SUPERVALU Acquisition Rumors: Is it Time to Buy?
Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Trying to identify a stock that is shorted to the same degree as SUPERVALU (NYSE: SVU) may pose a challenge. The stock has 40% of its shares short, as of September 28, with a short ratio of 24.90. For the last five years investors have been betting on the fall of the company, as it lost more than 90% of its value. Although, in the last few days it has risen by nearly 40%, as takeover rumors circulate. But do these rumors mean that you should buy at its current price?
Why is SUPERVALU Drawing Interest?
On October 18 the grocery chain indicated that it was talking with several interested buyers for a potential takeover. However, the first question some might ask is, “why?” The company is valued at $620 million and surprisingly has more than $35 billion of sales over the last 12 months. The company has assets and a presence that may be useful to certain buyers looking for either a larger presence or a new presence in the space.
The company’s $6.3 billion debt load has presented a problem for the company and its attempt to sell. However, strangely enough, it’s the balance sheet that JPMorgan analyst Carla Casella believes will attribute to its eventual acquisition. According to Casella, the company has a lot of low-cost debt that will not need to be refinanced, and with the company owning 40% of its real estate it can be used as financing to keep costs in check.
According to numerous reports, Cerberus is the company that is showing the most interest. On Monday Debtwire reported that the private equity firm was attempting to raise between $4 and $5 billion in debt financing so that it can bid. Aside from Cerberus, there have been reports of other firms interested in SUPERVALU, including KKR & Company (NYSE: KKR).
KKR is a publically traded diversified investment services company. The company has a strong balance sheet with over $42 billion in assets and operates with a high-profit business. It is possible that KKR could become more active, but because of its high margin business model, and the weight of a SUPERVALU buyout, I can’t imagine that it would take the risk. Therefore, if any company is going to acquire SUPERVALUE, I think it makes most sense for the private equity firm Cerberus, which is the most likely scenario according to analysts.
How to Play it
Since Monday’s 50% gain, SUPERVALU has slightly pulled back from a high of $3.15 to its current price of $2.85. However, judging by its ability to maintain the majority of gains, it looks as though investors are anticipating the acquisition in the near future.
As a company SUPERVALU is nothing you want to buy. If you decide on an investment you are doing so with the complete understanding that an acquisition must occur to capitalize on the investment. If you look at the pure size of the company, its presence, and then its valuation, you might believe that it’s cheap, or that it’s a good investment regardless. However, keep in mind, this is a company that recently suspended guidance, is in deep debt, operates in a low margin business, and continues to lose market share to larger competitors.
Since 2008 SUPERVALU has lost more than $8 billion in annual sales. Meanwhile, companies such as Kroger, Wal-Mart, and Costco continue to steal market share. Therefore, SUPERVALU’s search for a potential buyer appears to be a last resort, and one that must occur to keep a portion of the business intact. As an investor, it's nothing I want to touch. SUPERVALU appears desperate, meanwhile potential buyers have all the leverage, and I wouldn’t be surprised if the process drags out over a period of several months. At this time, there is no real pressure on the acquiring company, which could mean the shares will dive lower as the excitement wears down. Either way, it’s a little too risky for me.
BrianNichols has no positions in the stocks mentioned above. The Motley Fool owns shares of Supervalu. Motley Fool newsletter services recommend Supervalu. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.