Sobeys parent company to buy 51% stake in Longo's, Grocery Gateway

The parent company of Sobeys said it has signed a deal to buy a 51 per cent stake in specialty grocery store chain Longo's and its Grocery Gateway e-commerce business for $357 million.

Empire Company Ltd. said the deal adds two high-quality banners to its business and helps it grow in Ontario. Empire said Longo's will be able to benefit from its infrastructure and capabilities in areas such as sourcing, logistics and real estate.

Under the deal, Toronto-area grocer Longo's and Grocery Gateway will continue to be led by CEO Anthony Longo. During an investor call on Tuesday, Empire CEO Michael Medline said it will not "change or spoil" the specialty grocer.

"This model of keeping the brand separate has been extremely successful with Farm Boy and we believe it is imperative to do the same with Longo's," he said, referring to the company's 2018 acquisition of Farm Boy.

Longo's — which was founded in 1956 in Toronto by brothers Tommy, Joe and Gus Longo — has 36 locations in the Toronto area, while Grocery Gateway serves 70,000 customers.

"We are a strong competitor in southern Ontario's hypercompetitive grocery market and we're still a family business," Longo said during the investor call.

"The success of the Farm Boy acquisition gave me and my leadership team the confidence that Empire will meaningfully invest in our growth."

Marion Chan, the principal of TrendSpotter Consulting, described Longo's as a "prime target for any retailer that wants to expand into Ontario."

"If you look at the division of the country between Loblaws, Metro and Sobeys, Sobeys has been trying to move west ever since their acquisition of Safeway in 2013, so they had to kind of leapfrog over Ontario because that's a huge mountain to climb," Chan told CBC's Jacqueline Hansen on Tuesday.

"So it's taken until now, I think, with their acquisition of Farm Boy and now with Longo's, I think that that gives them some strength in Ontario that they've never had before."

Range of customers

The acquisition builds on Empire's long-standing banners in Ontario including Foodland, FreshCo and Farm Boy.

The Stellarton, N.S.-based grocery giant also operates Safeway, IGA and Thrifty Foods, and e-commerce business Voilà.

"They're really covering a really broad range of consumer and the needs of different consumers," Chan said, noting that Loblaw employs a similar approach.

Acquiring Grocery Gateway, which Chan credited as a pioneer of online grocery delivery, is also beneficial at a time of increased online ordering due to the COVID-19 pandemic.

"I think this will really solidify Sobeys' strength in that area," she said.Sylvain Charlebois, senior director of the Agri-Food Analytics Lab at Dalhousie University in Halifax, said it's concerning to see the increasing consolidation of Canada's food distribution landscape.

But he said Empire is the only major grocer to support exploring a code of conduct between grocers and food suppliers.

"Empire has recognized there is too much power given to one segment of the entire industry while Loblaw, Metro and other players have not," he said.

Deal expected to close in 2022

The acquisition price of $357 million for 51 per cent is based on an enterprise value of $700 million, Empire said in a news release.

The deal, which is subject to customary closing conditions, is expected to close in the first quarter of Empire's 2022 financial year.

Michael Vels, Empire's chief financial officer, said future expansion of the company's store network will be based on market conditions such as demographics.

"All of our banners are going to obviously compete for capital," he said during a conference call. "We're going to make the right financial decision for all the businesses."

Decisions on new stores will be made "on the basis of the right fit in the right market," Vels added.