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February 24, 2014

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Locavore

No real meat on the Ranchers Reserve bone so to speak, the magic is made with leverage. The more debt you use, the greater the tax deductibility of interest payments and the less you have to put in as an equity investment. Very similar with the mortgage on a house: you deduct interest payments (assume interest only mortgage), only put 20% down as equity, real estate goes up by 20%, you just made 100% return on your equity. The difference is that Cerberus is likely to take dividends out of Safeway with its stable cash flow, further juicing their near term return and lowering the risk of their initial investment.

Also companies that use leverage have less left over to spend on capital improvements so in that sense, it is good that the Burlingame store got renovated when it did.

Joe

Thanks, Locavore. I was thinking you might have some salsa to add to this guacamole. Are they under-levered now or is this just a convenient time to throw on unneeded sour cream?

Definitely glad the store got finished before the financial knife comes out. Will those juicy Just4U discounts on the website dry up?

AK

Safeway is big, but it could be bigger.

Grocery is a relatively low margin business, and with more economies of scale comes higher margins and stock value.

Safeway is well run and provides a good value to the customer. A Cerberus type of buy out shop is likely to raise prices, and leverage their stronger locations and their relative price inelasticity, like Burlingame.

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