Deal shifts power at Supervalu HQ

As Cerberus Capital Management buys half of Supervalu, the private equity outfit will also gain a big say over the embattled supermarket operator's remaining businesses.

Under terms of the $3.3 billion deal announced Thursday, New York-based Cerberus will own up to 30 percent of the Eden Prairie-based company, and will appoint three directors to keep watch on its stake.

Plus, Supervalu's post-deal chairman is the CEO of Cerberus-owned Albertson's LLC, an entity created when the private equity group bought the dregs of the old Albertsons chain in 2006 and Supervalu got its prime stores. Albertson's is seen as a successful investment for Cerberus, while Supervalu's stock peaked at more than $40 in 2007 and closed Friday at $3.53.

"One executed well. The other destroyed value on an epic proportion," said Karen Short, an analyst at BMO Capital Markets.

Under the deal announced Thursday, Cerberus will pick up chains that include 877 stores, primarily in the Chicago area and on the East and West coasts. The slimmed-down Supervalu retains Cub Foods, the biggest Twin Cities grocer, as well as its wholesale business and four other regional supermarket chains.

Cantor Fitzgerald analyst Ajay Jain wrote in a research note that Cerberus' role in the new Supervalu "is an additional positive."

With Cerberus on board, Supervalu's management might be on a tighter leash from its board of directors. And cost-cutting could get more intense.

In Greek mythology, Cerberus is a three-headed dog that guards the gates of the underworld, home to the dead. In the financial world, Cerberus is master of a $20 billion investment portfolio spanning myriad industries.

The firm was in the news recently when it put one of its companies, Freedom Group, up for sale after the Newtown, Conn., school shootings. A gun manufacturer, Freedom made the assault rifle used in the massacre.

Cerberus owned the majority of automaker Chrysler Corp. before it went bankrupt in 2009. Closer to home, Cerberus is one of the private equity firms backing Best Buy founder Richard Schulze's effort to buy his old company.

When most of Boise, Idaho-based Albertson's Inc. was sold in 2006 to Supervalu, Cerberus bought the underperforming Albertsons stores that Supervalu didn't want. But Supervalu will now unload to Cerberus its Albertsons outlets and the other big chains it bought from Albertson's.

Cerberus resold more than 400 of the 655 Albertsons it bought, capitalizing on the real estate value of many. Cerberus-owned Albertson's LLC, based in Boise, doesn't release financial data on its remaining stores.

Robert Miller, a veteran executive who has headed Albertson's LLC since 2006, "is one of the most brilliant supermarket industry leaders," Flickinger said. Miller will become Supervalu's chairman when the Cerberus deal closes, which is expected by the quarter's end.

Cerberus will designate three of Supervalu's 11 board members, including Miller. "I think you are going to see more hands-on board involvement," BMO's Short said. "I think you'll see more accountability from a board perspective."

David Livingston, a Wisconsin-based supermarket consultant, said Supervalu should experience a lot more financial and operational discipline with Cerberus on board. Cerberus may push for more sales or closures of underperforming stores, he said, and look diligently for costs to cut.

That's been the key to Albertson's LLC's success, Livingston said. "They've done very well managing the expense side of the business," he said. "But they haven't done anything operation-wise to make those stores a better shopping experience."