GROUPE CASINO CONSIDERS SALE OF SMART & FINAL BANNER

ELLIOT ZWIEBACH

LOS ANGELES - Smart & Final, the non-membership warehouse chain here, may be on the block in the next few months now that its majority owner, Casino Guichard-Perrachon, has announced plans to dispose of non-core assets by the end of 2007.

However, since Groupe Casino has not yet specified which assets it will sell, it's possible it will hold onto the company, industry observers told SN.

Even if it does decide to sell Smart & Final, they added, it is not yet clear whether it would simply opt to sell its 57% equity stake in the company or form a partnership with Smart & Final to sell the whole company.

"It's still Day One in the process," one observer said last week.

With holdings in a dozen countries around the world, Groupe Casino could raise the $2.5 billion it says it needs to refinance its debt without including Smart & Final, the observer added, "though given the distance of the West Coast of the U.S. from France, it would not be a surprise if it decided to dispose of the company."

Analysts said Smart & Final is an attractive property, with low debt, considerable real-estate holdings and significant opportunities for growth - a company that could expand, under new ownership, to markets in Texas, New Mexico or virtually any other part of the U.S. Besides its non-membership warehouse stores, it also operates a group of cash-and-carry units that could be spun off separately from the other holdings, they pointed out.

"Fortunately for the [management] team, Smart & Final is one of Casino's better foreign assets, with dependable cash earnings and modest leverage," Gary Haberman, managing industry analyst for Global Credit Services, New York, said last week. "Not only is the niche warehouse grocer an attractive West Coast business but it could also provide a foundation for consolidation of cash-and-carry stores across other regions as well."

Smart & Final, with 2005 sales of $2 billion, operates 199 non-membership warehouse stores and 51 cash-and-carry units in California, Oregon, Washington, Arizona, Nevada, Idaho and northern Mexico. Groupe Casino, based in St. Etienne, France, acquired control of the company in 1984.

In disclosing its 2005 results in mid-March, the French company said it had completed a comprehensive strategic review of its asset portfolio, "with the aim of refocusing the group on the most profitable, value-creating markets," beginning with the disposal of nonstrategic assets to help improve its financial structure.

The company did not list the assets it may seek to divest, "[though] Smart & Final is clearly one of the units that could be on the sell list," Claudie Casimir, an analyst with Ixis Securities, Paris, said last week.

In anticipation of its inclusion on that list, the Smart & Final board of directors said last week it intends to review its strategic alternatives, with plans to hire legal and financial advisers to assist in that review.

Rick Phegley, chief financial officer, told SN Groupe Casino has been "a stable and supportive shareholder" since its initial investment in the company. He declined comment on whether the French company had signalled its intentions to the company prior to its public announcement.

Karen Short, an analyst with Soleil Securities, New York, told SN she believes Smart & Final could be sold in two pieces, with a strategic buyer acquiring the cash-and-carry stores, most of which are in the Pacific Northwest, and a private equity buyer acquiring the warehouse stores.

"With the company owning 30% of its total real estate and 40% of the Smart & Final locations, it makes sense that a private equity buyer would have more interest because of the ownership position, because of the broader market appeal of that format and because of the significant opportunities for growth in existing markets, contiguous markets or the rest of the country," Short said.

"So I can see a situation where a private equity company takes Smart & Final private, rolls the concept out to a larger footprint, then takes the company public again as an exit strategy. And with private ownership, there are significant opportunities to run the stores better," she said.

Short also suggested that a new owner might opt to sell the company's distribution center in Commerce, Calif., and outsource distribution. "Since the strike-lockout in Southern California, the distribution center has been able to maintain the stores' needs, but just barely - and inefficiently."

The price of Smart & Final stock, which was in the $13-$14 range at the end of 2005, rose to about $16 last month when Groupe Casino announced plans for an asset sale, and it continued to rise last week.

Jonathan Ziegler, a Santa Barbara, Calif-based analyst with Dutton Associates, El Dorado Hills, Calif., said Groupe Casino tried to sell the company in the mid-1990s for approximately $25 per share, at a time the company's shares were selling at about $18, "and it may have shopped it to Target, Wal-Mart and Costco, without success. Now it's a different era, with a limited possibility of getting bids above the market price."

He said Costco Wholesale, Issaquah, Wash., would be a logical buyer for the company "because it would enable Costco to grow Smart & Final with smaller stores in more localized markets.

"But there's also a lot of money in financial markets, and Smart & Final could attract some financial buyers."

Gary Giblen, senior vice president and director of research for Brean Murray, Carret & Co., New York, said a sale of Smart & Final could help the company achieve the geographic expansion it has talked about for years, including possible moves into Texas and New Mexico.

He said there were no obvious buyers for the chain, "though there could be interest from Costco if there were no antitrust issues or from a supermarket interested in operating a warehouse format," he said.

Smart & Final "cleaned up" its operations over the last few years by getting out of the food-service business, but now it has a good store base and a well-focused management," Giblen said.