ALBERTSONS COULD ATTRACT JOINT BIDS

Elliot Zwiebach

BOISE, Idaho -- The financial advisers to Albertsons here are reportedly looking over preliminary bids from a variety of private equity investors in an effort to put together a deal for the sale of Albertsons by Thanksgiving, industry observers told SN last week.

The bids were reportedly submitted earlier this month to Goldman Sachs & Co. and the Blackstone Group -- the investment banking firms hired by Albertsons to help it sort out its strategic alternatives, which it said could include the sale of the company.

Observers told SN it is unlikely any single investment group will be able to come up with enough money -- possibly $16 billion -- to acquire Albertsons on its own; consequently, they said they expect the chain to be sold to a consortium of investment groups, who would then operate the company while trying to sell off less profitable divisions to strategic buyers.

One source said Albertsons began meeting with investment bankers about six months ago "to pitch the company to potential investors." Some of those private equity groups began meeting with the company and its bankers about a month ago to indicate what they think the company is worth and to outline what their offers might look like, he added.

Although some potential investors may have formed tentative partnerships with each other to finance the deal, "those partnerships are in a state of flux," one source told SN, and it's possible Goldman Sachs and Blackstone could try to put different combinations together that they think would be most effective.

Published reports of possible investors include the following:

- Apollo Partners, New York, which teamed with Yucaipa Cos., Los Angeles, in 1995 to acquire a major stake in Dominick's Finer Foods, Northlake, Ill. It was also an investor with Yucaipa later that year in Ralphs and Food 4 Less in Southern California. It does not have any current supermarket holdings.

- Bain Capital, Boston, which has not made any previous investments in the supermarket industry, although it has major investments in Duane Reade drug stores in New York and Shoppers Drug Mart in Canada.

- Carlyle Group, Washington, which owned a 30% stake in Fresh Fields, a natural food chain based in Rockville, Md., until it was acquired by Whole Foods Market, Austin, Texas, in 1996. Carlyle does not have any supermarket holdings, although it has had a major investment in Dr Pepper/Seven Up Bottling Group, Dallas, since 1998.

- Cerberus Capital Management, New York, which has not made any supermarket investments in the past, though it does have a major holding in Sun World, one of the largest produce companies in California.

- Kimco Realty, New Hyde Park, N.Y., a publicly traded real estate investment trust that owns and operates shopping centers in 42 states and that was reportedly a bidder for Pathmark Stores, Carteret, N.J., earlier this year before losing out to Yucaipa. An industry source said REITs are becoming more interested in buying out companies with large real estate holdings such as Albertsons, which said it owns more than 60% of its real estate.

- Kohlberg Kravis Roberts & Co., New York, which was a major supermarket investor in the 1980s and 1990s through its acquisitions of Fred Meyer Inc., Portland, Ore., in 1981; Malone & Hyde (a wholesaler), Memphis, Tenn., in 1984; Safeway, Pleasanton, Calif., in 1986; Stop & Shop, Quincy, Mass., in 1988; Bruno's, Birmingham, Ala., in 1995; and Randalls Food Stores, Houston, in 1997. It gradually reduced its holdings in each one and currently has no supermarket holdings.

- Thomas H. Lee, Boston, which acquired Big V Supermarkets, Florida, N.Y., in the early 1990s and sold it in 2002 to Wakefern Food Corp., Elizabeth, N.J. It does not have any current supermarket holdings.

- Yucaipa Cos., Los Angeles, which owns a 40% stake in Pathmark and a 10% stake in Wild Oats Markets, Boulder, Colo. Until it got involved with those companies earlier this year, Yucaipa had been inactive in supermarket retailing for several years after overseeing the consolidation of West Coast retailing during the 1990s before selling Fred Meyer, Ralphs, Food 4 Less, Smith's Food & Drug and Smitty's to Kroger Co. in 1999; it also previously sold Dominick's to Safeway.

John Heinbockel, an analyst with Goldman Sachs, New York, said in a report last week a sale of the company to a consortium of financial buyers seems the most likely scenario. (According to Goldman Sachs, Heinbockel works in the company's investment research division, which, for legal and compliance reasons, is completely separate and walled off from other divisions, including the investment banking division, which provides financial advisory services for clients.)

"There is certainly sufficient equity capital, in the aggregate, to finance such a transaction," Heinbockel wrote. "In addition, the 'buyer by committee' would diversify some of the operational risk away and potentially maximize what the better assets could garner by more precisely matching them to the best buyer. It is also possible some strategic buyers could play a role, especially in the drug retail business, thereby augmenting sales proceeds and the price that can be paid for the whole company."

Heinbockel said Albertsons' management, and possibly its board members, appear to prefer a private rather than a public solution.

He said a privately held Albertsons "might be forced to divest one or more of the urban chains (Jewel, Acme or Shaw's) to reduce its leverage to appropriate levels. Capital spending could then remain stronger."

Being privately held might also facilitate the pursuit of an everyday-low-price strategy, Heinbockel said.

When Albertsons announced on Sept. 2 it might be for sale, Heinbockel said his initial thought was the decision reflected frustration by the chain's directors with the company's direction and performance. However, based on subsequent discussions with industry sources and published reports, "it appears private equity interest was expressed in a division [of Albertsons], possibly the drug stores, and this interest encouraged the board and management to pursue a potentially broader transaction," Heinbockel said.

Perry Caicco, an analyst with CIBC World Markets, Toronto, said in a report that it believes Albertsons is likely to be sold to a consortium of private equity players. "To a private investor with the right skill set, Albertsons probably contains a substantial amount of unlocked value. The real opportunity might be for a consortium of players to take Albertsons private and begin the process of surfacing value by monetizing real estate (through a sale-and-leaseback arrangement) and the healthier divisions and then repairing some of the better but undercapitalized assets" before selling them.