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Empire Company Ltd. (symbol EMP.A; www.empireco.ca), is a diversified Canadian firm based in Stellarton, Nova Scotia.

Empire sells and distributes food through national grocery retailer Sobeys. It also invests in real estate and various publicly traded companies.

In June 2007, Empire paid $58 a share (a total of $1.06 billion) for the 29.9% of Sobeys it didn’t already own. (Sobeys was a recommendation of our Successful Investor newsletter. We first recommended the stock in April 2003 at $36, so the buyout left our subscribers with a 61% gain.)

Sobeys owns or franchises more than 1,500 stores across Canada. In addition to Sobeys, its banners include IGA, IGA Extra, Price Chopper, FreshCo and Safeway (see below).

The company’s real estate division includes commercial and residential property operations. It owns 41.6% of Crombie REIT (symbol CRR.UN on Toronto), which invests in retail, office and mixed-use properties.

In November 2013, Empire completed its purchase of U.S. grocery store operator Safeway’s (symbol SWY on New York) Canadian operations. The deal included 213 grocery stores (200 which have in-store pharmacies), 62 gas stations, 10 liquor stores and four distribution centres.

Most of these stores are in Western Canada, which complements Empire’s Sobeys stores in Eastern Canada and gives it a wider geographic presence.

Empire paid $5.8 billion for the Safeway operations. To help fund the purchase, it sold $1.6 billion worth of non-voting class A shares. The company also sold 70 Safeway stores to Crombie REIT for $991.3 million. In addition, it raised $248 million by selling its Empire Theatres business, which included 46 cinemas with 397 screens across Canada.

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Investing advice: High debt adds to risk of big Safeway acquisition

Thanks to the Safeway acquisition, Empire’s sales jumped 35.4% in its fiscal 2015 first quarter ended August 2, 2014, to $6.2 billion from $4.6 billion a year earlier.

Without one-time items, earnings gained 46.8%, to $131.7 million from $89.7 million. However, per-share earnings rose 8.3%, to $1.43 from $1.32, on more shares outstanding due to the Safeway acquisition.

In addition to selling assets and new shares, Empire borrowed $2.6 billion to finance the Safeway deal. As of August 2, 2014, its long-term debt was $3.1 billion, or a somewhat high 44% of its market cap.

Following a detailed review, Empire now plans to close 50 of Sobeys’ less-profitable stores, mostly in Western Canada. These closures will cut Empire’s annual revenue by $400 million, but they should boost its long-term earnings.

Separately, the company feels that eliminating overlapping supply chains between Safeway and Sobeys, as well as other cost cuts, will save it $100 million in the first year. Empire expects to realize annual savings of $200 million after the third year.

In addition, Empire is selling the Western Canadian milk, yogurt and ice cream operations it acquired as part of the Safeway deal to Quebec dairy producer Agropur. The company will receive $356 million when it completes the sale in the next few months.

Empire’s earnings will probably improve to $5.43 a share in fiscal 2015, and the stock trades at 14.1 times that forecast. As well, Empire recently raised its quarterly dividend by 3.8%, to $0.27 a share from $0.26. The new annual rate of $1.08 yields 1.4%.

The company benefits from Sobeys’ steady cash flow—and Safeway should add to that. The acquisition should also give Empire more bargaining power with suppliers. However, food retailing is increasingly competitive, as U.S. big box retailers like Wal-Mart and Costco continue to expand across Canada.

In addition, big acquisitions like Safeway, no matter how promising, can come with hidden risks. That could prevent the company from realizing the full benefits of this purchase. Empire’s high debt adds further risk.

We don’t recommend Empire Company. For new buying of a grocery retailer, we prefer Loblaw Companies Ltd., (symbol L on Toronto).

Tomorrow in Best Canadian Stocks we look at WestJet’s success in a competitive airline market.