MINNEAPOLIS - Supervalu is transforming itself into a predominantly retail company with the pending acquisition of the best-performing divisions of Boise, Idaho-based Albertsons.
The transaction, which is expected to close in four or five months, will more than double Supervalu's revenues - to $44 billion from an expected $19.9 billion for the fiscal year ending Feb. 25 - and triple the size of its retail component, boosting retail sales to $35 billion, or 80% of the total, vs. 53% today, with the rest coming from distribution.
If the deal is completed, Supervalu would become the second largest conventional retail operator in the United States, behind only Cincinnati-based Kroger Co. It would rank No. 4 on SN's list of the Top 75 food retailers in North America, after Wal-Mart Stores, Kroger and Coscto Wholesale Corp.
The deal is subject to regulatory and shareholder approval. However, transition planning is scheduled to begin immediately, Jeff Noddle, chairman and chief executive officer, said last week, with the two companies collaborating over the next few months.
Besides acquiring 1,124 stores from Albertsons, Supervalu will also be supplying most of the other Albertsons supermarkets and Osco and Sav-on drug stores that are being acquired by Cerberus Capital Management and CVS Corp., respectively - at least for a period of time during those stores' transition to their new ownerships, Noddle said in an interview with SN last week.
"Our agreement with Cerberus runs for more than a year - and could run up to two years - while the CVS agreement could run as long as a year, though they will probably move more quickly than that," Noddle said.
Supervalu will be able to supply its own needs at some of the 700 in-store pharmacies it is acquiring, though not in Southern California, where it does not have any current distribution, "and we will get support from CVS for some period of time until we resolve that issue ourselves," Noddle said.
In addition to the stores, Supervalu is acquiring 12 distribution centers from Albertsons, Noddle said. Although there is some overlap with Supervalu facilities in the Chicago area, Pennsylvania, and to a lesser degree, in the Pacific Northwest, "we will look to see how best to rationalize those facilities over the long term," Noddle said.
While industry analysts said last week they view the transaction with caution, citing possible integration challenges, Noddle downplayed those challenges. "Analysts are paid to be cautious," he said. "The way we look at it, the integration risk at store level is minimal. There is no risk in combining the acquired operations with our other entities because each will operate as a regional chain, with its own leadership, staffs and merchandising people. There could be some risks at the corporate level as we combine two large companies, but we will be looking at utilizing the best people and the best systems from each company to minimize those risks."
Sharing Best Practices
Talking with analysts earlier in the week, Noddle said Supervalu expects to avoid some of the integration problems others in the industry have experienced. "This deal will be successful because we will be sharing best practices, and there won't be one-size-fits-all," he said.
"[Transactions] that are done immediately sometimes impact the core businesses too greatly. On the other hand, letting the integration drag on is not a good decision either. We will do this at a very measured pace over three years."
Jason Whitmer, an analyst with FTN Midwest Securities, Cleveland, said he has a very bullish outlook on Supervalu. "While some investors may be concerned with the sizeable execution risks and high debt levels ahead for such a sizeable acquisition, we estimate this deal will be convincingly accretive by at least 35 cents this year and up to $1 over the next three years."
Patricia Baker, an analyst with the Toronto office of Merrill Lynch, New York, said the acquisition is "strategically in line with Supervalu's approach of owning strong regional brands with good market shares, [and] Supervalu has a proven track record with regard to integration of acquisitions, providing some confidence this larger acquisition may follow suit. But the deal is not without challenges [because] this is not a small acquisition.
"We would exercise caution and note that expected synergies may take time to materialize or may not even be realized as expected."
John Heinbockel, an analyst with Goldman Sachs, New York, said he "would not rule out some up-front indigestion, especially if the macro environment is not accommodating."
Perry Caicco, an analyst with CIBC World Markets, Toronto, said the stores Supervalu is acquiring are "declining businesses, poorly merchandised and in bad need of capital, [and] it will take an immense amount of time and effort for Supervalu to re-merchandise, reconfigure and rejuvenate these stores."
Eric J. Larson, an analyst with Piper Jaffray, Minneapolis, said the acquisition will enable Supervalu to leverage its supply chain capabilities across a broader store base, "which will benefit the new retail operation and also create opportunities to acquire new supply chain customers."
Cherry-Picking the Best
Noddle said Supervalu was able to cherry-pick the Albertsons operation, "and we purchased those exact assets we felt fit in our geography and our portfolio and did not acquire certain other markets."
The pending acquisition of the 1,124 Albertsons locations - accounting for combined sales of $24.5 billion - encompasses 200 Jewel-Osco stores in the Greater Chicago area; 210 Shaw's and Star Markets in New England; 134 Acme Markets located mainly in Philadelphia; and 569 Albertsons-banner stores, including 322 in Southern California (from Los Angeles south to San Diego, including 11 units of Bristol Farms) and Las Vegas, and 258 stores in the Pacific Northwest and the Intermountain region.
