Investment Capital's Stake in Big Buyout Concepts 2007-04-16 (1)

David Merrefield VP, Editorial Director [email protected]

What's up with private equity money? Well, quite a bit, it seems.

The thing is that there's so much private equity money seeking a place to work that seemingly every company in the food distribution business is being mentioned as a possible buyout candidate.

Last week marked a high-water mark of sorts for this kind of talk when investors asserted that Kroger Co. was likely to be bought by a private equity fund. With that, Kroger's top executive made a rare public statement to the effect that such a buyout wasn't being contemplated by either Kroger's management or its board. See Page 1.

Let's take a closer look at what's inspiring such talk. To be sure, private funds play a significant role in financial transactions. A couple of obvious deals involving private funds include, most notably, last year's Supervalu-led buyout of Albertsons and the establishment of the remnant Cerberus-Albertsons store group. More recent examples include the A&P-Pathmark deal and the privatization of Dollar General. Many other examples from other lines of business could be cited. (Late last year, SN was acquired by a company underpinned by private equity funds.)

There are many reasons why a company might be interested in doing a deal with private money. A company that's publicly funded, but not doing too well, might see it as a way to get out of the public spotlight so its problems can be resolved at leisure. Conversely, if such a company is led by executives who don't know which way to turn next, those managers become vulnerable to the blandishment of a near-term pecuniary payday. Similarly, a company that's owned or controlled by family interests may see a deal as a way to unlock a bundle of cash, and private equity is where the easy money is found now.

So what motivates private equity investors? As earlier cited, there is just a lot of money at the moment seeking safe and profitable harborage. That brings investors to companies that have intrinsic value in the form of good cash flow or substantial real estate holdings, which define many food distribution companies. Also, investors look for companies that have an unrealized upside potential that could be unlocked through the installation of new management, the sale of assets or the breakup of the whole thing. Another great option is to pretty up an acquisition, then promote a synergistic merger. Examples of that include the Pathmark transaction and the Sears-Kmart merger.

Given these factors, it's not surprising that in recent time several food distribution companies have been touted as possible buyout candidates. On that list is Ahold's entire business in this country, Safeway, Delhaize, Supervalu and, of course, Kroger. In part, this reflects the fact that no deal is too big to contemplate now. However, none of these possibilities seems too likely. None, with the remotely possible exception of the first, has characteristics that would lend itself to timely extraction of invested capital. And, of these, Kroger is perhaps least likely.

This suggests one possible explanation for all the recent chatter about the possible sale of large and stable companies such as these: Investors are putting out the word that these companies are in play in a bid to set in motion a self-fulfilling prophecy.