Leading Wholesaler Supervalu Bows To Pressure, Sells Albertsons,Shaw's, Jewel Osco Star Market to Cerberus Capital, Kimco Real Estate; Debt, Save-A-Lot
- Category: Investing
- Published on Friday, 18 January 2013 06:06
- Written by Seraphim
With high debt payments and intense competition from new hypermarkets Walmart and Target, Supervalu missed earnings estimates in recent quarters which had led to a stock selloff in recent months, forcing the company to make a move. The company is also struggling with high goodwill and asset impairment charges, in fact Supervalu profited only 0.2% of the $7.91 billion it raked in last quarter which is ridiculously low when compared to competitors Kroger (1.5%) and Sysco (2.6%).
Another thing plaguing the company is declining sales; last quarter same store sales were down -4.5%, at the same time unit sales at Kroger were up by the highest margin in over two years. Selling the five banners will help the company restructure by lowering its debt ratios; $3.2b of the $3.3b received will simply be debt switching hands from Supervalu --> Cerberus. Cerberus also said it will acquire a 30% interest in what remains of Supervalu for $4 a share or 32% more than the shares were worth the day before; The new slimmed down company will still oversee 1300 Save-A-Lot stores in addition to the banners Shop 'n save, Cub Foods, Farm Fresh, Hornbacher's, Shoppers.
For non shareholders this is obviously a bad deal. Cerberus and all of its partners in this deal are mostly interested in the real estate assets meaning that many of the stores will probably end up closing, leaving people out of work and lessening grocery competition which is bad for shoppers.
sidenote : About a month prior to the deal, Cerberus Capital sold off its interest in gun manufacturer Freedom Group due to its connection to the gun used in Newtown.
The debt gets cut in half but so does the revenue!
Supervalu sold $36.1b worth of products in the fiscal year ending Feb 25, 2012 but after this deal closes (end of 2013Q1) annual revenue will fall to around $17b with the retail business taking most of the hit (retail sales accounted for 77% of revenue last year, 80% of that from the sale of grocery items); just under a quarter of total revenue comes from the wholesale distribution segment (serving nearly 2000 retailers).
Why Supervalu Didn't Work
In 2006 Supervalue nearly doubled in size after acquiring 1100 of Albertson's 1755 locations. That vaulted the company into a top 5 position in terms of sales (neck and neck with Safeway in 3 of the last 4 years). The problem is that Supervalu couldn't really afford to make such a big deal, Albertson's cost Supervalu $6.3 billion 60% of which had to be paid in cash (end of last 4 years Supervalu never had more than $240m in cash & equivalents; by comparison Safeway cash eq doubled to over $700m). With price wars heating up Supervalu had to develerage in order to make debt more manageable, allowing it to lower prices to match the competition.
Another reason investor interest wanes: dividends ! Costco, Safeway, Kroger, Sysco all pay dividends whereas Supervalu does not.