Albertsons plans to sell assets, independent money manager says

Bloomberg NewsMay 20, 2013 

A loan package for Albertsons LLC is raising speculation that the Boise supermarket chain's new owner is preparing to sell some of its properties.

A $1.15 billion credit pact signed this month stipulates that Albertsons must in certain cases use all proceeds from sales of secured assets where the loan backing a property is more than 40 percent of the value to pay down debt, said a person with knowledge of the deal who asked not to be identified because the terms aren’t public.

The amount scales down as the ratio decreases.

Such detailed formulas are unusual and indicate that Albertsons' principal owner, Cerberus Capital Management, is divvying up the company’s properties, according to Jonathan Insull, money manager at Crescent Capital Group.

"Clearly, asset sales are part of the plan," Insull said. "It’s definitely something they are focusing on."

Peter Duda, a spokesman for Cerberus who works at public relations firm Weber Shandwick, declined to comment on the financing or any plans for asset sales.

Cerberus is the New York private-equity firm that led a consortium that reunited the Albertsons stores in March under the control of Cerberus's Albertsons LLC unit. The consortium bought about 870 Albertsons, Acme, Jewel-Osco, Shaw’s and Star Market sites for $3.3 billion, including all of the Albertsons supermarkets in Idaho. Those stores had been owned by Supervalu Inc. since 2006, when Albertsons Inc. was broken up and sold.

Cerberus bought more than 600 Albertsons stores in the 2006 purchase, mostly in the South and Southwest. It whittled them to 200 by March, mostly by selling them to other supermarket companies or closing the stores and selling them for their real estate value.

Cerberus may use proceeds from asset sales to help trim Albertsons' debt, which amounts to about $3 billion.

Lenders provided a $1.15 billion term loan and two revolving credit lines totaling $1.4 billion to finance the Cerberus group’s purchase of Albertsons, according to data compiled by Bloomberg. The company refinanced the initial term loan this month, reducing its borrowing costs, the data show.

After the March purchase, Cerberus carved out the Albertson banners and assets to combine them with the namesake stores it already owned. The two-step deal resulted in Cerberus controlling both Albertsons, which owns the namesake brand, and New Albertsons Inc., which holds the other four chains.

The transactions left New Albertsons with "considerable" liabilities, including about $2.3 billion of senior unsecured notes, as well as significant lease and pension obligations, according to an S&P report from March 20.

S&P in April gave New Albertsons a CCC+ rating, seven levels below investment-grade, with a stable outlook. Albertsons has a B rating, five levels below investment-grade, with a "negative" outlook. S&P cited weak sales trends with operating measures likely to be worse than industry peers.

"It’s a very tough business," Philip Zahn, a Chicago-based analyst at Fitch Ratings, said in a telephone interview.

Traditional supermarkets face competition from discount chains such as Wal-Mart Stores and Target as well as specialty stores like Whole Foods and Trader Joe’s, he said.

Albertsons is "highly leveraged" with its debt expected to be around 6.5 times adjusted earnings before interest, taxes, depreciation and amortization by early 2014, Charles Pinson-Rose, a New York-based analyst for S&P, said in a telephone interview. Kroger has a leverage ratio of 2 times and Safeway’s is 2.8, Bloomberg data show.

While Cerberus may sell assets acquired in the latest buyout of grocery store chains, Pinson-Rose said the firm will likely seek to improve operations by raising the quality of its fresh produce and meat, packaging and store presentation.

"Under the original deal they improved operation trends and then sold some real estate," Pinson-Rose said. "It was a gradual process. Not one big deal."

The Idaho Statesman contributed.

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