SUPERVALU SEEKS TO DRIVE PROFITS WITH TOTAL LOGISTICS BUY

MARK HAMSTRA

MINNEAPOLIS -- Supervalu here is beefing up its distribution business with the acquisition of an established player in third-party logistics.

The wholesaler and retailer said it has agreed to acquire Total Logistics, a Milwaukee-based warehousing and distribution services provider, for about $233 million, including about $68 million in debt obligations.

Supervalu said it would fold its own third-party logistics division, Advantage Logistics, into Total Logistics Control, the Zeeland, Mich.-based division of Total Logistics that supplies services to consumer goods companies.

"Our aim is to leverage Total Logistics' infrastructure, systems capabilities and management" to capitalize on the growing demand for third-party logistics, said Jeff Noddle, chairman and chief executive officer, Supervalu, in a conference call discussing the acquisition last week. "They bring a full fleet of logistics solutions to current and prospective customers, not only in the food business, but in other industries as well. This is a highly esteemed, growing business to which Supervalu can add resources in order to expand our national footprint as a third-party logistics provider."

He said he views Supervalu as a potential consolidator in the third-party logistics arena, which he said is populated predominantly by niche players.

Supervalu had built up very little overhead in its operation of Advantage Logistics, Noddle said. The division handles distribution for Kroger facilities in Livonia, Mich., Phoenix and Denver, and provides logistics support for Atkins warehouses in Aurora, Colo., and Atlanta, and for a Target facility in Fort Worth, Texas. Noddle said he thinks the Advantage business could be easily integrated into Total Logistics within about six months.

"It does seem like it lines up quite nicely with Advantage Logistics, as well as the total distribution business in terms of growing both the top line and margins," said Jason Whitmer, an analyst in the Cleveland office of Midwest Research. "I think it's a way to get into some very new businesses, and to further increase its intellectual capacity in [third-party logistics]."

He described the acquired business as "clearly more profitable than the distribution business as a whole."

Total Logistics also owns Zero Zone, a North Prairie, Wis.-based maker of refrigerated display cases. Noddle said Supervalu would evaluate the Zero Zone business before deciding what action to take with it.

The acquisition of Total Logistics is expected to close within 45 days. Supervalu said it could be accretive to earnings in 2006.

For the nine months ended Sept. 30, 2004, Total Logistics had revenues of $253.3 million, up 25% over the year-ago results. Earnings before interest, taxes, depreciation and amortization (EBITDA) was $15.6 million in the nine-month span, up 24% over the preceding-year period. Net income was $5.1 million,nearly double that of the preceding year-to-date span.

TLC generates most of Total Logistics' revenues. Its clients include such consumer goods companies as General Mills, Campbell Soup, Diageo, Kraft Foods, Sara Lee and Kellogg's. It manages more than 30 warehouses around the country, including 15 that are dedicated to specific clients.

Pamela K. Knous, chief financial officer and executive vice president, said managing dedicated facilities has been TLC's biggest growth driver in the past year. The dedicated facilities require a low level of capital investment, she explained. TLC generates revenues from the business by passing along costs, plus a management fee.

Noddle said he hopes to leverage Supervalu's expertise to broaden the client base.

"TLC has a significant stake already with food manufacturers, and I think we can enhance that stake and really leverage some capabilities in that regard," he said. "There are retailers that we have been in discussion with. We have had many strategic discussions at Advantage Logistics that now we'll forward into TLC in terms of what even further capabilities TLC can add."

He described the third-party business as being a good generator of return-on- invested capital.

Chuck Cerankosky, analyst, KeyBanc Capital Markets, said he thinks the acquisition could go far in generating efficiencies.

"Jeff Noddle has always had a very sophisticated view of the distribution business," he said. "Part of his vision is to take product that is newly produced [by the CPG customer] and immediately send it on its way to a retailer, as opposed to taking intermediate stops in warehouses."