Safeway, Inc.'s Leveraged Buyout (a), Safeway, Inc.'s Leveraged Buyout (B), Safeway, Inc.'s Leveraged Buyout (C): The Media Response

HARVARD BUSINESS SCHOOL PUBLISHING

Posted: 26 Mar 1997

See all articles by Karen H. Wruck

Karen H. Wruck

Ohio State University - Fisher College of Business, Department of Finance

Steve-Anna Stephens

Harvard Business School

Date Written: Revised, June, 1994.

Abstract

SUBJECT AREAS: Leveraged Buyouts, Labor Unions, Restructuring, Governance, Negotiation Strategies, Performance Measurement, Politics of Finance.

CASE SETTING: USA, Texas, grocery stores, $15.2 billion sales (1993), 1078 stores (1993), 1980-1993.

Situation: After years of deteriorating financial performance and eroding market share, Safeway Inc., the largest public grocery store chain in the United States, found itself the target of a hostile takeover offer. After considering its options, management decided to take the company private in a $4.3 billion leveraged buyout sponsored by Kohlberg Kravis and Roberts. Safeway's lack of competitiveness stemmed, in part, from the fact that it paid its unionized workforce a 33% premium over competitive market wages. Following the LBO, the company undertook massive asset sales and the renegotiation of uncompetitive labor contracts to achieve wage parity.

The (A) case begins with the controversy surrounding the shutdown of the Dallas division following a standoff with organized labor.

The (B) case reviews of Safeway's asset sales and post-buyout financial performance, and ends with a discussion of the controversy surrounding Wall Street Journal reporter Susan Faludi's Pulitzer Prize-winning expose of the LBO's human fallout.

The (C) case focuses exclusively on this controversy by presenting the media response to the LBO and its aftermath, including full text of Faludi's interview with Safeway CEO Peter Magowan, and her subsequent Journal article.

Pedagogy: The cases motivate a discussion of the market for corporate control as a control force, and social costs and benefits to society from restructuring, particularly when employment and wages are at stake. Students sort out the relative influence of rigid labor contracts, divisional cross subsidization, and strong managerial reliance on historical accounting measures as sources of Safeway's performance problems. Using material in the (A) case, students conduct their own due diligence to determine relative the extent to which lack of wage parity affected the firm's profitability, its ability to make capital expenditures, and it's ability to offer better prices to consumers. It also allows students to understand how cross subsidies from stronger to weaker units constituted a material waste of cash flow by management. Through the (B) and (C) cases, students are given the opportunity to consider the financial results from the LBO, and are asked to critically evaluate the controversy surrounding the impact of the LBO on employees, their communities, and society at large.

JEL Classification: G34, L81

Suggested Citation

Wruck, Karen H. and Stephens, Steve-Anna, Safeway, Inc.'s Leveraged Buyout (a), Safeway, Inc.'s Leveraged Buyout (B), Safeway, Inc.'s Leveraged Buyout (C): The Media Response (Revised, June, 1994.). HARVARD BUSINESS SCHOOL PUBLISHING. Available at SSRN: https://ssrn.com/abstract=9244

Karen H. Wruck (Contact Author)

Ohio State University - Fisher College of Business, Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States
614-292-4330 (Phone)
614-292-2418 (Fax)

HOME PAGE: http://https://fisher.osu.edu/people/wruck.1

Steve-Anna Stephens

Harvard Business School

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States

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