After months of drama, which included slashing its dividend and flirting with bankruptcy, grocery store chain SuperValu (click ticker for report: ) has finally found its footing. Private equity firm Cerberus will purchase several of SuperValu’s chains, including Albertsons, Acme, Jewel-Osco, Shaws, and Star Market, as well as all related pharmacies. This unit, known as New Albertsons Inc. (NAI) will be purchased for $100 million and the assumption of $3.2 billion in debt. Cerberus will also tender up to 30% of SuperValu’s outstanding stock for $4.00—a relatively large premium to where SuperValu’s been trading recently. It also gives Cerberus a clear path toward full ownership if it so chooses.
The “new” SuperValu will retain the Independent Grocery supplier business, as well as Save-A-Lot, Shop n Save, Cub, Shoppers, Farm Fresh, and Hornbachers. While these brands have weaker reputations and markets than the NAI stores, SuperValu was in desperate need of doing this deal. Due to such heavy debt obligations, management was unable to sufficiently allocate resources to capital investment, leaving stores sorely lagging its better-capitalized peers. SuperValu was not only plagued by internal capital issues, but this happened at a time when the US economy went into deep recession and firms began to engage in price wars. The timing couldn’t have been worse for an Albertsons acquisition than in 2006 with literally every financial metric challenging.
Regardless, we tend to like the deal for SuperValu, as now it can focus its efforts on a few smaller chains and not have to worry as much about burning cash via debt and declining operating cash flow. New management will take the reins, possibly leading to a favorable change in capital allocation and business strategy. The deal also allows the firm to recapitalize its debt, as the firm best explained:
“In connection with the Transactions, SUPERVALU has negotiated a new and fully underwritten $900 million asset based revolving credit facility led by Wells Fargo and a $1.5 billion term loan secured by a portion of the Company’s real estate and an equity pledge of Moran Foods, LLC (the parent entity of the Save-A-Lot business) led by Goldman Sachs Bank USA, Credit Suisse, Morgan Stanley, Bank of America Merrill Lynch and Barclays. The proceeds of these financings will be used to replace the existing $1.65 billion asset-based revolving credit facility, the existing $846 million term loan, and to call and refinance $490 million of 7.5 percent bonds scheduled to mature in November 2014.”
Shareholders did not get the best deal possible, but given that the firm needed to get something done to survive, it’s hard not to like the transaction. The deal does give us some hope that Roundy’s (click ticker for report: ) could become recapitalized, though it could easily be done in a similarly-pressed situation as with what we saw at SuperValu (especially if same-store sales losses do not moderate).
Cerberus already owns several hundred Albertsons stores, and it has long awaited a chance to purchase the entire chain. Obviously, Cerberus’ track record is inconsistent, especially since it’s jaded by two high-profile debacles such as its 2007 purchase of Chrysler and its 2006 decision to take a majority stake in troubled lender GMAC.
We continue to dislike the structure of the grocery store sector, and we do not think shares of SuperValu or Roundy’s look like a compelling risk/reward situation at current prices.