ALBERTSONS SALE OFF, BUT ASSET DISPOSALS BEGIN

MARK HAMSTRA

BOISE, Idaho - Albertsons here is expected to begin divesting some of its underperforming assets quickly now that it has rejected a $26-per-share offer to buy the company outright, sources told SN last week.

After putting itself up for sale in September and collecting bids from several groups of interested suitors, Albertsons late last month scuttled the $9.6 billion deal and said it would no longer seek to sell the whole company. Instead, it will attempt to sell off its weaker stores, which sources told SN include locations in Northern California, Florida, Texas, Nebraska and parts of Utah. The company said it was in discussions with "several parties" interested in acquiring its underperforming assets.

After months of speculation about who might buy Albertsons - and how a buyer might then parse out the $40 billion supermarket operator's far-flung holdings - the highest bidder turned out to be a group of three companies, including Supervalu, Minneapolis, which had agreed to acquire all of Albertsons' best-performing retail operations, one source with knowledge of the deal told SN.

The source, who asked not to be identified, said Supervalu would have taken over Albertsons' stores in Southern California, Las Vegas, Chicago and the Northeast, where Albertsons operates the Acme and Shaw's chains. Supervalu's partners in the bid, Cerberus Capital Management and Kimco Realty, were to have acquired Albertsons' underperforming regions with the intention of selling them off for their real-estate value. Albertsons' freestanding drug store division was to have been acquired by CVS Corp., Woonsocket, R.I.

The massive deal - described as one of the largest leveraged buyouts in history - fizzled in the final stages of negotiations, the source told SN, at least in part because Albertsons' board was not satisfied with the offer of Cerberus and Kimco for the underperforming assets. The overall transaction was to have involved a combination of cash and Supervalu stock.

Some reports said the parties involved had reservations about potential antitrust issues, but sources told SN it was unlikely that concerns over intervention by the Federal Trade Commission could have derailed a deal this large and complex. Instead, the board apparently decided that it could achieve greater returns for shareholders by selling parts of the company itself, sources said.

"I think they were disappointed in the price, and I really think that is what drove the decision [to cancel the sale], because they sort of suspect it is worth more than that," said Jonathan Ziegler, an analyst with J.M. Dutton & Associates, Eldorado Hills, Calif. "Basically, Supervalu, Kimco and Cerberus were going to parcel out individual properties, and they were going to make a spread. I really don't think Supervalu was going to keep and operate many of those stores. I think they were going to parse them out to independents, and have the independents become customers of theirs."

One analyst said he thinks an acquisition of Albertsons could still come to pass - in part because of the "ego" pressure on the private-equity firms to execute high-profile deals, especially in the wake of the Sears-Kmart merger.

"We believe [Albertsons] could still be sold in its entirety for about $28 per share," said Gary Giblen, senior vice president and director of research, Brean Murray, New York. "The sheer size of Albertsons' assets makes it a prize. Albertsons is a marquee deal."

If a transaction similar to the one proposed by the Supervalu group does not take place, he said, he expects Albertsons to sell the entire company piecemeal. He said an acquisition of Albertsons' Jewel-Osco division in Chicago would be very important for Supervalu, and other pieces of the company are attractive to various other operators.

In a research note, Perry Caicco, an analyst with CIBC World Markets, Toronto, estimated the value of Albertsons' non-core supermarket assets, which include about 415 stores, to be about $686 million. The company's 694-unit drug store division, which analysts said could either be sold or retained, has a value of about $3.93 billion, he said. He put a value of about $2.15 billion on Shaw's, $2.87 billion on Jewel-Osco, $1.44 billion on Acme, and $2.2 billion on Southern California. Another 573 core stores are worth $1.3 billion, he estimated.

Ziegler said he expects Albertsons to "go back to the drawing board and see what they can do to create higher value."

"I think over time they will either try to come up with a formula the way Safeway has or Kroger has and really develop a hard-hitting positioning for the chain, both in merchandising and in promotion and marketing, or I think you will see them gradually dismember it," he said.

Michael Johns, a vice president at banking firm Harris Nesbitt, Chicago, said much of Albertsons' business is profitable.

"There were parts of Albertsons that were exceptional," he said. "Looking at it as an outsider, their margins really weren't that bad."

He acknowledged that parts of the company were underperforming, although he declined to cite specific regions. He singled out California - where Albertsons operates nearly a third of its store base - as "an area of concern" because of its high density of locations and vulnerability to future expansion by Wal-Mart Stores, Bentonville, Ark.

He also noted that "there's been a lot of talk about Texas and Florida, because of declining market share."

Several analysts suggested Kroger Co., Cincinnati, which was reportedly eyeing Albertsons during the bidding process before backing out, might be interested in at least some of Albertsons' stores in Florida.

One possibility, Johns said, is for Albertsons to shed its underperforming stores and outsource some or all of the distribution for its remaining operations.

He also said he thinks Albertsons could decide to revamp its overall approach to food retailing.

"I think Albertsons is going to have to go through some kind of change," he said. "The status quo was not good enough for [Chairman and CEO] Larry Johnston and the board.

"Getting rid of underperforming stores is good, but how did they become underperforming is the real issue," he said. "The bigger hurdle is what are you going to do with the average parts over time in the future?"

In a research note, Steve Chick, an analyst with JP Morgan Securities, New York, said he expects shareholder activism to accelerate and possible changes in the Albertsons board of directors and management. Sources told SN last week that the board supports Johnston, however.

Albertsons' stock price plunged more than 15% to around $20 per share after the sale talks ended, but rose slightly last week.