Deals

Tara Lachapelle is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

As cutthroat competition in the grocery retail space takes its toll, there's at least one struggling company that could warrant a look from buyout firms or other suitors: Supervalu Inc.  

Supervalu's Mark Gross last week joined the chorus of CEOs cautioning investors that the retail environment in the U.S. remains tough and is getting tougher, particularly for the Save-A-Lot discount grocery chain that it's planning to spin off and Supervalu's other retail banners. Ebitda for the fiscal year ending in February is expected to come in 5 percent below last year's level.

"The environment is much different than what we had originally anticipated at the beginning of the year, and so our forecasts are now more reflective of this continued persistent deflation."

However, Gross's comments were also sprinkled with some good news for Supervalu's main line of business, which provides wholesale distribution to independent grocery retailers and drives the biggest portion of its profit and cash flow. This combination of operational difficulties, a weak stock and glimmers of hope could turn Eden Prairie, Minnesota-based Supervalu into a takeover candidate after it frees itself of the Save-A-Lot unit.

Food & Disorder: SVU
Supervalu (ticker: SVU) is a junk-rated, heavily indebted company whose market value has eroded. That said, its main business is showing signs of improvement and underperforming pieces could be sold.
Source: Bloomberg

Supervalu's $1.3 billion market value (and shrinking) puts it in the sweet spot for LBO shops that have reduced their appetite for big transactions. Its stock price has plunged 30 percent this year, marking the worst performance among consumer-staples stocks in the S&P 600 Small Cap index. But relative to the more than $150 million of free cash flow Supervalu generated in the past 12 months, it's also now the cheapest food retailer in the U.S. And that's a metric financial suitors might like.

Debt is a hurdle -- Supervalu has $2.5 billion of it -- but hypothetically it could divest the remaining retail chains to help pay some of that. The company sold its Albertsons, Acme, Jewel-Osco, Shaw's and Star Market grocery stores to a Cerberus Capital Management-led investor group in 2013.  It still owns regional names Cub Foods, Farm Fresh, Hornbacher's, Shop 'N Save and Shoppers. 

Parts In Play?
Over the past few years, Supervalu has been sharpening its focus on the wholesale distribution business. A further slicing up of the company could make it ripe for bids.
Source: Bloomberg

Speaking at a Goldman Sachs retail conference last week, Gross conveyed excitement about a string of good news coming from the wholesale distribution business -- progress for which management deserves much credit. It recently replaced rival C&S Wholesale Grocers as the primary wholesaler for Marsh Supermarkets in Indiana and Ohio. It also secured a supply agreement with Fresh Market, which was taken private by Apollo Global Management this year. (He said Supervalu won't see the benefits of that deal until after it's fully rolled out in March.) Lastly, Supervalu won back two customers that it lost at the end of last year. 

Closely held C&S says it services 6,500 retailers and institutions, while Supervalu has 1,773 stores operated by wholesale customers. A few years ago when Supervalu was exploring a sale, C&S was said to be interested in buying its distribution business. At the time, the Wall Street Journal reported that there was also the potential for C&S to team up with a private equity firm to buy Supervalu and then divvy up the assets. Gross, who was put in charge of Supervalu earlier this year, is an M&A specialist and was formerly a top executive at C&S up until 2006. For the past decade he ran a consulting firm, advising on industry acquisitions and buyouts.

Turning to Deals
Supervalu recently appointed industry veteran and M&A specialist Mark Gross its CEO. His first order of deal business is separating the Save-A-Lot chain, which should help lift the sagging stock price.
Source: Bloomberg

Supervalu appears very much a company in flux but with strong leadership. The Save-A-Lot spinoff, if and when it occurs, may be just the start.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. As part of the deal, Cerberus gained a large stake in Supervalu that it agreed to hold for two years. Once that time was up, the private equity firm didn't waste time unloading its position. 

To contact the author of this story:
Tara Lachapelle in New York at tlachapelle@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net