By Olivia Oran and Soyoung Kim
NEW YORK, Feb 21 (Reuters) - U.S. grocery store operator Safeway Inc is in advanced talks with private equity firm Cerberus Capital Management LP over a leveraged buyout deal that may come within the next few weeks, according to people familiar with the matter.
The two parties are negotiating an agreement in which Cerberus would buy Safeway in its entirety and are hammering out detailed terms, including price, the people said this week.
Discussions with Cerberus have been taking place over the last several months and Safeway is not negotiating a deal with another buyer, the people said. Talks could still fall apart.
A deal would represent one of the largest leveraged buyouts since the financial crisis. Safeway has a market capitalization of roughly $8.7 billion and $5.6 billion of total debt as of September.
A deal would unite Safeway with Cerberus' Albertsons chain, creating a dominant grocery franchise on the West Coast. It would allow Cerberus to cut costs by leveraging Safeway's back office operations, technology and manufacturing plants, analysts said.
However, such a merger could spark antitrust concerns in the Southern California region where both grocery chains have a big presence, and may require some divestitures in that area.
While Cerberus had proposed a range of deal options, including a transaction for the whole as well as for parts, Safeway prefers to sell the entire company, the people said, asking not to be identified by name because the conversations are confidential.
Representatives for Safeway and Cerberus did not immediately respond to requests for comment.
It was not immediately clear how Cerberus, which raised $2.61 billion last year for its latest flagship fund, would fund the equity involved with a leveraged buyout of Safeway.
But the private equity firm is not facing any issues with financing and is not teamed up with another buyout firm for the deal, the people said.
Safeway said earlier this week it was in talks about a possible sale, without identifying the parties involved. Cerberus is in discussions about a deal, people familiar with the matter told Reuters then.
Reuters first reported in October that Cerberus and other private equity firms were exploring a deal for all or part of Safeway.
Cerberus is a seasoned investor in the supermarket sector. Last March, a Cerberus-led investor group acquired a group of grocery chains from Supervalu Inc, including Albertsons and Jewel-Osco, for $3.3 billion.
Before that transaction, Cerberus owned 650 Albertsons locations as a result of a 2006 deal under which the chain was acquired and its stores broken up between the private equity investor, Supervalu and CVS Caremark Corp.
Safeway has been in the hands of private equity before. KKR & Co LP took Safeway private in 1986, and then sold its stake in 1999.
Safeway has been trying to streamline its business by selling off non-core units. Last year, it spun off its gift card provider, Blackhawk Network Holdings Inc, into a separate publicly traded company.
It also sold off its Canadian business to the operator of Canadian retailer Sobeys for $5.8 billion in cash.
More recently, Safeway has revealed plans to leave the Chicago market by early this year. That announcement came after activist investor Jana Partners pressured the company to review strategic alternatives, including exiting weak markets.
Safeway said on Wednesday it has decided to distribute the remaining 37.8 million shares it owns of Blackhawk to Safeway shareholders. It also said "it is an appropriate time" to explore alternatives for its 49 percent stake in Casa Ley, the fifth-largest food and general merchandise chain in Mexico.