Rumors Move Grocery Chain From Suffering To Super
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SuperValu (NYSE: SVU) has certainly had a rough five years compared to its strong competitors. However, recent takeover rumors have led to SuperValu’s current position looking much brighter on the stock exchange, with an increase of 44.7% since Oct. 16.
Rumors are surfacing that private equity firm Cerberus Capital Management is in talks with JP Morgan Chase (NYSE: JPM) and Bank Of America to obtain $5 billion in debt financing to purchase the grocery store chain. According to Debtwire and the New York Business Journal, Cerberus Capital Management is the front-runner for the purchase, as they are considering a whole company purchase rather than splitting the corporation up for a takeover. An unnamed representative from SuperValu dampened rumors by telling reporters there is no guarantee SuperValu will sell. However, JP Morgan analyst Carla Casella is somewhat more confident, stating that she believes there is a 50% likelihood the company will indeed be sold.
An acquisition might be just the ticket for SuperValu, which has been struggling to keep its head above water. This is believed to be largely due to changing consumer shopping habits and a number of strong competitors like Whole Foods (NASDAQ: WFM). SuperValu has undertaken a number of turn-around efforts, including closing under-performing stores and suspending dividends, but has yet to see desired results.
One of SuperValu’s biggest concerns is its heavyweight competitors. SuperValu has been operating with a disappointing profit margin of -3.54% or similar for the past five years, and while revenue is sitting at $35 billion, growth in this area is down 5.2%. Compare this to Whole Foods Market and things don’t look good. Whole Foods Market is seeing a significantly higher profit margin of 3.84%, and has watched their quarterly revenue grow by 13.60% year-over-year.
As much as SuperValu has been scrutinized for its poor results, it is now in the hot seat amidst these acquisition rumors. The company's stock value dropped rapidly following the release of their lowered revenue guidance for the 2012 fiscal year. By the time SuperValu chose to suspend its 2013 fiscal year guidance on July 11, the stock was plummeting downward at an alarming pace. At this point, the company chose to elect a new CEO in the hope to turn their position around.
However, despite their best attempts, it wasn’t until Oct. 22 ,when acquisition rumors began, that SuperValu saw their position on the stock exchange change for the better. The company's shares jumped from $2.20 to above $3.00 in just one day, leaving the company with an overall return of +29.75% for the month of October. Unfortunately, this hasn’t seen SuperValu recover their position for the past 52 weeks. The grocery store chain is still sitting in the red for the past year, with a return of -60.70%.
Considering how SuperValu is fairing financially compared to competitors, a takeover may be a positive turn of events for the grocery store chain. At this stage, a date when the potential sale could be expected to close has not been released, and Cerberus Capital Management may still be awaiting confirmation of approval for the $5 billion in debt financing.
It is too early to say whether or not a takeover will result in a positive financial position for SuperValu, but given that a number of long/short equity investors are standing by their positions while others sell out, there may still be hope for the company yet. Whether or not SuperValu choose to sell or continue with turn around efforts, their current position has certainly begun to change. With any luck, regardless of the outcome of the sale, SuperValu will be able to maintain their improving streak. This is a special situation to keep on top of.
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mthiessen has no positions in the stocks mentioned above. The Motley Fool owns shares of Bank of America, JPMorgan Chase & Co., Supervalu, and Whole Foods Market. Motley Fool newsletter services recommend Supervalu and Whole Foods Market. 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.