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Empire Co. (EMP-A.TO) has reached a deal to buy a 51 per cent stake in the Longo’s specialty grocery store chain and its Grocery Gateway e-commerce business for $357 million.
The parent company of Sobeys said the deal, which was announced on Tuesday, will add "two high-quality banners" to its store network and "furthers Empire's strategic goal of growing its market presence in Ontario.”
Longo’s operates 36 locations across the Greater Toronto Area, with sales topping $1.1 billion in its most recent fiscal year. Under the terms of the deal, Longo’s current president and chief executive Anthony Longo will continue to run the chain, but Empire said it will benefit from the company’s infrastructure and sourcing and logistics capabilities.
“Longo’s is a grocery crown jewel of the Greater Toronto Area of southern Ontario, with a very strong brand and legions of loyal, satisfied customers,” Empire president and chief executive Michael Medline said on a conference call with analysts on Tuesday.
“The partnership with Longo’s accelerates Empire’s growing presence in Ontario and, more specifically, the Greater Toronto Area, Canada’s largest and fastest growing grocery markets.”
Canada’s Competition Bureau said it will review the proposed transaction to determine whether it will result in less competition in the market.
Empire chief financial officer Michael Vels said the deal features “non-customer facing synergies” related to procurement and the supply chain that will improve customer experience and delivery costs for both businesses. He said the “synergies… will not impact Longo’s team members.”
“Having these different banners is the best way to grow,” Medline said. When asked about overlap between Empire’s various brands – which already include Sobeys, Foodland, FreshCo and Farm Boy – Medline pointed to the 2018 acquisition of Farm Boy as an example of how the company was able to incorporate a different brand into its store offering.
“We didn’t mess with it at all. We freed them up to get some great real estate and put up more stores than they ever had before,” he said.
“I keep saying to Anthony (Longo), we’re not going to disturb you. We need you, we need your ideas and the brains of you and your team. That’s how we look at it.”
The deal will also mean that Empire will have two e-commerce platforms – Sobeys’ online grocery delivery service Voilà, as well as Grocery Gateway. While the company said it is “intrigued” by the potential of collaborating the two services, Medline told analysts that the two platforms are distinct and will continue to operate separately.
“We believe we appeal to more customers with the two platforms, as they provide different value propositions for customers,” he said.
“Both platforms are growing materially and are adding customers, so we can further accelerate our online penetration by operating them separately. At the same time, the two groups will collaborate to generate ideas and opportunities.”
Sylvain Charlebois, a professor of food policy at Dalhousie University, says he expects Empire will eventually consolidate the two e-commerce services.
“Empire’s commitment to e-commerce is so significant that it’s impossible to think that they will be operating two systems in parallel,” he said in an interview, adding that Voilà service is more technologically advanced than Grocery Gateway.
“Sobeys is ahead of the game when it comes to e-commerce in this country right now. Why wouldn’t you want to convert?”
The only changes will be those that make our stores and experience even better.Anthony Longo, CEO of Longo's
Longo’s, which was first founded in 1956, has been rapidly expanding recently, opening 10 stores in the last five years. The company acquired Grocery Gateway in 2004, and it has since grown to 70,000 customers. Longo called Empire “a perfect partner in the next chapter of our company’s history.”
“Together we will become even stronger, more competitive to grow as a trusted food partner for Canadian families,” Longo said, adding that the guest experience at the chain will not change under Empire’s ownership.
“The only changes will be those that make our stores and experience even better. We will become more efficient through Empire. They have impressive sourcing, logistics and real estate that we will benefit from, and also have access to new supplier partners as we look to add exciting new products.”
The transaction is expected to close in the first quarter of 2022. It will be funded by issuing up to $125 million in Empire shares, as requested by the Longo’s family, as well as $197 million in cash and $35 million in debt.
The deal allows Empire to take full control of Longo’s over the next decade. Longo’s shareholders will have the option of selling an additional 12.25 per cent stake in the company five years after the transaction is finalized. After 10 years, both companies have mutual put and call options for remaining outstanding shares.
Alicja Siekierska is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @alicjawithaj.