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Safeway Plans IPO of Blackhawk Gift-Card Division

Blackhawk is “a high-growth company captured inside of what is currently a low-multiple body.” — Steve Burd, chairman and CEO, Safeway

PLEASANTON, Calif. — Safeway here said last week it plans to sell a minority stake early next year in Blackhawk Network Holdings, its gift-card subsidiary — a move analysts said could generate more than $750 million while enabling Safeway to continue to reap benefits from Blackhawk’s growth.

Safeway said it plans to file a registration statement for a potential initial public offering of Blackhawk and expects to execute the deal during the first half of 2013.

Blackhawk represents volume of $6.9 billion, or 14% of Safeway’s business,  William Y. Tauscher, chairman and chief executive officer of the subsidiary, told analysts earlier this year.

Launched in 2001 as a venture to seek marketing opportunities, Blackhawk offers prepaid gift cards from hundreds of different brands through a network of retail and online locations globally, including many major supermarket chains in the U.S.

Steve BurdSpeaking at the Goldman Sachs Global Retailing Conference in New York last week, Steve Burd (right), chairman and chief executive officer, described Blackhawk as “a high-growth company captured inside of what is currently a low-multiple body.”

He said Safeway is scheduling the IPO for early next year “because like basketball, the gift-card business is a fourth-quarter game, so we will finish off the year and use those numbers and the growth history that supports it to do the IPO.”

Operating revenues for Blackhawk in 2011 rose 30% to $752 million, with adjusted EBITDA up 30% to $78 million — numbers Burd said are expected to improve in 2012.

Analysts Weigh In

Analysts said they believe Safeway would most likely use proceeds from the IPO to pay down debt.

Deborah Weinswig, an analyst with Citicorp, New York, said the IPO will enable Safeway to monetize a portion of the Blackhawk business while continuing to participate in its growth.

Though Safeway did not disclose how much of the business it would sell, Weinswig estimated it would be in the range of 20% to 30%, with the potential to generate proceeds of more than $750 million, or 10 times adjusted EBITDA in 2011.

John Heinbockel, managing director for Guggenheim Securities, New York, said he estimates the Blackhawk stock could sell for about $4.50 per share.

Read more: Safeway Q2 Profits Down 16%

While Safeway has resisted calls for a Blackhawk IPO for several years, “frustration with a decade-low price-to-earnings ratio may have caused a change of heart,” Heinbockel noted.

Andrew Wolf, managing director at BB&T Capital Markets, Richmond, Va., said the upside to Safeway shares is more dependent on the valuation of the core business than on Blackhawk.  “Clearly fundamentals at the core supermarket business remain the primary driver of value creation for Safeway shareholders,” he pointed out.

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