As Supervalu posts what's likely to be another quarter of disappointing results on Wednesday, at least its investors will have welcome deal news to distract them.
The company announced Monday that it's offloading its Save-A-Lot discount grocery chain to Canadian private equity firm Onex for $1.37 billion -- greater than Supervalu's total market capitalization at the end of last week. Supervalu had toyed with the idea of a Save-A-Lot spinoff, but a sale may be more immediately beneficial.
The move will help Supervalu pay down debt and home in on its wholesale-distribution business, as U.S. food retailers feel the pain of a deflationary price environment. The company has already sold some of its traditional chains -- such as Albertstons and Jewel-Osco -- to financial buyers in 2013, but still owns some regional stores such as Cub Foods and Shop 'N Save.
The Save-A-Lot purchase price is a 71 percent discount to that unit's trailing 12-month revenue -- which is still a higher valuation than Supervalu's stock fetches. Even after surging about 6 percent on Monday, Supervalu traded at a 92 percent discount to revenue for the past 12 months. That's the lowest multiple among its peers and nearly the lowest in the entire Russell 2000 Index.
The consensus estimate for Supervalu's second-quarter sales has dipped from the $4 billion analysts were predicting, on average, in early September. Now they see sales coming in just shy of $3.95 billion when the company reports on Wednesday. Keep in mind, Supervalu's revenue has fallen short of expectations for four consecutive quarters, and management's tone was relatively downbeat at the latest investor conference in September. But the deal news will trump disappointing results.
The company says the Save-A-Lot transaction should close by the end of January, which means probably another quarter of price pressures eating profit. That could be offset by signs of improvement in the wholesale business, which recently won back two customers it had lost last year and also secured a supply agreement with Fresh Market, the chain recently taken private by Apollo Global Management.
Wholesale generates about half of Supervalu's operating income and is more insulated from food-price deflation. The more Supervalu's financials skew toward that division -- and the more headaches the company can shed -- the better.
Next, investors may look for Supervalu to sell its regional stores. There's been speculation Kroger may be interested in Cub Foods, which has locations in Minneapolis, not far from where Kroger has been making investments.
Should Supervalu shrink further and continue to reduce debt, a takeover of the remaining company becomes feasible, too. It explored a sale a few years ago, and its main competitor C&S Wholesale was said to be interested in the distribution business at the time.
In any case, Supervalu's management is making the best of a difficult environment, and the market's reaction to the Save-A-Lot sale could embolden them to at least pursue more divestitures.
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