January 11, 2013
Supervalu Shakeup – Investment Group to Buy Chains
Supervalu announced yesterday that it has agreed to sell its Albertsons, Acme, Jewel-Osco, Shaw’s and Star Market grocery chains along with its Osco and Sav-on in-store pharmacies to AB Acquisition LLC, an affiliate of a Cerberus Capital Management investor consortium, which includes Kimco Realty, Klaff Realty, Lubert-Adler Partners and Schottenstein Real Estate Group.
The deal is valued at roughly $3.3 billion, which includes the assumption of $3.2 billion in debt plus $100 million in cash. As part of the deal, AB Acquisition plans a tender offer for up to 30 percent of Supervalu’s outstanding common stock at a price of $4 per share. The tender offer represents a 50 percent premium to the 30-day closing average for Supervalu’s shares as of Jan. 9.
The deal will bring back together all Albertsons stores under single management. The banner had been split between Supervalu and AB-owned Albertsons LLC back in 2006.
Following the deal close, Supervalu will be led by Sam Duncan as president and CEO. Mr. Duncan, the former chairman and CEO of OfficeMax, will replace current Supervalu president, CEO and chairman Wayne Sales. In addition, five current Supervalu board members will resign and the total board will be cut from 10 to seven directors. Five current members will remain on the board and two others will be designated by Symphony Investors, one of whom will be Robert Miller, current president and CEO of Albertsons LLC. Mr. Miller will serve as non-executive chairman of the board.
The new Supervalu will consist of the company’s current grocery wholesale business serving nearly 2,000 stores across the U.S. as well as the Save-A-Lot limited assortment chain with its 1,300 stores. The company will also continue to operate its Cub, Farm Fresh, Hornbacher’s, Shoppers, and Shop ‘n Save regional banners.
Mr. Sales believes the new owners will be more successful in getting the acquired banners turned around. "Obviously, we’ve been talking for a long, long time about the need to invest in price, to invest in the customer experience, and to invest in fresh food," Mr. Sales is quoted as telling an investor group by The Wall Street Journal. The group, he said, "brings a very strong balance sheet to be able to immediately invest" and has "a very strong and experienced retail, food leadership team."
According to Albertsons LLC, same-store sales in that group have achieved gains in 19 of the past 25 quarters. Much of the credit there goes to Mr. Miller, a former COO at Kroger who later helped turn around the Rite Aid drugstore chain.
Many however, see the deal as a real estate play.
"They are not in this because they have a passion for running grocery stores. You don’t buy failing grocery stores because you want to be in the grocery business," David Livingston, principal, DJL Research and a RetailWire BrainTrust panelist, told Reuters.
There does not appear to be a lot of optimism on Wall Street for the new Supervalu either.
"For Supervalu, specially the remaining business, there’s no signs at all of stabilization," Scott Mushkin, an analyst at Jefferies & Co. told Bloomberg News. "Save-A-Lot has deteriorated," he said.
- Supervalu Announces Definitive Agreement for Sale of Five Retail Grocery Banners to Cerberus-Led Investor Group – Supervalu Inc./Business Wire
- Private Equity Firms Show Supervalu Who Is the Boss – The Wall Street Journal (sub. required)
- Supervalu selling 877 supermarkets in $3.3 billion deal – Reuters
- Cerberus-Led Group Agrees to Acquire Supervalu Chains – Bloomberg News
Discussion Questions
What do you think will happen with the chains acquired by AB Acquisition? What are your expectations for the new Supervalu following the deal?
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Supervalu will still suffer form having an antiquated business model of running premium priced stores while facing an onslaught of new competitors. In 2013, having debt, high prices, still paying rent and not owning, and tolerating a union is no longer a viable business model.
As for the acquired stores I would expect Cerberus to do what they have done in the past. Sell stores, close stores, sublease stores, and the ones they keep open, operate Kmart-esque style from the expense side of the business.
The new Supervalu will go back to being irrelevant to most of us who deal with retailers, not wholesalers.
