Why Albertsons Swiped Left

It’s probably not the end of the world for Albertsons Cos.

The Boise, Idaho-based supermarket retailer, after all, walked away sooner than paying another dollar to acquire its would-be drugstore counterpart Rite Aid. Both retailers mutually agreed to dissolve the potential partnership on the verge of a shareholder vote that may well have left them both still single, with only a little more egg to wipe off their faces.

The sudden swipe left, as we reported, leaves Albertsons once again without a public exit strategy for Cerberus Capital Management, which has now owned Albertsons for a dozen years or so, or about three lifetimes in the private-equity world. It would be some kind of longevity record were it not for Lone Star Holdings and Bi-Lo: That partnership was finally severed earlier this year courtesy of the second Chapter 11 on its watch.

It’s tempting but not entirely accurate to draw too many parallels between Bi-Lo and Albertsons, despite both retailers flirting with too much debt, bolt-on acquisitions and failed IPOs. Some observers I spoke to in the aftermath of the Rite Aid failure had little trouble interpreting it as a kind of blessing in disguise for Albertsons.

“You can debate whether Rite Aid was the right strategic deal for Albertsons, but the key objective was to go public, which is what Cerberus wanted,” said Neil Stern of McMillanDoolittle, a Chicago-based industry consultant.

Related:How Albertsons Got Its Groove Back

Stern said he figures Albertsons would consider taking another run at a public offering, perhaps without first acquiring a public company do so, particularly if the modest momentum the company has shown in its most recent reported quarters can continue.

Just getting back on a growth trajectory indicates the many things Albertsons has done right, says Burt P. Flickinger III of Strategic Resource Group. Flickinger, who said he is both a bondholder of Albertsons and a stockholder in Rite Aid, maintains he would have cast his votes for a deal had it come to that. As it stood on the day after the deal was called off, his Rite Aid stock was taking a beating.

Flickinger points to Albertsons’ strong operators and management as an advantage likely to continue with or without Rite Aid, nothing that most divisions right now are casting very different shadows than they were at the time they were acquired. Rite Aid, he believes, should have been the next.

“This is a catastrophe for Rite Aid,” he says.

Stern agreed, saying investors opposing the deal “clearly overplayed their hand” in hopes of getting a better price and now face an even more uncertain future.

Related:Albertsons, Rite Aid Terminate Merger Agreement

One Rite Aid investor, who asked not to be identified, told me the deal failure should trigger a series of moves at the drug chain, including the installation of a new board and management, which the company already indicated was a possibility. According to the investor, officials have been unable to effect share price appreciation and unable to afford to renovate its fleet despite a developing “world class” format in its Wellness store.

Albertsons, by contrast, merely needs to look harder to find its vehicle onto the public markets, and perhaps its next CEO, by playing the field the way it always has. To that end, it ought to be a considered today a more serious contender for grocery assets on the market, from longshots such as Sprouts to names including Cub, Hornbachers and Shoppers, all expected to be spun off in the recently announced Supervalu-UNFI deal. They just need to know when to swipe right.