Finding value in Supervalu

The sale of Supervalu may start a trend that leads the grocery industry to better health. By Barrie Dawson Ten days into the new year, and there is a slimmer, stronger Supervalu for the world to see, thanks to the sale of 877 stores in a transaction that just might save the grocery icon’s life. “They have some excellent wholesale properties, and they have some pretty good small retail brands,” says industry analyst Dr. Bill Bishop, chairman and founder of Willard Bishop, a retail-consulting firm based in Barrington, Ill. “I would expect that the remaining wholesale business, while at a different scale, could be a pretty attractive business. “I kind of think this is the only step that will be made. They had better hope it’s all they need for viability. I don’t know what happens after that,” he says. Last July, it became painfully clear something had to happen. Supervalu was dragging around 2,434 retail stores at the time, and its first-quarter financial report vividly revealed how all that bloating was bringing the nation’s third-largest retailer to its knees. When its stock prices plunged the next morning, financial strategists were called in to help save the chain. Their efforts culminated in a $3.3 billion agreement to sell its Albertsons, Acme, Jewel-Osco, Shaw’s/Star Market stores as well as its Osco and Sav-on in-store pharmacies to the New York City-based Cerberus Capital Management-led consortium AB Acquisition LLC. “When we announced our review of strategic alternatives this past summer, our goals were to improve our business, better position the company for the future and create the best opportunity to deliver shareholder value,” outgoing Supervalu CEO, chairman and president Wayne Sales said during an online conference call. “I believe we have accomplished these goals.” Sales said that once the transaction is complete, Supervalu expects to generate annual revenue in excess of $17 billion—47% which is to come from its food-wholesaling business, which serves 1,950 independent retailers nationwide; 25% from its 1,300 Save-A-Lot discount stores; and 28% from its streamlined retail food division, which includes the Cub, Farm Fresh, Hornbacher’s, Shoppers and Shop ‘N Save banners. “By focusing on these core grocery businesses, we will create short- and long-term value for all shareholders,” said Sales, whose successor is 61-year-old Sam Duncan, most recently the chairman and CEO of OfficeMax. “As for the divested banners, they will become part of a company with the financial resources, leadership and experience necessary to help them improve their businesses.” The sale reunites the Albertsons stores for the first time since 2006, when Cerberus and Supervalu bought parts of the chain. In addition, the Cerberus-led consortium, Symphony Investors, is buying up to 30% of Supervalu’s common stock at $4 a share. Thus, Cerberus will have a lot to say about Supervalu’s future. It has already named Robert Miller, president and CEO of Albertsons, as non-executive chairman of the board. “I thought this was inevitable,” industry analyst Dr. David Rogers, president of Deerfield, Ill.-based DSR Marketing Systems, says of the sale. “I think the bottom line is, it’s part of the managed downsizing of the American supermarket industry. I think with these real-estate companies—their involvement is very obvious. “Jewel is strong, obviously, but Shaw’s and Acme are not. I think we’ll see an awful lot of stores closed, repositioned or sold to competitors. It is part of a macro trend that’s going on now in the industry.” The Cerberus consortium buying the grocery chains from Supervalu includes Kimco Realty Corp., Klaff Realty LP, the real-estate group Lubert-Adler Partners and Schottenstein Property Group. “Cerberus doesn’t want to own stores, so it means a definite transformation for all those banners,” says Bishop, who believes Jewel may be sold to the Kroger chain, strengthening its presence in the Chicago area. “Since the partnership includes some pretty astute real-estate repurposers, you can imagine there will probably be some shrinkage of each of these brands. “Typically, anywhere from 20% to 60% of a chain are unprofitable stores, so this is going to be a way for people to focus and unpack some of those.”