A Deal That Helps This Struggling Grocery Retailer
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Shares of the struggling grocery retailer and distributor Supervalu (NYSE: SVU) has jumped more than 14% recently, from $3.04 to $3.47 per share. The bullish momentum was built on the news that Supervalu would sell five of its grocery retail chains to a consortium of investors led by Cerberus Capital Management for around $3.3 billion. Cerberus also offered to purchase up to 30% of the company’s common stock at $4 per share, valuing Supervalu at nearly $855 million. The asset breakup seems to benefit both the company and its shareholders.
Supervalu has a long history, dated back in 1925, with two main business segments: retail food and independent business (wholesale). In the retail food segment, the company had more than 1,100 traditional retail food stores and more than 1,330 hard-discount retail stores. The retail segment represented around 77% of fiscal 2012 revenue. In the retail segment, the majority of revenue was generated from grocery products, accounting for 62% of the total revenue in fiscal 2012. The independent business, with 22 distribution facilities, distributes wholesale grocery products to around 1,900 independent retailers. This wholesale distribution segment accounted for 23% of the total sales. Supervalu has been struggling for several years, with the growing competition from both big box retailers such as Wal-Mart and other grocery chains like Kroger (NYSE: KR) and Safeway (NYSE: SWY).
Big Acquisition Leverages on the Struggling Business
Back in 2006 many people thought Supervalu would face “exponential growth” with the purchase of more than 1,100 Albertsons grocery stores. Supervalu had to pay $3.8 billion in cash and $2.5 billion in stock. Along with Supervalu, Cerberus, including Kimco Realty, also bought 655 Albertsons stores at that time for $1.1 billion. It was considered to be a sweet deal for the real estate investment guys, as it was traded at a large discount compared to the real estate value of the stores. However, it was not sweet for Supervalu. The company was left with a large debt burden after the deal. In addition, the financial crisis hit shortly afterwards, and competition in the industry was getting fiercer with the price wars. Supervalu couldn’t decrease prices low enough due to the high cost operation and high debt service payments.
A Good Breakup for SUPERVALU
This time, five retail chains of Supervalu will be sold for $100 million in cash and $3.2 billion in debt. The deal will reduce Supervalu's debt burden from nearly $6.2 billion in long-term debt to $3 billion. The cash balance would go from $155 million to $255 million. In addition, the offer for 30% of Supervalu’s stake was sweet, especially in the current urgent situation of the company. Chairman and CEO Wayne Sales commented in a conference call: “It is not a hugely deleveraging. It is still leveraged. But we believe that certainly the leverage that we have is much more manageable and the important thing here is risk. I think it is hugely de-risked because of the growth opportunities that we have at Save-A-Lot, the stability of our independent business and the leading market shares that we have with the remaining banners.”
At the current trading price of $3.53 per share, the total market capitalization is nearly $750 million. Because of a huge debt load and little cash, its enterprise value is around $7 billion. The market is currently valuing Supervalu at 4.6x EV/EBITDA. Kroger is valued at 5.23x EV/EBITDA and Safeway is at 4.63x EV. Safeway is the highest dividend payer among the three, with 4% yield, whereas Kroger is paying a 3.1% dividend yield. Supervalu doesn’t pay any dividend.
Foolish Bottom Line
Personally I think there are two important things which could increase Supervalu's value for shareholders. First is the breakup of the business to raise more cash and to deleverage further. Second, Supervalu needs good management to reshape the business strategy to drive potential future earnings. Hopefully, when Cerberus becomes a 30% owner, it will help the business going forward.
hoangquocanh has no position in any stocks mentioned. The Motley Fool owns shares of 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!