There is much work to do in each banner with some having some common issues as well as a few that are just particular to the banner. Overall, as other panelists have stated, there will be the usual store closings, consolidations, and asset selling to help pay down the existing debt. Beyond that, each banner will need to re-evaluate their cost structure, pricing, and facility conditions in order to compete.
None of the acquired banners have a particularly strong market image in price, service or innovation. If there is a future for these stores, it will require astute C-level leadership to evaluate each banner’s potential and striving to attain a profitable marketing position. I am likely to be more optimistic than most that this is doable, but only if Cerberus is willing to invest in those banners and stores that offer upside, and also bring in the talent necessary to bring those stores back to relevance.
Competition makes everyone better so it is a sad day in grocery to see Supervalu getting split up. I do see the Albertsons reunion as being a positive move. As for the rest of the stores, I am concerned that they will be sold to competitors that are eager to be in those locations. Whatever the goal, I believe they will move quickly.
Supervalu’s core competency has always been wholesaling. In my opinion, the company’s attempt to manage over chain retail banners has not worked well. I have never been a fan of how they marketed these banners, and in my opinion, the individual brands have been reduced to a blur.
Manufacturers had a difficult time working with Supervalu as a company that managed chain retail, and I think many will breathe a sigh of relief with these latest developments.
Real estate play? Yes, I think so too. These retail locations will probably be worth more sold one at a time to the highest bidder, than they would be altogether under Albertsons’ banners.
With the sound of the old famous Chicago tune playing in my head, I don’t think it is a either a positive for those acquiring or for what remains.
What I do believe is that “It’s only the beginning…” and “More than just a start…”
It’s a positive for both parties. Supervalu will now be less distracted, allowing it to focus on its wholesale business and attempting to reignite growth at Save-A-Lot. Cerberus can get back to shedding assets and paying itself nice dividends (after putting in roughly $350m of equity into Albertson’s LLC, its since distributed over $2b).
And the beat goes on….
This outcome was very predictable from the start. Supervalu tried to leverage a successful regional wholesale business into a dominant retail giant without a clear, consistent retail strategy or an effective plan for integrating the various pieces.
They were trying to operate multiple banners in different markets with a variety of positionings and a plethora of programs. Most of the banners were weak and lacked equity to build upon.
This development places another nail in the coffin of that perpetual notion of scale being the solution to poor business results. When you try to merge weak companies on the basis of synergy, you often multiply the scale of the problem rather than solve it.
These types of deals are almost always based upon real estate. An investor consortium does not buy into a grocery business to improve the grocery business and shopper experience. The valuation was most likely such that it was a sound investment for just the real estate and they got the grocery business for next to nothing.
It is unlikely that they’ll invest the necessary resources to address and aggressively compete in the current grocery retail landscape. Rather likely, will be traditional cost control and cutting initiatives that will be spun as providing benefits and value to their customers. As far as Supervalu is concerned, this may allow them to focus their efforts and distribution expertise and truly inject the resources and initiatives to revitalize their banners in a manageable and effective way.
The AB Acquisition is a real estate play. That’s where the money is for AB. Who in the financial fraternity wants to tough it out running grocery stores today???
SVU will return to where it was when it was once a premier and profitable company … only to find that the river of retailing has raced too far forward since then. What mistakes mortals can make.
I expect AB Acquisition to follow its usual path: close some stores, sell some stores. Focus on the profitable stores; market dominance is not the goal, profitability is. It will actually be very interesting to see what they decide to retain. My view is Shaws is in by far the worst shape, with Albertsons next in that line. Acme is somewhat questionable, but I think with enough closures you could get a good, solid, profitable base of stores there. Jewel obviously remains strong.
I have observed the Albertson’s LLC operations in Phoenix and Colorado in recent months. While you are hard pressed to actually find an open location, what is open looks great and obviously is profitable and good volume. Mostly newer stores that are under 15 years old, some have received remodels in the past couple years by Albertson’s LLC, promotions are reasonably strong and store cleanliness and product freshness are excellent. Pricing is above Kroger, but well below Safeway. I would shop in those stores, sometimes. The Albertson’s LLC bases in Texas and Albuquerque are not so great, but they still seem to be doing a fine job on freshness and cleanliness.
