Supervalu to Sell Save-A-Lot Chain to Onex for $1.37 Billion

  • Shares of seller jump after transaction is announced
  • Onex has been seeking ways to deploy its cash stockpile

Supervalu Inc. agreed to sell its Save-A-Lot grocery business to Canada’s Onex Corp. for $1.37 billion in cash, offloading a discount chain at a time of heavy price competition in the U.S.

As part of the deal, Supervalu will provide services such as payroll and merchandising technology to Save-A-Lot for five years, the Minneapolis-based company said in a statement Monday. The transaction, slated to be completed by Jan. 31, will bring about 1,370 stores to Onex, Canada’s largest buyout firm.

The deal is part of a broader shake-up in the U.S. grocery market, with major players consolidating and scores of supermarkets changing hands. The industry has become more cutthroat over the past year, with a bout of food deflation putting pressure on grocery chains. The sale of the discount stores will leave Supervalu to focus on its food distribution business, which supplies to products to hundreds of stores across the U.S.

The Save-A-Lot sale “provides us with a stronger balance sheet that will allow us to further build on our core strengths and growth opportunities,” Supervalu Chief Executive Officer Mark Gross said in the statement.

Onex, meanwhile, is seeking ways to deploy its mounting stockpile of cash, which has been dragging on its performance. The Toronto-based firm has about $23 billion in assets under management, and it has said the volatility in the equity and credit markets over the past year has made for a challenging investment environment.

“Save-A-Lot provides its customers with measurable savings and is differentiated among its competitors in a growing segment of the industry,” said Matt Ross, Onex managing director. “We are excited to partner with the management team at Save-A-Lot, along with its licensed store owners, to enhance the company’s operations and support its growth for years to come.”

Shares of Supervalu jumped as much as 9.6 percent to $5.49 in New York following the announcement. They had been down 26 percent this year through the end of last week. Onex was up as much as 1.6 percent in Toronto on Monday.

St. Louis-based Save-A-Lot operates hard-discount grocery stores -- no-frills locations that focus on low prices. Grocery competition has been heating up in the U.S., particularly among discounters, as Wal-Mart reduces prices to boost store traffic and fend off a U.S. push from Germany’s Aldi. Dollar General Corp. has also made groceries a priority.

By shedding Save-A-Lot, which is coping with lower beef and dairy prices, Supervalu will be “less exposed to macro deflationary headwinds,” according to William Kirk, an analyst at RBC Capital Markets.

There’s also been a wave of consolidation among grocery chains. Last year, Royal Ahold NV to acquire Delhaize Group, combining the Stop & Shop and Food Lion chains. And Kroger Co., the largest U.S. grocery chain, has been gobbling up smaller competitors. Albertsons Cos., meanwhile, postponed plans in October 2015 for an initial public offering, saying the market was too volatile.

Supervalu plans to use the proceeds to prepay at least $750 million against its term loan balance, to further reduce debt and improve its capital structure, as well as to fund growth initiatives, it said.

Barclays Capital Inc. and Greenhill & Co. acted as financial advisers to Supervalu, and Wachtell, Lipton, Rosen & Katz is its legal adviser.

    Before it's here, it's on the Bloomberg Terminal.