By Mark Hamstra
The special deal on supermarket companies might have been a limited-time offer.
Although private equity has waded bravely into food retailing with several acquisitions over the past few years, food retailers are still relatively unattractive to investors looking for turnaround opportunities because of the sector’s low margins, high risk and, recently, rising stock valuations.
As two stories on Page 1 of this issue indicate, many supermarket chains for one reason or another simply don’t hold appeal as acquisition targets for private investors seeking a fix-it-and-flip-it scenario. This week’s cover feature on Ingles Markets, by Associate Editor Jon Springer, is an example. Some analysts had previously told SN the company was a prime acquisition target because of its real estate holdings, but despite attracting some investor interest over the past year, the company remains publicly held.
Founder Robert Ingle’s 49% stake and 87% control of the voting allow the company to act more like a private company in many ways, which could be part of the reason for the chain’s success. As the story explains, Ingles invests at a relatively high level in its assets, pouring money into better facilities and added services that have served it well in its core market of small Southern towns, and have helped it become a viable alternative for consumers put off by the supercenter experience. But as its stock price has soared, Ingles’ appeal as an investment has diminished.
Another chain that has been on the selling block is A&P’s Farmer Jack division in the Detroit area. As detailed in a story beginning on Page 1, Montvale, N.J.-based A&P two years ago said it would seek to sell the chain, then pulled back after a suitable buyer could not be found. In this case, private equity apparently has seen little opportunity for a turnaround of the banner in Michigan’s currently weak economy. A&P indicated the chain will likely be broken up among multiple strategic buyers.
Selling to strategic buyers probably remains the most viable option for supermarket companies looking for an exit strategy.
Even the high-profile investments in Pathmark and Wild Oats by Yucaipa Cos., a Los Angeles-based investment firm, ended up with the two chains executing strategic mergers with competing food retailers.
Other private equity acquisitions have been highly targeted. In the case of Marsh Supermarkets, the Indianapolis-based chain that was sold to Sun Capital Partners last year, the supermarket company’s stock price had been beaten down to the point where it was just too cheap to pass up. Sun Capital has a history of making such opportunistic retail acquisitions, in which it installs its own management team with a specific plan for a turnaround, according to Cheryl Carner, managing director of retail finance at Capital Source, a financing firm based in Chevy Chase, Md., that focuses on middle-market companies.
Carner, whose firm is financing the expansion of New York’s Fairway Markets, said she’s looked at several supermarket deals lately but has found few that merit investment.
“It’s a low-margin business, and they are difficult to lever,” she said. “There’s less room for error.”