The deal will boost Supervalu's corporate store base to 1,759, compared with 635 today, and its total base of corporate and licensed stores to 2,651.
The 695 freestanding Osco and Sav-on drug stores Albertsons operates, which account for volume of $5.2 billion, are being sold to CVS Corp., Woonsocket, R.I., while 655 Albertsons-banner stores in Florida, Texas, Arizona, Northern California, the Rockies and the Plains States - with combined volume of more than $10 billion - are being sold to Cerberus, Kimco Realty and three other partners. Supervalu is retaining the Osco and Sav-on banners on its deal-branded stores.
Supervalu sold its 26 corporate-owned Cub Food Stores in Chicago to the Cerberus group last week, which will result in a one-time non-cash loss of $61 million that will be reflected in Supervalu's fourth-quarter results, the company said.
The sale of the Cubs reportedly cleared the way for Supervalu and its bidding partners to reopen discussions with Albertsons, after talks fell apart in late December, by eliminating the sticking point of whether Albertsons or Supervalu would take responsibility for any antitrust issues. Noddle declined to comment on those reports when questioned by SN.
No Store Sales Planned
Noddle said in a media conference call last week Supervalu has no current plans to sell off any of the assets it is acquiring, "though you never say never." If Supervalu were to decide to close any locations, its independent customers would have first crack at buying them, he said.
Supervalu also has no plans to re-brand any of the acquired stores, Noddle told industry analysts in a conference call, "though there could be [future] opportunities" to open additional Sunflower natural food stores "or to convert Albertsons brands to Supervalu brands down the road.
Noddle said Supervalu's independent customers are supportive of the transaction "because good independent retailers today understand what they are up against in terms of supply chain and scale and procurement, and a lot of them know down the line that they will benefit directly from the size and scale and scope that we will have."
Supervalu's customer base overlaps with its newly acquired stores in Pennsylvania, Chicago and the Pacific Northwest, but Noddle said Supervalu does not have customers in the other areas where it is picking up Albertsons locations.
Potential Synergies
Supervalu anticipates synergies of $150 million to $175 million, pre-tax, in the next three years, Noddle said. "We've mapped out a three-year journey, and we hope to get many of the synergies loaded in the first two years," he said.
He said he anticipates synergies of $75 million to $85 million from better procurement and sharing of best practices, $50 million to $60 million from consolidating functions and eliminating redundant overhead, and $25 million to $30 million from supply chain optimization. "And that's really based just on our first, high-level look," Noddle said.
Noddle told analysts Supervalu intends to operate its broader store base as it does its current portfolio of stores - on a localized basis. "You can't sit in one market and understand what consumers want in another market," he said.
Asked whether Supervalu will need to be more centralized in overseeing its retail operations than it has been, Noddle told SN, "We will look at what Albertsons does centrally and at the division level and then strike a balance that uses the size and scale of the new Supervalu while allowing people closer to the consumer to make in-market decisions - a new balance between what they do and what we do."
The new Supervalu will have operating cash flow of 6.2%, exclusive of any long-range improvements, Noddle told analysts - results he compared with 5.9% at Safeway, 5.4% at Kroger and 4.8% at Supervalu prior to the acquisition.
The stores Supervalu is acquiring have operating cash flow of $1.77 billion, or 7.2% of sales - higher than Albertsons' historic cash flow "because we are acquiring only certain markets and not others," Noddle said. Those other markets have operating cash flow of about 3.5%, he said.
As a result, 89% of operating cash flow will come from retail and 11% from supply chain, compared with a 67%-33% split currently.
"We've been preparing ourselves over the last five years to get our balance sheet in condition to give ourselves headroom and flexibility to look at opportunities that came along in the industry," Noddle said. "We think this is a once-in-a-lifetime opportunity - a very compelling opportunity - to be able to select a great part of this company for our portfolio and our supply chain."
The total price for the transaction is $17.4 billion, of which Supervalu will pay $12.4 billion - $3.8 billion in cash, $2.5 billion in stock and assumption of $6.1 billion of Albertsons debt; CVS will pay $3.9 billion (including $1 billion for real estate), with the balance of $1.1 billion coming from the Cerberus-led group.
The deal, priced at $26.29 per share, will be made up of $20.35 in cash and $5.94 in Supervalu stock at a fixed exchange rate of 0.182 Supervalu shares for every share of Albertsons. Current Albertsons shareholders will own about 35% of Supervalu stock.
Future of Albertsons' Weaker Markets Uncertain
NEW YORK - The consortium of hedge fund giant Cerberus Capital Management and four real estate companies set to acquire 655 Albertsons locations insisted last week that its plan was to operate the stores, but industry observers - and history - suggest other plans are also in the works.
