SUPERVALU MAY STILL COVET SOME ALBERTSONS STORES

ELLIOT ZWIEBACH

MINNEAPOLIS - Supervalu here said last week its dealings with Albertsons are over, though some industry analysts told SN they believe the door is still open for the two companies ultimately to come to terms on some properties.

In a conference call discussing financial results for the third quarter ended Dec. 3, Jeff Noddle, chairman and chief executive officer, Supervalu, said the proposed deal "[would have] allowed Supervalu to obtain what we viewed as the best markets for us, while our partners were prepared to acquire the standalone drug stores and the retail properties for which we had no interest but which met their strategic and business objectives."

Under the scenario widely reported, Supervalu would have acquired approximately 1,100 Albertsons-owned stores in Chicago, the Northeast, Southern California and Las Vegas; CVS Corp., Woonsocket, R.I., would have purchased the chain's drug store operations; and Cerberus Capital Management and Kimco Realty would have taken over other assets for their real-estate value. Noddle called the potential transaction "an extraordinary opportunity" -¡ the type of event that occurs "only rarely."

When the deal fell apart, Noddle said, "Albertsons said it was removing the company from sale and was going to focus on its existing properties, and that is as much as we know at this point."

Noddle could not be reached for further comment last week on whether Supervalu would still be interested in acquiring any Albertsons properties.

However, some analysts indicated they believe some sort of deal between Supervalu and Albertsons could still come to fruition.

"Supervalu made it clear it is willing to spend big bucks if an acquisition is compelling," Chuck Cerankosky, an analyst with Key Banc Capital Markets, Cleveland, told SN, "and I believe Noddle left the door wide open to be part of some transaction with Albertsons.

"The reasoning is that Supervalu wants to grow, and given the attrition in its business, an acquisition, particularly a large one like this, would be very important, especially if it could get Albertsons at a good price."

Mark Husson, New York-based managing director and global head of consumer research for HSBC Securities, London, offered a similar opinion. "The reasons Albertsons wants to sell the company and Supervalu wants to buy it have not changed," he said. "All that needs to change is flexibility in approaching the Federal Trade Commission, since that was apparently what caused the deal to fall through.

"But I think the door is still open, and if Albertsons is able to get the right offer for the entire company, I believe it would still be willing to go back to Supervalu or other potential buyers."

Patricia Baker, Montreal-based analyst with Merrill Lynch, New York, implied in a published note that Supervalu and Albertsons might still come together in some sort of deal, noting Supervalu "did not comment about the possibility of still acquiring certain Albertsons assets."

Jason Whitmer, an analyst with Midwest Research, Cleveland, offered a contrasting view. "I believe Supervalu made it clear this [deal with Albertsons] was a closed issue and gave no indication that anything else is coming," he said.

Meredith Adler, an analyst with Lehman Brothers, New York, said in a published note Supervalu stood to benefit from a deal with Albertsons. "There is no doubt the transaction was riskier than anything the company has done before, [but] the state of the grocery industry requires such bold actions given its fundamentally slow growth and the intensive competition coming from many directions. Supervalu's outlook without the Albertsons acquisition is much blander," she said.

In his remarks during the conference call, Noddle said Supervalu had offered stock and cash components - worth a reported $26 per share, though Noddle did not pinpoint the amount - in its portion of the proposed transaction.

"We strongly believe the acquisition of these highly desirable markets" - which he did not identify - "represented a strategic fit consistent with our approach of operating a diversified portfolio of regional banners, locally managed and branded, with very strong prevailing market shares," Noddle said. "We believe the proposed transaction would have been accretive to our results and would have generated sufficient cash flow to allow for meaningful debt reduction over a reasonable time-frame."

He said the company will continue to "seize opportunities" that improve shareholder value and make strategic sense.

In the course of pursuing the deal, Supervalu incurred pre-tax costs of $4.5 million, which translated into 2 cents per share net, which was included in results for the quarter, Noddle said.

In outlining some of the criteria Supervalu uses in evaluating acquisitions, Noddle said, "We would first and foremost look at markets where we can leverage our existing asset base in both retail and distribution. Opportunities in-market or contiguous to our markets are our highest preference. But we also look at formats that we think might be complementary to our portfolio of retail business and the support we provide in the distribution business.

"We have return-on-capital goals of 18%, but we have also said that if some compelling opportunity comes along that we think is unique, then we might push out some of those goals or make a different financial decision that impacts us in the near term - and clearly [the Albertsons transaction] fit that category. But we are very cautious, [though] that does not mean we would not do something we felt was a substantial opportunity for our shareholders."

Noddle also implied Supervalu would have been willing to temporarily sacrifice its investment grade rating to make the Albertsons deal.

Net earnings for the 12-week quarter rose 15.8% to a record level of $75.2 million, while sales rose 3.1% to $4.7 billion; for the 40-week period net income fell 31.7% to $200.2 million and sales climbed 1.8% to $15.2 billion. Results for the year-to-date include charges related to the pending sale of 20 corporate-owned Shop 'n Save stores in Pittsburgh, start-up costs related to growth initiatives, losses incurred from Hurricane Katrina and costs related to terminated acquisition activities.

Sales in the retail food segment rose 1.9% to $2.5 billion for the quarter, primarily reflecting new store openings, the company said, while comparable store sales fell 0.9% in the quarter, despite positive comps at company-operated Save-A-Lot stores; sales for the year-to-date rose 1.3% to $8.1 billion.

In other conference call highlights:

Supervalu opened the first Sunflower Market - its new natural-foods format - in Indianapolis last week (See Page 7), and Noddle said the company has developed a private label line for the store, called Nature's Best, that will include 130 stock-keeping units by the summer.

Noddle said Supervalu opened its first Hispanic store - called El Primero Mercado - at a converted Shoppers Food & Pharmacy location earlier this month in Manassas, Va. After one week of operation, the store is "performing very well," he said, although expansion plans are undetermined.

Noddle said Supervalu expects to increase the number of corporate Save-A-Lot openings next year and decrease the number of licensee openings in an effort to speed development. Noddle said a remodeling initiative for Save-A-Lot has been "very positive."