Truckloads to Unpack From Supervalu Stunner

A sudden quiet fell over a packed ballroom at the River Centre in St. Paul, Minn., early Thursday when Supervalu CEO Mark Gross took the stage and announced that the nearly 150-year-old wholesaling giant was selling itself to rival United Natural Foods Inc.

“There was a moment of silence, and then everyone was like, ‘Oh my God, I can’t believe it,’” said Troy Waiss, manager of Stevenson, Wash.-based A&J Select Market, one of hundreds of independent grocers and product manufacturers gathered at the convention center for Supervalu’s annual expo. “People were confused, taking it all in. It got quiet for a second, and then you heard mumbling throughout the room. I think everyone was surprised.”

There was much to take in.

The stunning $2.9 billion deal represents the culmination of a wild period of transition for Supervalu and an apparent victory for a persistent investor, while setting the stage for a new age of wholesaling with reverberations likely to be felt from Wall Street to Main Street, observers reacting to the announcement told WGB.

The deal, if completed as planned later this year, will create the first truly national wholesaler across the spectrum of food from fast-moving conventional groceries and fresh foods to slower-turning but emerging products in natural/organic, ethnic and deli/gourmet/specialty fields. Along the way, about $4 billion in retail sales are expected to go up for grabs: UNFI representatives made clear the combined company had no intention to continue Supervalu’s owned retail store network, which includes the Cub Foods, Shoppers Food and Pharmacy and Hornbacher's brands.

Related:UNFI to Acquire Supervalu in $2.9B Deal

“It’s a great day for UNFI and Supervalu, and a tough day for AWG, KeHe, C&S and Wakefern,” industry consultant Burt P. Flickinger III said, referring to rival distributors. Flickinger said his Strategic Resource Group had helped activist investor Blackwells Capital make its case for Supervalu to consider such alternatives, although Supervalu officials long insisted plans to reinvent the company and unleash value for its stockholders were in the works internally.

Prior to the deal's reveal, Supervalu and Blackwells were hurtling toward a collision at the former's annual meeting next month, where a slate of board directors proposed by the New York investor are challenging Supervalu’s candidates. The entities since last fall have engaged in a lengthy swap of insults.

A Blackwells spokesman reached by WGB Thursday offered no comment. Supervalu’s embattled board unanimously approved the UNFI takeover, which represented a 64.5% premium to the company’s closing price Wednesday.

Girding for Battle

Supervalu and UNFI, in the meantime, also appeared to be arming themselves for combat. Supervalu officials at the expo meeting earlier this week spent much of their energies highlighting the Market Centre distribution arm, which provides speciality and ethnic distribution and is on the verge of a major expansion that would make those items available to its customers across its footprint. The pending expansion – Market Centre’s first Midwest distribution center is set to open July 29 in Joliet, Ill., with plans for an East Coast hub coming to Carlisle, Pa. this fall – put hundreds of specialty food exhibitors on the floor of the expo show, where Supervalu’s independent customers were making buys.

In a presentation Wednesday, Market Centre president Joe Falvey said the division, which Supervalu acquired along with its purchase of Unified Grocers a year ago, would position the company to better compete with natural channel distributors such as UNFI and its rival, KeHe, the supplier to high-flying retail rivals such as Whole Foods and Sprouts, respectively.

“Market Centre was really a West Coast thing, so no one even knew what it was,” Falvey said. “If you go to a vendor, they say, ‘Who do you use?’ and they don't mention us because we weren't a national option. But now we are going to be, and this is the sales story that we have to keep pitching to everybody as they see us grow.

“People say, ‘Well, why do you think this is going be successful?’ I go, ‘It's very simple. Unified is controlled by Whole Foods, which is the main competitor of ours. KeHe is controlled by Sprouts and Albertsons. And when you have such large customers controlling that distributor, they become that distributor. … We don't have a really huge anchor tenant in our organization, [but] we’ve got thousands of these stores all over the place.”

Supervalu previously offered some specialty items through a reselling partnership with UNFI, Falvey said, but it had not taken on the specialty distributors so directly until now.

Similarly, UNFI over the past several years has been focused on a “build out the store” strategy that added fresh and specialty suppliers and perimeter offers to better serve core natural food retailers whose business has been under siege as the organic trend went mainstream. CEO Steven Spinner in a conference call discussing the Supervalu acquisition confessed it had been going on “forever,” and that the deal would vastly expand its product selection, customer base and geographic coverage while bringing much-needed distribution capacity to service its growing legacy customers, primarily Whole Foods.

Retail Upshots

UNFI officials in a conference call Thursday said they would seek to sell Supervalu’s remaining retail chains in part to recover funds to pay down debts to be taken to fund the cash transaction.

CEO Steven Spinner – who will oversee the combined units, with COO Sean Griffin to be put in charge of integrating Supervalu –  was careful to say the company would sell in a “thoughtful and economic manner,” meaning holding out for good deals. Among Wall Street’s criticisms of Supervalu was that the company took too little in exchange during the recent shutdown and liquidation of the ailing Farm Fresh chain. A handful of strategic competitors carved up that Virginia-based banner, including Kroger and Food Lion, but many stores remain unsold.

Supervalu’s Shop n’ Save and Shop n’ Save East banners are already on the sales block, but little has come of that sales process so far.

Flickinger said that Albertsons and Kroger could be players for the Cub, Hornbacher's and Shoppers banners. Those units during Supervalu’s recently completed first quarter generated a combined $901 million in sales and positive comp sales of 0.4%.

Complimentary Pairing

Officials said the deal would create a complementary match, providing nationwide coverage from 60 distribution centers with little geographical overlap, although some consolidation of facilities is likely. UNFI said it saw $175 million in synergies coming from areas such as systems and technology, alignment of logistics and operational efficiencies.

The combined companies would presumably gain better leverage on suppliers, which could reduce costs for independent customers and allow them to be more price-competitive with scaled giants such as Kroger, Aldi and Whole Foods.

Waiss of A&J Select Market said many of the independents he’d spoken to in St. Paul were in agreement that that would be the ultimate benefit of the deal. Waiss was less concerned about potential disruption, explaining that he'd already experienced it when Supervalu acquired his former supplier Unified. “We’ve been though this before and could do it again in another four months,” he said.

For UNFI, the deal may also prove valuable to retaining Whole Foods as a wholesale account – or if the giant sets out on its own following the completion of its current deal, as some sources have suspected it would, to better absorb the loss of business.