United Natural Foods Inc., the firm that bought Eden Prairie-based Supervalu Inc. last year, has sued Goldman Sachs and other banks that advised it on the $2.9 billion deal, saying they added tens of millions in costs and helped their other clients at its expense.
The suit, filed in New York State Court on Tuesday, said Goldman Sachs committed breach of contract and fraud and that the firm improperly extracted around $200 million for advisory and financing services.
The suit also names Bank of America Merrill Lynch as a co-defendant. The company filed a separate suit against Minneapolis-based U.S. Bank “for its collusive action, led by Goldman Sachs, in these matters.”
“We expected our extremely well-paid transaction advisers to provide ethical counsel and unbiased support around this landmark acquisition — not leverage their positions to pursue larger profits for themselves and other clients at our expense and ongoing damage,” Steven Spinner, chief executive of United Natural Foods, said in a statement issued Wednesday.
Goldman Sachs spokeswoman Nicole Sharp told Reuters that the bank believes the claims have no merit and plans to “vigorously defend ourselves against these accusations.” Reached by Reuters, Bank of America spokesman Bill Halldin declined to comment. Reached by the Star Tribune, U.S. Bank declined to comment.
United Natural Foods hired Goldman Sachs to negotiate the deal and structure a loan to finance it. But by acting as both a trusted adviser and counterparty lender, Goldman Sachs “consolidated its command over all aspects of the transaction in order to extract millions in unjustifiable interest, fees, and other damages suffered by the company and its shareholders,” United Natural Foods said.
The deal, the largest involving a Minnesota company in 2018, came after Supervalu had struggled for more than a decade to pay down debt it took on in 2006 to purchase the Albertsons grocery store chain, then one of the nation’s largest. Its ongoing debt represented $1.6 billion of the $2.9 billion value of its sale to United Natural Foods.
In the lawsuit, United Natural Foods reveals that the deal originally called for it to retire that debt, the Wall Street Journal reported. But that would have been harmful to investors who had purchased credit default swaps (CDS) tied to the Supervalu debt, including hedge-fund clients of Goldman Sachs who owned such swaps. The investment bank was simultaneously trying to attract some of those hedge funds to participate in the loan, the company revealed in the suit.
About $470 million in Supervalu credit default swaps were outstanding at the time of the deal, the Journal reported, citing the suit. Holders of those swaps would have lost out if the debt was retired.
Goldman persuaded United Natural Foods to add Supervalu as a co-borrower on the loan that funded the overall deal, a move that kept the Supervalu credit default swaps alive, but did not tell the company about its hedge-fund clients that owned the swaps, the suit said. Those swaps doubled in value after the deal closed, and it was only then that United Natural Foods learned Goldman had other clients who benefited from the ongoing debt risk faced by it and Supervalu.
“The co-borrower adjustment spurred an artificial and significant spike in the value of CDS protection contracts held by the bank’s hedge fund clients,” the company said in a statement.
Since the deal closed in October, United Natural Foods assembled a committee of executives to integrate the two food distributors. The company is also seeking buyers for Supervalu’s retail assets, including the Cub Foods chain, the largest grocer in the Twin Cities.
In announcing the lawsuit, United Natural Foods said it remains “completely committed to the Supervalu combination.” But it added, “We are also determined to pursue our claims against the defendants for their unlawful acts surrounding the deal.”