As far as Supervalu goes, this is a very costly lesson but basically brings them right back where they were prior to purchasing these tainted Albertsons assets.
That brings me to another point: these assets (Albertsons, Jewel, Acme, Shaws) seem… tainted. I am questioning if Cerberus is taking too much on. These operations (Jewel excluded) suffer from terrible management. When Cerberus formed Albertson’s LLC, they took management that was primarily veterans to the old Albertsons Inc. and that is a big part of why I think they look pretty good operationally. It will not be so easy, with these assets, to do that.
I wonder if AB Acquisition will be removing the self checkouts from its acquired stores as they did from the Albertson’s LLC Stores some time ago.
I’ve never been a big fan of financial maneuvering as a substitute for actually earning a profit by selling goods to shoppers who want them. But the pure capitalists in our industry see churning cash cow retail assets as a faster route to ROI.
Let’s not mistake moving pieces around for actually building something. Albertsons may gain a larger footprint, but there will be few genuine economies of scale. The Cerberus folks may see a way to sell off enough assets to cover the acquisition costs. Plus they may view the assumed debt as a way to offset other liabilities.
Supervalu dodges a bullet by accepting a token payment of $100 million to get shed of a business it couldn’t manage. It paid $12 billion in 2006 for its slice of Albertsons and the other stores, so I’d hate to have my bonus based on the rate of investment return to its shareholders. Then again, the share prices jumped this morning. Seems to me like a clear case of beating one’s head against the wall because it feels so good when you stop.
I like Mark’s comments. Chicago is still looking for retail leadership. Target, Costco, Walmart, Meijer, Aldi and now Marianos have taken a bit, but no one offers a truly strong, ongoing proposition. It will need to include online as this market is the birthplace to Peapod and a strong OGS offering is a clear must. That said, it is not certain that Jewel can get that kind of investment focus with so many other fires to put out.
Ah, Albertsons…the gift that keeps on giving! The real estate angle has received a lot of play here, but with no detail of (supposedly) great sites having been provided, that seems to be because no one can come up with any other reason for it. But with the nation already overstored, the economy in perpetual slow-mo, retail migrating online, and space opening up from Circuit City, Borders, Mervyns, et al—and potentially Sears/Kmart and Fresh Choice in the future—how is that going to work?
Detroit this week revealed a plan to turn its dying neighborhoods into lawns and “collection ponds,” and I think Cerberus may end up doing the same.
Cut, revitalize and invigorate. Supervalu needs to do more of this. Their performance has been poor because their model has been broken. Supervalu needs to adapt or perish. By selling these broken divisions, they can at least concentrate their focus as an organization and invigorate their business model.
Stores will be evaluated and some percentage closed. Some store investment will be made. Based on the exit strategy, some banners will be eliminated. Prices will be lowered and store labor cost will be reduced. Free cash flow must increase for debt servicing.
Supervalu should rationalize their network. Exit unprofitable markets. Get costs down and do what they do best—be a wholesaler to independents. They must identify another business where their logistic skill can help them grow. Without growth, they will become the next Flemming.
Before they do anything, they need to reverse 4+ years of negative same store sales and at the same time increase margins. Not an easy task, given their past performance at running retail stores.
SAL will have to beat Aldi, which has been a problem for years (e.g. Chicago) and don’t overestimate their ability to show a price differential with Walmart Superstores. Remember, SAL only has price going for it.
Then there’s the other three “heavy hitters” (i.e. Shop N Save, Cub and Farm Fresh) also operating in the price arena. None of these entities are especially known for operating top quality perimeter departments and perishables (where the margins and opportunities for differentiation typically are). Again, this leaves them with the challenge to change the mix, drive sales and “hopefully” increase top line sales AND margins.
Given this, and an ongoing lack of retail expertise at the executive level, in my opinion, the outlook for the “new” Supervalu is very optimistic. After all, when was the last time this company has actually grown ANY retail entity they have operated?