the Canadian Federation of Independent Grocers, the head of the bureau suggested that the mere existence of a much bigger competitor wasn’t grounds for blocking a merger.
“Competition law in Canada focuses on conduct that could potentially dampen competitive intensity or thwart competition on the merits. Competition law in Canada does not regulate imbalances in bargaining power,” said Matthew Boswell, the Commissioner of Competition.
Empire will pay for the deal with $125 million in shares, $197 million in cash, with the remaining $35 million being financed by debt.
The deal also gives Empire the ability to buy 100 per cent control of Longo’s within 10 years. It values Longo’s at $700 million, which is less than what Empire paid for Farm Boy two years ago.
In 2018, Empire bought control of Farm Boy for $800 million, a year after Medline arrived from Canadian Tire.
“In 2017, I told the board that we were under-represented in Ontario, and needed better solutions for e-commerce. Today, we can compete with anyone in Ontario, and online,” Medline said.
Before Medline’s arrival, Empire suffered a major misstep with the purchase of westernbased grocery chain Safeway. Empire was forced to write down the value of its Safeway purchase by almost $3 billion after a disastrous integration led to stock shortages and other logistical problems.
Medline vows the Longo’s move will be more like the Farm Boy acquisition than that of Safeway.
“We’re happy to have Safeway as part of the Empire family, but it’s fair to say that wasn’t the smoothest integration,” said Medline.
In a conference call with analysts, Empire’s chief financial officer Michael Vels said the deal would lead to savings for the combined firm, but vowed no Longo’s employees would lose their jobs.
Vels also said there were no plans to change the brand of any existing Longo’s or Sobeys stores as a result of the deal.
“We don’t have any plans to convert Sobeys stores to Longo’s, nor Longo’s stores to Sobeys,” Vels said.
Vels stressed that the company sees Grocery Gateway and
Voila operating as separate brands, although he suggested Grocery Gateway could eventually run on the same technology from U.K.-based Ocado Group which powers Ocado.
Longo’s bought Grocery Gateway for a reported $6.9 million in 2004 after the online grocer had filed for insolvency. Its supplier, until the insolvency filing, had been Sobeys.
Last week, Empire announced blockbuster fiscal third quarter results. Empire, which has 1,500 stores across the country, saw quarterly earnings rise more than 50 per cent to $187.3 million, up from $120.9 million in the same period a year ago.
Revenue also rose to $7 billion, from $6.4 billion a year ago, as Canadians spent more of their household food budget on groceries because of the COVID-19 pandemic.
Empire also got a boost from the recent launch of Voila. Empire signed a deal with Ocado in 2018, but it wasn’t until the summer of 2020 that Voila was launched.
Longo’s had sales of roughly $1.1 billion for the year ending Feb. 28.