How the Coronavirus Infected Albertsons’ IPO

While it’s anyone’s guess as to how soon—and by how much—the supermarket industry can recover from the punishing stock losses sustained during this week’s coronavirus meltdown, it will be some time before investors will finally get around to considering new stocks.

That’s especially unfortunate for the owners of Albertsons Cos., which have already waited 14 long years to cash out of their investment—and now appear to have no choice but to wait a little longer.

For Albertsons, timing could not have been worse. On March 9, the very first business day since the Boise, Idaho-based retailer moved to publicly register its stock for a listing, global markets fell into turmoil on growing fears of the financial effects of the coronavirus. By the end of the week, the World Health Organization declared the fast-spreading flu-like disease a pandemic, the financial markets had collapsed into a bull market for the first time in 11 years, major sports leagues were postponing games, and the Volatility Index—the market sentiment indicator referred to as the VIX, or the “fear gauge”—was soaring.

That’s a general indication that initial public stock offerings at best would be delayed until markets simmer down—and stay there for a while, sources say. But there’s no telling when that might be, or what investor appetite might look like then.

“It looks like we should be following Albertsons when we want to know what will happen with the IPO market,” Kathleen Smith, principal with Renaissance Capital, a Greenwich, Conn.-based institutional research firm that bills itself as “the IPO experts,” told WGB. “When they try to go forward, that’s when things get challenging.”

Smith was being facetious, of course, but for Albertsons, controlled by a consortium of investors led by the private equity firm Cerberus Capital Management, encountering exit-route roadblocks is becoming awfully familiar. Its latest filing marks the third time the company has made a public move to cash out over the past five years, and none have thus far succeeded.

Albertsons last registered stock for an IPO in 2015, touting its success in improving the performance of acquired stores through the “Albertsons playbook,” citing the fast turnarounds of large acquisitions of stores from Supervalu (the American stores group essentially reuniting the old Albertsons Inc.) and Safeway.

IPOs don't happen when the Volatility Index is above 30, sources say. That wasn't a problem until this week.

That IPO’s withdrawal was officially credited to Albertsons’ proposed merger with Rite Aid in 2018—itself an attempt to go public—but that deal would likely never have been pursued had the market been more receptive to Albertsons’ IPO pitch in 2015. Then, it wasn’t a virus but the lightning flash of the Amazon-Whole Foods deal, announced in summer 2017, that really finished off any possibility that Albertsons would get off the ground, although investors reportedly weren’t thrilled with a heavy debt load and deflationary industry conditions, either.

Albertsons subsequently argued hard for the Rite Aid deal but found little support among the holders of the drugstore’s stock, who believed the merger would shortchange them. Their rally to reject the offer caused Albertsons to call it off on the eve of the vote.

Stymied again, that event triggered another two years of hard work at Albertsons. It took the leverage message to heart, executing a series of sale-leaseback deals to raise hundreds of millions to pay down debt. In the meantime, the economy improved, investments in technology started paying off, and a series of high-profile hires, including CEO Vivek Sankaran, helped to turn the business around, allowing Albertsons to tell a story of well-known brands with well-located stores that were growing sales and positioned to benefit further as omnichannel demand grows.

The public filing this month accompanied the revelation that Albertsons had filed confidentially in October. That gave the company a chance to “test the waters” with certain large institutions, Smith said, giving the retailer additional confidence that it was finally time to strike.

Only then did the markets get sick.

For an IPO to proceed, Smith says the VIX needs to return to below 30, and stay there for at least a month. That was no problem until this week, when it rocketed to 75. 

“This extreme market volatility shuts down the market for all issuers,” Smith says. “Capital raising doesn’t happen when existing companies and investments are not doing well, because every investor pulls in their horns and won’t add risk when they’re trying to manage their existing issues in their portfolio.”

“The window is shut,” added Jeff Zell, a senior researcher for IPOBoutique.com, an advisory firm based in Tampa, Fla. “Investors are not going to be looking for new risk in this kind of volatility.”

All that said, the prospect of Albertsons as a “defensive” play is in its favor if and when the markets settle down, although a dividend would help, Smith said. And having registered its stock, Albertsons is ready to go when the market is.

“Given how many times Albertsons tried to take a bite at the apple, they obviously want to be ready to time this. All the [private equity] firms like Cerberus are all anxious to get liquidity in their portfolio, so there is a push to get out,” Smith says. “And if you’re the most fleet of foot, you can be ready to move forward.”