Inside the Suspenseful Final Moments of the Supervalu-UNFI Deal

In the hours before Supervalu and United Natural Foods Inc. announced their stunning merger, the wholesaler left behind a competing suitor offering the very same per-share price, according to a dramatic narrative filed this morning with the Securities and Exchange Commission.

The rejected suitor—which sources told WGB was likely to have been C&S Wholesale Grocers—only hours before had been leading the bidding before a last-minute, $100 million raise by UNFI, which left Supervalu’s board and advisers to choose between twin $1.255 billion offers.

In the end, they chose UNFI’s offer based on timing risks, antitrust concerns and closing certainty, and worked overnight to draft a merger agreement that the companies announced the morning of July 26.

The narrative described a masterful auction that unfolded over the course of seven months that saw offers for Supervalu gradually increase from $23 per share to the announced final $32.50 per-share price, with its pursuers increasingly willing to take on the company’s pension obligations and troubled retail division, and improve the certainty of the financing behind them. The process came against a parallel backdrop of intense investor pressure on Supervalu to swap out its board of directors and pursue a course of action prescribed by activist Blackwells Capital, which was not mentioned in the narrative part of the proxy statement. Supervalu shareholders will vote on whether to approve to the UNFI deal.

Related:Truckloads to Unpack From Supervalu Stunner

The UNFI-Supervalu merger is expected to have strong reverberations across wholesaling and retail. For UNFI, the deal vastly expands its offering into faster-moving conventional groceries and provides dozens of new warehouses it can use to better serve customers and address constrained capacity, which can help it retain—or perhaps absorb the loss of—its largest retail buyer, Whole Foods Markets. For Supervalu, it puts an exclamation point on a whirlwind strategic turnaround that followed years of subpar performance under a succession of managers and strategies that eventually drew activists to the stock.

Informal talks between Supervalu and potential financial and strategic partners—including UNFI and two rival wholesalers identified in the filing only as “Company A” and “Company B”—had taken place since 2016, according to the filing. But it was a $23-per-share offer from “Company A” last December, relayed in a phone call between its CEO and Supervalu’s counterpart, Mark Gross, that started a formal process.

Burt P. Flickinger III, managing director of Strategic Resource Group, told WGB that based on the descriptions in the filing and his work in examining the wholesaling landscape, in part to assist Blackwells, there was “a high degree of likelihood” the other suitor was C&S Wholesale, which he noted had previously employed Gross.

Company B on two occasions expressed interest in making a deal with a Supervalu, but it made no formal offers, the narrative relates.

C&S did not immediately return a call to WGB for comment, while a Supervalu spokesman reached by WGB declined to identify the parties.

The following are highlights from narrative submitted to the SEC.

Talks Begin, UNFI Soon Joins

The initial offer from Company A came in partnership with a financial partner, who was also not identified in the filing. A formal offer from that group prompted Supervalu to engage with investment bankers and other advisers in January and start a process by which it would permit the bidders to view nonpublic information in an attempt to improve an initial offer the board deemed “inadequate.”

In early March, Gross contacted counterpart Steven Spinner of UNFI and encouraged him to consider making an offer for the company. By the end of that month, UNFI indicated it was willing to discuss multiple structures to facilitate a transaction, including a cash sale, stock sale and spin merger, and that the consideration to Supervalu stockholders could consist of cash and shares of UNFI common stock. However, UNFI said the offer it was considering would not include Supervalu’s retail business, legacy corporate technology, systems and software associated with its retail business and legacy pension liabilities associated with its retail business.

In April, Company A increased its offer to $27 per share, prompting Gross to inform UNFI that “time was of the essence,” and that it would require a specific offer.

UNFI subsequently relayed intentions to proceed with an offer that would be contingent upon the divestiture of Supervalu’s retail assets, and on May 17 it provided a $21-per-share offer with that contingency. Supervalu’s board said this offer “meaningfully undervalued” the company but allowed for parallel due diligence between the suitors to continue in hopes of generating better proposals.

