Supervalu is offering private-equity shoppers the biggest discount of any supermarket in America.
The third-largest U.S. grocery chain fell to a 30-year low this week, reducing its valuation to 3.9 times earnings before interest, taxes, depreciation and amortization. The multiple is the cheapest since at least 1990 and less than all U.S. food retailers, according to data compiled by Bloomberg.
The company employs about 1,000 people at its Boise offices, in addition to Albertsons store employees around Idaho.
Supervalu has seven times as much debt as its market value and is mired in its worst sales slump. Target and Walmart stores have grabbed a larger share of grocery revenue.
But Barclays Plc says the company could still lure buyout firms with its cash flow and command a 50 percent premium. Supervalu, which analysts say will turn a profit for the first time in three years, has the industrys highest free cash flow yield, the data show.
Free cash flow is money leftover after a company pays its expenses, including investments. Free cash can be spent on expansion, dividends, debt payments or purposes. Potential buyers eye that cash to pay off money borrowed to acquire the company.
Asset sales could also help a buyer pay down Supervalus debt and boost returns, Highmark Capital Management said.
Theres no question about it, these shares are cheap, cheap, cheap, David Dietze, president and chief investment strategist at Summit, N.J.-based Point View Wealth Management Inc., which owns Supervalu stock, said. Its been a problem child. It could make a good candidate for private equity. They are trading at such a very small multiple of earnings and cash flow.
Mike Siemienas, a spokesman at Eden Prairie, Minn.-based Supervalu, declined to comment on whether the company is open to a sale or has been approached by any buyers.
Supervalu traces its roots to a grocery warehouse business formed in 1926. It operates more than 2,000 stores under brands such as Jewel-Osco in the greater Chicago area and Shaws, which has stores across the Northeast. The companys largest supermarket chain is Albertsons, the chain founded by Joe Albertson in Boise that Supervalu bought in 2006.
Once worth more than $10 billion, Supervalu had plummeted 92 percent in less than five years as the U.S. economy fell into a recession and customers turned to discount stores.
Analysts estimate Supervalu will suffer a fourth straight year of declining sales in the current fiscal year, extending the longest stretch of decreases since at least 1987, according to data compiled by Bloomberg.
The share plunge pushed Supervalu to $4.06 on June 11, the lowest price since 1982. The stock ended at $4.18 Tuesday, giving Supervalu $887 million in market capitalization.
Even with debt that exceeds its cash by more than $6 billion, Supervalu was valued at 3.9 times its Ebitda, data compiled by Bloomberg show. Thats a third less than the industry median and about half the multiple for consumer staples companies in the Standard & Poors MidCap 400 Index.
Ebitda stands for earnings before interest, taxes, depreciation and amortization. Its one way to measure free cash flow.
Supervalu is now 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, who published a report dated Monday analyzing the LBO prospects for Supervalu, Kroger and Safeway.
Supervalu is the smallest of the three and generates the most cash from its operations, after deducting capital expenses, relative to its stock price, data compiled by Bloomberg show.
The companys free cash flow yield of 45 percent is more than 10 times higher than the median 4.2 percent for U.S. food retailers with at least $100 million in value, the data show.
By Adlers math, a buyer could pay a 50 percent premium for Supervalu and still earn a return exceeding 40 percent, which would clearly be very attractive to private equity.
Potential buyers may still be wary of pursuing an LBO because Supervalu owes too much money, said John Heinbockel, a New York-based analyst for Guggenheim Securities. With more discount retailers selling cheaper groceries, Supervalus long-term viability is also being threatened, Heinbockel said.
Supervalu also has pension and retirement liabilities that exceed $1 billion, which Highmarks Lowenstein said could keep some potential acquirers at bay.
Still, options-market traders are growing more bullish on Supervalu, a sign they may be trying to anticipate a surge in the companys value, said Chris Rich, head options strategist at JonesTrading Institutional Services LLC in Chicago.
Supervalu is interesting for an acquirer with deep pockets who is looking to do a turnaround, he said. The grocery store business is tremendously competitive. But a buyer that has an understanding of retail, would they take a shot at this? Absolutely.
The Idaho Statesman and Bloomberg reporters Leslie Patton in Chicago and Sarah Rabil in New York contributed.