Debt investors are supporting Supervalu’s plan to sell five grocery chains as the retailer — whose creditworthiness has improved the most in its industry since July — sacrifices sales for profit.
Bonds of Supervalu, which hit a record low 83 cents in July, have risen to 99.8 cents to yield 8.08 percent after the company said Jan. 10 that a group led by Cerberus Capital Management LP is buying the stores in a $3.3 billion deal.
Supervalu is selling its New Albertsons division. That division comprises what's left of all the supermarket chains Supervalu bought from Boise's Albertsons Inc. for $17.4 billion in 2006, including all Albertsons supermarkets in Idaho.
The same Cerberus-led group in 2006 bought more than 600 Albertsons supermarkets in Texas, Florida, Northern California and other areas that Supervalu didn't want. It has since sold or closed two-thirds of them. The remaining 200 stores are known as Albertsons Markets. Cerberus' deal with Supervalu would reunite what's left of the two Albertsons chains under one ownership. They would be managed by Albertsons LLC, a Cerberus unit in Boise.
New Albertsons annual revenue has declined to about $17.6 billion from $24.5 billion at the time of the 2006 purchase by Supervalu, according to Fitch Ratings. Earnings before interest, taxes, depreciation and amortization fell more than 50 percent, to $873 million from $1.77 billion.
The divestiture will leave Supervalu a smaller, more profitable company, reducing the risk of owning its bonds, according to Moody’s Investors Service. The firm is selling its New Albertsons division, which saw sales decline 28 percent since their acquisition by Supervalu in 2006, according to a Jan. 17 report from Fitch Ratings.
"It’s positive as the sale will improve the business mix of the remaining company and also positive from a cash-flow and liquidity standpoint," Mickey Chadha, a senior analyst at Moody’s in New York, said in a telephone interview. "They’re getting rid of about 80 percent of their retail grocery stores that were underperforming, and the remaining businesses are less capital intensive."
Mike Siemienas, a spokesman for Supervalu, declined to comment.
Cash available to reduce debt after the divesture will be $175 million a year, Sherry Smith, chief financial officer, told investors and analysts in a Jan. 10 teleconference to discuss earnings for the quarter ended Dec. 1. Supervalu’s free cash flow — money available for debt reduction, dividends and share repurchases, or reinvestment — was $208 million in the latest 12 months, compared with $793 million for the year through February 2010, according to data compiled by Bloomberg.
Shares have gained 29 percent since the divestiture announcement after falling 70 percent in 2012.
The Cerberus-led consortium will offer to buy as much as 30 percent of Supervalu’s common stock for $4 a share cash, according to the Jan. 10 statement. If they don't obtain at least 19.9 percent of the outstanding shares, Supervalu will have to issue new shares at a price representing a 19.9 percent stake.
Food retailing accounted for 71 percent of Supervalu’s $35.8 billion sales in the four quarters through Dec. 1, Bloomberg data show. After the asset sale, retail grocery stores will contribute about 30 percent of revenue to Eden Prairie, Minn.-based Supervalu. Its discount Save-A-Lot segment and its wholesale business will account for about 70 percent, according to Moody’s estimates.
"The way they were heading, they needed to do something," Evan Mann, an analyst at Gimme Credit, said in a telephone interview. "The chains that are remaining will require lower capital expenditures going forward and a lower investment in competitor pricing."
"There’s a lot of competition from discounters like Wal-Mart and specialty stores like Trader Joe’s or Whole Foods, and those chains are eating into the business of traditional supermarkets," Philip Zahn, an analyst at Fitch, said in a telephone interview. "Of the three largest traditional supermarket chains, the story’s quite different. Kroger is the largest and generates good sales growth, Safeway has been generating very low, positive sales growth, and Supervalu has had sales declines."
Kroger's properties include the Fred Meyer chain, which has several stores in the Treasure Valley.
Revenue at Supervalu is expected to fall to $34.4 billion in the year that ends Feb. 28 from $44 billion in its 2008 year, the first full 12-month period after the acquisition. Kroger sales are expected to rise to $96.7 billion in its year ended yesterday from $70.2 billion in 2008 and Safeway, which uses a calendar year, is expected to have advanced to $44.2 billion for 2012 from $42.3 billion in 2007.
Supervalu is selling its Albertsons, Acme, Jewel-Osco, Shaw’s and Star Market stores and related pharmacies to the Cerberus group.
Supervalu will retain Save-A-Lot, its wholesale distribution business, and five regional grocery banners that include Cub, Shoppers, Shop ’n Save, Farm Fresh, and Hornbacher’s, which are expected to generated about $17 billion in revenue, Chief Executive Officer Wayne Sales said on the conference call.
The cost to protect Supervalu debt against default has fallen by 909.4 basis points since July, the most among major food retailers.
Five-year credit swaps protecting against losses on Supervalu’s debt fell to 750.29 basis points Thursday from 1,659.7 basis points on July 25 to according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market. That means investors pay $750,290 annually to protect $10 million of debt for five years. Credit swaps on Safeway, the second largest U.S. grocery store chain, dropped to 334.5 basis points from 497.5 basis points while Wal-Mart Stores five-year protection fell to 37.5 basis points from 45.1.
Credit swaps, which typically fall as investor confidence improves and rise as it deteriorates, pay the buyer face value if a borrower fails to meet its obligation, less the value of the defaulted debt.
The Idaho Statesman contributed.
