Supervalu seeks a whole sale as pieces attract suitors

Article by: DAVID WELCH, LESLIE PATTON and CRISTINA ALESCI , Bloomberg News
Updated: August 23, 2012 - 9:28 PM

Analysts doubt the company will stay together. Would one suitor buy it, then sell the parts?

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Supervalu's northern region offices and warehouse in Hopkins.

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Supervalu Inc.'s advisers are asking potential buyers to bid for the entire business, even as several suitors have inquired about individual parts of the Eden Prairie-based grocery company, according to people with knowledge of the matter.

Cerberus Capital Management is examining a possible deal involving the Albertsons unit, said another person, who asked not to be identified because the talks are private. Royal Ahold NV, the Dutch parent of Giant Food Stores, is interested in the Shoppers chain, which operates in Maryland, Virginia and Washington, one person said. Supervalu said in July it hired Goldman Sachs Group Inc. and Greenhill & Co. to find a buyer.

While Supervalu's valuation is cheaper than its peers, it may prove difficult to find one purchaser for the company's 11 far-flung regional grocery chains, said two of the people.

"It's going to be very difficult to sell Supervalu as a whole," Charles Cerankosky, an analyst at Northcoast Research Holdings in Cleveland, said in an interview. "The most likely scenario, as opposed to what the board or management would like to do, is the company ends up being broken into pieces."

Mike Siemienas, a spokesman for Supervalu, declined to comment on the sale process. Peter Duda, a spokesman for Cerberus, declined to comment. Jochem van de Laarschot, a spokesman for Ahold, said the company doesn't comment on rumors. Michael Duvally, a spokesman for Goldman Sachs, also declined to comment.

A post-sale breakup?

One possible outcome is that a private-equity buyer will acquire the entire company, keep some of the chains and sell other pieces, one of the people said. There are interested bidders who would be willing to do the breakup work, this person said. Such bids would take longer to put together because the company would have to find interested parties for pieces of the retailer before approaching the company about a bid while respecting Supervalu's confidentiality requirements.

Supervalu was valued Wednesday at 3.84 times earnings before interest, taxes, depreciation and amortization (EBITDA), while Cincinnati-based Kroger Co. was valued at 6.7 times EBITDA. While it is less expensive than peers, one element that makes the sale of the whole business difficult is that Supervalu's chains are very different from each other, Cerankosky said.

"Jewel in Chicago is very different than Save-A-Lot, which is very different than Albertsons in Southern California," he said. "What all of the operating units have together is poor performance, which makes it difficult to go to a single buyer and say, 'This is a growth story' or 'This is easy to fix.'"

Supervalu has more than 2,400 retail food stores, including 935 licensed Save-A-Lot locations, and its wholesale business has about 2,660 customers.

The price problem

Supervalu charges more than its competitors, according to a Bloomberg Industries Philadelphia pricing study from June. Supervalu's Acme brand was more expensive than Delhaize Group SA's Bottom Dollar, Wal-Mart Stores Inc., ShopRite and Ahold's Giant for a total basket of food and household goods, the report shows.

"The No. 1 problem is, everything in Supervalu costs too much" and is more expensive than Kroger and the discounters, said David Dietze, president and chief investment strategist at Summit, N.J.-based Point View Wealth Management, whose clients own Supervalu shares. "Customers are saying, I can't afford to pay those prices, I'm going to drive out of town and stock up the minivan to save.'"

A buyer of Supervalu in its totality, which had a market capitalization of more than $10 billion five years ago and now has a market value of about $454 million, would be saddled with $6.14 billion in net debt and $1.05 billion in pension obligations. It would be much easier to garner interest from potential acquirers who want to "cherry pick" from Supervalu's brands, Dietze said.

Save-A-Lot holds appeal

Save-A-Lot, which prices its food 40 percent less than traditional grocers, may be the most valuable piece and may fetch as much as $1.94 billion, Deborah Weinswig, an analyst at Citigroup Inc., said in August. The grocer's distribution business may get about $817 million from a buyer, she said.

Still, identical-store sales at Save-A-Lot declined 3.4 percent in the quarter ended June 16, which may give some buyers pause, Cerankosky said.

"It's intuitively the right business for these times, but when you look at the numbers, you have to step back and say, something didn't go right there either," he said.