Cerberus, based here, along with Kimco Realty, New Hyde Park, New York; Schottenstein Stores, Columbus, Ohio; Lubert-Adler Partners, Philadelphia; and Klaff Realty, Chicago, contributed between $1.1 billion and $1.2 billion for Albertsons stores the retailer deemed as "non-core assets" - stores in Dallas-Fort Worth, Northern California, Florida, the Rocky Mountains and the Southwest. The non-core assets - which, though troublesome for Albertsons, still generated $10 billion in annual sales - were part of last week's spectacular $17.4 billion deal for the Boise, Idaho, retailer.
"The group plans to operate the stores on an ongoing basis under the Albertsons name," said Richard Auletta, spokesman for Cerberus. He also said Howard Cohen has been named executive chairman of the new company, which is set to change hands midyear. "Plans are to bring in a CEO and president, and look for members of the management team among current Albertsons executives and industry experts," he said.
Cerberus would operate the stores out of Albertsons' home base in Boise, Idaho, with Supervalu providing services to all of the locations, Auletta said. All parties have agreed to maintain the same benefits plans and programs. Cohen is a former chief executive officer of Gtech, a gaming technology company based in West Greenwich, R.I.
Cerberus and the same four partners also acquired 26 Cub Foods stores in Chicago and Bloomington, Ill., formerly belonging to Supervalu.
Cerberus, which made its name as a so-called "vulture investor" in the early 1990s, today calls itself a long-term value investor with assets of more than $16 billion. Its holdings include Alamo/National car rental, Fila sportswear, Aozora Bank, the building products division of Georgia-Pacific and the department store chain Mervyns. Albertsons would be its first food retailing company, but Cerberus reportedly was among the bidders for the Bi-Lo/Bruno's chain when it was sold by Ahold late in 2004.
"They're an opportunistic, aggressive fund with a strong stomach," one retail executive, who asked not to be identified, told SN. Another observer close to the Albertsons deal described the fund as "intimidating," telling SN "they are a very significant hedge fund/private equity player with some very highly intelligent, wealthy individuals. When you're sitting across the table from multimillionaires like those guys, it changes the balance of power."
Auletta declined to comment on the financial details of the Cerberus group bid, but one analyst, Ross Smotrich of Bear Stearns, New York, estimated that Cerberus had taken a greater ownership percentage than its four partners.
Real Estate Specialists
The other four bidders are real estate companies known for selling and re-leasing retail properties, indicating that at least some portion of the group's strategy would involve the re-leasing or sale of real estate.
Shopping center owner and developer Kimco, observers said, is a pioneer in the field of recycling retail real estate dating back to its purchase of the Gold Circle discount store chain in 1988. Kimco has since been active in the disposition of real estate left behind by a long list of troubled retailers, including Hechinger, Caldor, Ames and Kmart.
"These are very smart real estate people who've made money on the carcasses of bad retail concepts, and they'll do it again," said Bob Ginsburg, vice president of real estate services firm CB Richard Ellis, Dallas.
Kimco's strategy is risky but lucrative, according to Ted Kraus, publisher of the commercial real estate newsletter The Dealmakers, Mercerville, N.J. Generally, such companies benefit by exploiting the spread between rents under the existing lease and the current market rates, he said. Given the long-term leases typical of large anchor stores like supermarkets, a successful re-tenanting, either with a new supermarket user or by subdividing the space, can provide returns upward of 20%, Kraus said.
"You don't have to be Einstein to realize there's a lot of money to be made" on such flips, Kraus said, although it requires aggressive marketing of properties, and can be risky in the event of a real estate downturn. As to perspective tenants, he said, "They haven't run out of them yet."
Mervyns as Model
Cerberus' $1.65 billion purchase of the Mervyns department store chain from Target in 2004 could provide a blueprint for its plans with Albertsons, observers speculated. Since that purchase - which included Klaff and Lubert-Adler as partners - Cerberus named a former JCPenney executive to lead the chain and has closed, or announced the impending closure of, 87 stores deemed as low-volume, unprofitable or both. At the same time, Cerberus has begun a multimillion dollar investment in what it called its core West and Southwest markets, reports said.
"Everyone thought Mervyns was just going to be a real estate play, but they are operating the stores," said Neil Stern, senior partner at McMillan-Doolittle, Chicago. "Operating the stores will be one of the possibilities they will have in each market, along with spinning them off to another operator or selling the real estate for other uses."
Stern said it was doubtful that Cerberus would use Albertsons locations to expand its Mervyns empire, mainly due to the cost of converting the stores, but acknowledged it was a possibility.
