Profit From This Tender Offer

Mike is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

In yet another hit to distressed supermarket chain Supervalu (NYSE: SVU), privately-held Cerberus Capital Management LLC has finalized a deal to purchase its storied grocery-store brands Albertsons and Jewel-Osco in a transaction valued at about $3.3 billion. As part of the deal, Cerberus would float a tender offer for about 20 percent of Supervalu's shares. With regulatory approval all but assured and no rival bids on the horizon, the deal may close as soon as the end of the first quarter of 2013.

Under the terms of the somewhat complex deal, Cerberus would pay $4 per share for a 20 percent stake in the Eden Prairie, Minnesota-based supermarket conglomerate. Although the New York-based private equity firm had originally expressed interest in purchasing the entire company, the two parties could not agree on a fair valuation. Cerberus remains interested in increasing its Supervalu stake to as much as 30 percent in the coming months.

Cerberus would tap multiple credit facilities to come up with the $3.3 billion necessary to finance the deal. In addition to Albertsons and Jewel-Osco, the company would also purchase smaller grocery brands Shaw's, Star Market and Acme. These acquisitions would give Cerberus a foothold in Albertsons's West Coast home markets as well as the Midwestern and Northeastern regions in which Shaw's and Jewel-Osco operate.

What the deal means for Supervalu

Before news of the deal broke on January 9, Supervalu's stock had been trading below $3 per share. Relative to its $2.78-per-share closing price on January 8, the $4-per-share tender offer represents a premium of 43.8 percent. Currently, the stock is trading in a range between $3.50 and $3.70. Investors who buy in at an average price of $3.60 and tender their shares stand to earn a quick 11.1 percent return on their investments.

Once the deal is in the books, Cerberus will enjoy a significant amount of influence over Supervalu's day-to-day operations. The company will have the right to choose two of Supervalu's seven directors and may exert influence over the selection of four additional board members in the coming year.

Supervalu should not be underestimated. The company will retain some assets, including its 1,300-store Sav-A-Lot supermarket chain and several smaller Midwestern brands. These assets could be attractive to potential suitors. In order to raise cash, the company could sell off these brands one at a time or package them together for sale to a rival supermarket chain. It is possible that Cerberus expects the company to follow this route. If this is the case, the private equity firm might be able to make a quick, profitable exit.

On the other hand, Cerberus could be looking to establish a closer, longer-term relationship with the company. In light of the deal's structure and Cerberus's open desire to acquire a greater stake in Supervalu, it appears likely that the private capital firm will soon make another run at majority ownership of the company. After all, Cerberus is flush with cash after its hasty sale of firearms maker Freedom Group in the wake of the December 2012 Connecticut school shooting. The grocery-store and food staples businesses are considerably less controversial and volatile than the firearms business.

Other potential acquirers

Cerberus may not be the only suitor for a smaller Supervalu. For years, cross-town department store giant Target (NYSE: TGT) has expanded its grocery-store operations in an effort to compete with Walmart and other discount chains. An acquisition of Supervalu's reduced portfolio would give Target control of the storied Sav-A-Lot brand and provide the company with an edge in regions beyond its traditional Upper Midwestern stronghold. Target offers dry groceries at many locations but adding grocery stores to the company could push the customer to solely shop at Target owned stores for all their needs.  Alternatively, the purchase of Supervalu's wholesaling infrastructure might reinforce Target's already robust logistics infrastructure.

Then again, Supervalu might be a logical target for a fellow grocery-store powerhouse like Kroger (NYSE: KR). The Cincinnati-based supermarket giant is even larger than Supervalu and could easily subsume the weakened conglomerate into its corporate ecosystem. Supervalu stores could become part of the 2400 Kroger owned supermarkets and department stores.  Although Kroger already has a solid Midwestern customer base, it could benefit from Supervalu's logistical infrastructure as well as the addition of its Sav-A-Lot network. However, Kroger has a heavy burden of debt and relatively paltry cash reserves. Any deal between the two companies would have to involve a substantial amount of additional leverage.

It should be noted that Supervalu is taking a significant loss on its sale of Albertsons. In 2006, the company spent about $12 billion to acquire a majority stake in the then-independent grocery chain. Under the terms of the current deal, it stands to recover less than 20 percent of that initial investment. The sheer magnitude of this loss makes it likely that it will remain the target of takeover speculation during the coming months and years.

Given the inherent competitiveness of the supermarket space, the Cerberus-Supervalu deal is unlikely to face regulatory scrutiny. Given Supervalu's weak financial position and depressed stock price, it is unlikely to face a shareholder revolt. If a rival bidder does not step forward to bid on the chain, it appears likely that this deal will close within the first four months of 2013. In the meantime, Supervalu looks to provide a solid return for risk-conscious investors who wish to hold the stock in the short term.


mthiessen 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!

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