SUPERVALU'S STUNNING BUY OF ALBERTSONS AND WHAT IT MEANS

David Merrefield

Well, it's happened. The much-negotiated and long-anticipated agreement expected to lead to the buyout of Albertsons by Supervalu and several investment groups was reached last week.

And the deal is stunning in its scope and its implications for Supervalu and Albertsons. Let's take a look at what it means for those operators, and more broadly, for the food distribution industry.

There's no way to overstate the importance of the deal to Supervalu. Just take a look at last week's SN Top 75 list. Supervalu, with a new pro forma top line of $44 billion, was catapulted from the nation's ninth largest food distribution company on the list to the second largest conventional operator, behind Kroger Co., or the third largest counting Wal-Mart Stores. Costco's top line remains larger than Supervalu's too, although its grocery-related sales are less than Supervalu's. So, Supervalu will replace Albertsons as fourth on the list.

As for what the deal means to Albertsons, it means Albertsons won't exist. Supervalu intends to acquire and retain its best retailing assets. Others in the investment consortium will acquire and grapple with the balance of the company. The portion of Albertsons going to Supervalu represents nearly $25 billion in sales as compared to Albertsons' pre-deal top line of about $41 billion. So one way to look at the deal is that Supervalu is acquiring about 60% of Albertsons' revenue-generating capacity. We'll see what fate awaits the remaining 40%, but doubtless much of that proportion represented by supermarket capacity will not survive as such.

To be sure, this is a large-scale acquisition from Supervalu's point of view, but from Albertsons' viewpoint, it's a vast dismembering, and one that may have been in the making since Albertsons' ill-considered acquisition of American Stores in 1999.

Yet, there's no reason to think that this situation portends too much for the overall food distribution industry, such as inspiring more and larger consolidation efforts. To the contrary, there's every reason to believe that deconsolidation - or perhaps better the destoring and dechaining - of the conventional industry is under way, and that this deal is part of it.

More than that, this deal may be the last of its kind and scope for quite a while. One reason is that the series of events that led Albertsons to put itself on the block are unique. Very seldom does a company lose its way to the extent that it's willing to sell itself even though it's a large-scale and profitable company. Most companies in that situation would find an improvement strategy short of exiting on the wings of real estate value.

Indeed, at various points in this week's SN you'll find Jeff Noddle, Supervalu's top officer, describing this situation as a "once-in-a-lifetime opportunity" and "a very unique transaction," and, incidentally, one which he postulates may be the largest ever characterized by a simultaneous buy and split-up.

Meanwhile, there are a number of other industry retailing assets on the market now, including Marsh, and possibly BJ's Wholesale Club and more assets of Winn-Dixie. We'll see if additional sales transpire, and, if so, whether they represent net consolidation or deconsolidation.