"It's hard to know what Cerberus' real intentions are," said Ted Taft, managing director for Meridian Consulting, Westport, Conn. "They could be a retail holding company with various concepts in the Southwest, but they could also sell all the stores, or make them really big drug stores or bowling alleys."
Michael Johns, a vice president for Harris Nesbitt, Chicago, said he expects the Cerberus group will use Albertsons to realize real estate value in places like Florida, where locations are scattered, land values are high and the retailer is free of union pension liabilities that would make store closures complicated and costly.
"Albertsons had 140 stores in Florida without a dominant market position," said Johns. "Are you going to spend a lot more money and get that market share? It's unlikely. It's also difficult to imagine a strategic buyer going into Florida without first knowing what will happen to Winn-Dixie."
Albertsons was battered by competition in Texas, but left behind 166 stores, including many strong sites that the retailer owns, Ginsburg said. "Their problem wasn't that their real estate was wrong, but that their operational strategy didn't work," he said, adding that he expected the top third of the Albertsons sites there would be flipped to competitors like Kroger, Tom Thumb or Wal-Mart Stores, with others going to non-supermarket uses.
Albertsons' 164 Northern California stores might also be attractive as a real estate play given high land values there, Stern said. Johns, however, noted that pension liabilities would make mass closures there more difficult.
"They're going to look at the base real estate value, and then sort of subtract off whatever pension liabilities they'd need to pay if they were to sell those locations and get rid of the employees," Johns said. "Whatever that net number is, they either need to be paid more than that by a strategic buyer or they'll just wind up selling the stores for their real estate value."
Johns speculated there would be a "70% chance" the Albertsons stores acquired by Cerberus would be sold. "My best guess is that it's not an operational play to turn the stores around but that it's most likely a sale for the value of the real estate, and if they need to operate stores, it's only because there will be some period of time between when they are going to own them and when they will sell them," Johns said.
JON SPRINGER
WHO BOUGHT WHAT
Supervalu (1,124 supermarkets)
210 Shaw's and Star Markets in New England
200 Jewel-Oscos in Illinois, Wisconsin and Indiana
134 Acme Markets in Pennsylvania, Delaware, Maryland, Pennsylvania and New Jersey
322 Albertsons in Southern California (Los Angeles, Orange County, San Diego), including 11 Bristol Farms locations, plus Las Vegas
258 Albertsons in the Pacific Northwest (Oregon, Washington) and Intermountain region (Idaho, Montana, Nevada, Utah)
ESTIMATED VOLUME: $24.5 billion
PRICE PAID: $12.4 billion (including $6.1 billion of debt)
CVS Corp.
695 freestanding Osco and Sav-on Drug Stores in the Midwest and California
ESTIMATED VOLUME: $5.2 billion
PRICE PAID: $3.9 billion
Cerberus Capital Management and four real-estate partners (655 Albertsons/Super Saver stores*)
166 Albertsons in Texas
164 Albertsons in Northern California
125 Albertsons in Florida
113 stores in the Rockies and Plains States (Colorado, Wyoming, South Dakota, Nebraska, North Dakota, New Mexico, Oklahoma)
61 Albertsons in Arizona
26 Super Saver stores (Texas, Louisiana and Florida)
ESTIMATED VOLUME: $10 billion-plus
PRICE PAID: $1.1 billion
*Cerberus and its partners also acquired 26 Chicago-area Cub Foods from Supervalu in a separate transaction
Histories Merge
1860: George C. Shaw opens first Shaw's store in Portland, Maine.
1891: Thomas P. Hunter establishes Acme Tea Co. in Philadelphia.
1917: Acme and four other retailers merge to form American Stores Co.
1926: Wholesaler Winston and Newell, forerunner of Supervalu, is formed in Minneapolis.
1939: Joe Albertson opens his first supermarket in Boise, Idaho.
1961: American Stores Co. acquires Alpha Beta Markets in Southern California.
1961: Jewel Tea Co., Chicago, acquires Osco Drug Stores.
1964: Jewel Tea acquires Star Markets in New England.
1966: Jewel acquires Buttrey Food Stores, Great Falls, Mont.
1979: Shaw's and Brockton Public Markets merge to form Shaw's Supermarkets.
1980: Supervalu acquires Cub Foods.
1984: American Stores acquires Jewel Markets.
1987: Shaw's acquired by United Kingdom-based J Sainsbury.
1989: Shaw's acquires Star Markets.
1992: Supervalu acquires wholesaler Wetterau.
1999: Albertsons acquires American Stores Co., converts Lucky Stores in California to Albertsons banner.
1999: Supervalu acquires wholesaler Richfood.
2001: Larry Johnston succeeds Gary Michael as Albertsons chairman; Jeff Noddle succeeds Mike Wright as Supervalu chairman.