Company A completed its due diligence in early June and reiterated a $27-per-share offer, while producing a letter from an investment bank stating it was highly confident that it could arrange debt financing for the potential transaction. However, Supervalu’s review indicated a number of “unacceptable” risks to completion of the proposed transaction, including conditionality relating to Company A’s debt and equity financing and significant limitations on Supervalu’s recourse in the event of a financing failure. In late June, its advisors informed Company A it was rejecting the offer.

UNFI in the meantime continued to pursue a means to acquire the company without taking on its retail business, including the exploration of a financial partner to take on those stores, in exchange for making a higher per-share offer.

On June 25, Company A increased its offer to $27.25 per share, but Supervalu’s advisers remained uneasy about financing risk and antitrust issues.

Later that month, UNFI revised its offer to $27 per share, conditioned upon the wind-down of its retail business, and indicated that its due diligence process was substantially complete. It also requested that Supervalu agree to a four-week exclusivity period during which it would not discuss certain alternative transactions with any other third party. Supervalu, however, now said that an offer conditioned upon selling its retail was unacceptable. It also turned down a July 16 counterproposal that included contingent value rights (CVR) that would bring the price to $27 per share if goals in meeting the retail sales were met. This too was rejected.

On July 17, Company A expressed an interest in negotiating a final agreement, with a goal of announcing a deal the following week.

On July 19, Supervalu informed UNFI that discussions between it and another potential buyer were substantially progressed and that if UNFI wanted to make a final proposal, “it should do so quickly.”

On July 23, having made some progress on the risks identified in Company A’s proposal, Supervalu informed Company A it was in talks with another potential suitor. That evening, Spinner called Gross to inform him UNFI’s offer would go up to $29.50 per share.

'Best and Final' Offers, Then More

On July 24, Supervalu’s representatives requested that both interested parties submit their “best and final proposal” the next morning, and that Supervalu intended to make a decision that night and announce it the morning of July 26.

Company A that morning issued an offer of $32.50 per share. A revised draft of the agreement accepted many of Supervalu’s positions regarding conditionality but did not provide for unconditional equity financing. UNFI’s representatives said it was prepared to offer $29.80 per share, but its representatives making the offer informed Supervalu’s advisers they had not been authorized to present it as the “best and final offer.”

That afternoon, Spinner phoned Gross and told him UNFI was still working toward a final offer. Company A subsequently informed Supervalu another offer could be forthcoming.

That evening, shortly before the board meeting was to begin, Spinner phoned Gross to indicate that UNFI’s best and final proposal was a price of $32.50 per share, but that the proposal would expire shortly unless accepted.

Supervalu began its evening board meeting considering equal per-share offers when one of its advisers received a phone call from a Company A financial adviser. "The representative … indicated that the board meeting was ongoing and asked if Company A intended to submit an improved proposal,” the filing said. “The representative of Company A’s financial adviser indicated that Company A would not do so.”

“Given that the final proposals by UNFI and Company A were both at a price of $32.50 per share, the discussion on the differences between the two proposals focused on timing risks and closing certainty relating to each,” the filing said. “The board noted during the course of its discussion that a transaction with Company A could take substantially longer than a transaction with UNFI to receive antitrust approval (and a transaction with Company A could require greater divestitures), and as a result, the proposal by UNFI offered a higher expected present value as compared to the proposal of Company A.”

Gross also expressed concern that there was “substantial business and employee risk during such period.”

The board also said that while Supervalu’s recourse in the case of a financing failure had been improved in Company A’s proposal, “there continued to be an underlying risk associated with a financing failure due to Company A-specific factors, such as a decline in Company A’s business, and that no similar risk was present in the UNFI proposal. Following discussion with its legal and financial advisers, it was the consensus of the Supervalu’s board that UNFI’s proposal was the best combination of value and closing certainty for Supervalu’s stockholders.”