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Supervalu Sinks on Strategic Review, Dividend Suspension

Supervalu Inc. (SVU), the third-largest U.S. grocery chain, sank the most since at least 1980 after saying it will review strategic alternatives for the business and suspended its dividend.

Supervalu tumbled 49 percent to $2.69 at the close in New York for the biggest decline since July 29, 1980, the earliest data compiled by Bloomberg. The Eden Prairie, Minnesota-based company’s shares have fallen 67 percent this year, putting it on course for a fifth straight annual drop.

The company, which last month announced layoffs in its Albertsons unit in California and Nevada, plans to accelerate price reductions and cut costs by an additional $250 million over the next two years, it said in a statement yesterday. It has retained Goldman Sachs Group Inc. and Greenhill & Co. to review its options, it said.

Supervalu, which operates the Shaw’s and Save-A-Lot chains, hasn’t turned an annual net profit in three years amid competition from Wal-Mart Stores Inc. (WMT) and Kroger Co. (KR) Its valuation stands at 4 times earnings before interest, taxes, depreciation and amortization, making it the cheapest among its peers and prompting investors and analysts to view it as a potential acquisition target.

“Supervalu could become the next casualty in the troubled supermarket space, as its fundamentals have finally begun to show real signs of distress after years of steady underperformance,” Edward Kelly, an analyst at Credit Suisse AG in New York, said today in a note to investors. “Supervalu fundamentals may be beyond repair at this point.”

Discount Stores

Once worth more than $10 billion, Supervalu’s stock has tumbled by almost two-thirds since 2008 as the U.S. economy fell into a recession and customers turned to discount stores such as Bentonville, Arkansas-based Wal-Mart, the world’s largest retailer, to buy more of their groceries.

Dollar-store chains have also grabbed more consumers, Chief Executive Officer Craig Herkert told analysts on a call yesterday. Dollar General Corp. (DG) and Family Dollar Stores Inc. (FDO) are adding more groceries to grab customers who prefer shopping in smaller stores.

“Given the economic situation the American consumer is in, a lot of grocery competitors are focused on making sure they have the right value proposition for customers,” Herkert said on the call. “We needed to accelerate our ability to play in that game.”

The company this year has already reduced prices by as much as 20 percent on about 200 produce items.

Quarterly Dividend

Net income in the fiscal first quarter fell 45 percent to $41 million, or 19 cents a share, from $74 million, or 35 cents, a year earlier, according to the company’s statement. Sales declined 4.7 percent to $10.6 billion, trailing the $10.8 billion average of analysts compiled by Bloomberg.

Supervalu said it will suspend its quarterly dividend and continue to review its dividend policy annually. Its last quarterly dividend, at 8.75 cents a share, was payable on June 15. It also said it will stop projecting per-share earnings and identical-store sales.

The company will pursue “deeper and more structural cost savings initiatives,” Herkert said in the statement.

“We are not convinced that this initiative will succeed,” said Kelly, who has a neutral rating on the shares. “SVU may not have the ability to absorb the large earnings hit associated with material price cuts.”

The company will increase its debt reduction to a range of $450 million to $500 million in the fiscal year and plans to pay down at least $400 million of debt annually thereafter.

Supervalu is seeking $2.5 billion in loans to refinance debt, according to a person with knowledge of the transaction.

‘Very Attractive’

The company is the most appealing leveraged buyout candidate among the three largest supermarket chains in America, according to Meredith Adler, a New York-based analyst for Barclays Plc, who published a June 11 report analyzing the LBO prospects for Supervalu, Kroger and Safeway Inc. (SWY)

By her math, a buyer could pay a 50 percent premium for Supervalu and still earn a return exceeding 40 percent, according to her report. That would “clearly be very attractive to private equity,” she wrote.

On the day of Adler’s report, Supervalu’s shares closed at $4.06.

Credit Suisse’s Kelly said that Supervalu’s Jewel-Osco chain could be attractive to Kroger, “but they are unlikely to pay an acceptable multiple given that it needs to work on price.”

Credit Swaps

“The company’s other assets may not have much value, as there is a lack of buyers in the market place,” Kelly said.

Supervalu traces its roots to a grocery warehouse business formed in 1926. Last month it announced plans to eliminate as many as 2,500 positions at its Albertsons unit, the biggest chain in its family of grocery stores. The reductions represented about 13 percent of staff across all 247 of those Albertsons stores.

The cost to protect debt issued by Supervalu surged after the grocery chain’s statement.

Credit-default swaps tied to Supervalu jumped 4.5 percentage points to 19.8 percent upfront as of 5:45 p.m. in New York yesterday, according to data provider CMA, which is owned by McGraw-Hill Cos. (MHP) and compiles prices quoted by dealers in the privately negotiated market.

Contracts tied to Safeway climbed 34.5 basis points to 414.2 basis points, and those on Supervalu unit Albertsons jumped 7.8 percentage points to 26 percent upfront, the data show.

Cash Flow

Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

A bankruptcy filing isn’t under consideration, Herkert said in response to an analyst’s question.

“Supervalu is a profitable company with solid cash flow,” he said. “Although these strategies will put pressure on our margins and profits over the near term, it is important that we take the bold actions necessary to put the company on a solid course for long-term success.”

To contact the reporter on this story: Chris Burritt in Greensboro at cburritt@bloomberg.net

To contact the editor responsible for this story: Robin Ajello at rajello@bloomberg.net

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