Supervalu Buyout Questioned

MARK HAMSTRA

NEW YORK — Shares of Minneapolis-based Supervalu jumped amid speculation the company might be an acquisition target, but some analysts questioned whether or not the deal talk was based on any actual interest in buying the company.

The possibility that the rumors were based on fact was enhanced by some reports that included a specific buyout price and mentioned a specific private-equity firm that had interest, but analysts still said the timing seemed wrong for such as deal, especially given Supervalu's challenges in the marketplace and its high level of debt.

“You never know, but it's not massively cheaper than Kroger or Safeway,” said Andrew Wolf, a Richmond, Va.-based analyst with BB&T Capital Markets.

Although Supervalu's shares had been trading earlier this year near 52-week lows, it still has some $8 billion in long-term debt following the Albertsons acquisition and a total debt-to-capital ratio of about 77%, analysts said.

Supervalu is one of many publicly traded companies across various industries that have recently been the subject of acquisition speculation as the economy recovers and investors seek stocks that may be perceived as undervalued.

Wolf noted, however, that the ratio of Supervalu's EBITDA to its enterprise value — a metric used in valuing acquisitions — was only 11% less than that of Cincinnati-based Kroger Co.

“That's not that big a difference,” he said. “I wouldn't say [Supervalu] is undervalued.”

Another analyst, who asked not to be identified, said although a case could be made for financing the deal, “the timing seems wrong,” especially given the challenges Supervalu faces.

Supervalu has been seeking to sell many of its assets anyway — recent transactions included the sales of its Shaw's stores in Connecticut and most of its Albertsons in Utah — and a buyer could be looking at acquiring Supervalu en masse simply to continue spinning off the assets in chunks. Supervalu also recently agreed to sell its Payson Store Fixtures division to DGS Retail, Boston.

“The question is, could you command a good price for anything other than the Jewel-Osco division [in Chicago]?” said the analyst who wished to remain anonymous, adding that the company would face “antitrust issues” in some markets, such as Southern California, where Albertsons competes side by side with Kroger's Ralphs chain and Safeway's Vons banner.

Wolf noted that some assets — particularly in the Northeast — could be sold to non-competing companies, such as Kroger, and he said he believes that Supervalu will continue to divest stores on its own as it redirects investment toward its Save-A-Lot limited-assortment chain.

In a report last week, Karen Short, a New York-based analyst with BMO Capital Markets, noted that Supervalu was the most likely acquisition target among the large-cap supermarket stocks, based on BMO's analysis of “leverage and interest coverage ratios, transaction size, and asset sale opportunities (post LBO to reduce debt).”

“A transaction involving Supervalu would likely require multiple sponsors, but leverage ratios would be comfortable, and given the multiple asset sale opportunities post LBO, debt could easily be reduced,” she wrote.