The term IPO conjures thoughts of Twitter, Facebook or Alibaba — relative newcomers to Wall Street and babies in the history books of global commerce, whose initial public offerings of stock in the past few years were big news. It probably won’t evoke thoughts of a storied Boise business founded on the eve of World War II.
Likely within months, Albertsons, a grocery chain that is one of Idaho’s oldest businesses, is expected to make its own IPO, becoming a publicly traded company that looks nothing like it did 75 years ago — but does resemble the Albertsons of 10 years ago, the last time the public could buy shares in the company.
When it goes public, Albertsons will again become Idaho’s largest publicly traded company, with sales more than triple those of Micron Technology Inc., the reigning champion. It is already an economic behemoth, with more than 2,200 stores and 254,000 full- and part-time workers — more than six times Micron’s worldwide force. Albertsons’ yearly sales rival Idaho’s annual gross domestic product.
But it won’t be a sexy tech IPO. It will be a calculated effort by Albertsons’ current owners to begin cashing in on their investments as they raise money in the stock market to pay down debt and pay for ongoing business operations.
New investors will get what analysts describe as a solid financial performer, a company that has managed to make money in a way that caused the old Albertsons Inc., Supervalu, and chains elsewhere to founder: by selling groceries in traditional, nondiscount stores.
There are risks, though. One of the biggest is debt. Albertsons’ owners loaded up on it this year to buy California-based Safeway, another struggling traditional grocer and an Albertsons competitor. Albertsons added about $9 billion of debt in fiscal 2014, mostly because it borrowed money and assumed Safeway’s debt as part of the deal. The takeover more than tripled Albertsons’ debt and more than doubled its annual sales on a pro-forma basis.
And investors have no assurance that Albertsons’ private-equity owners have discovered the secret to making traditional groceries reliably profitable. While Albertsons has succeeded in boosting sales, it lost money last year.
Back in 2006, the original Albertsons Inc. chain was broken up and sold for $17.4 billion. The sale followed years of struggle for profitability as Wal-Mart and other competitors siphoned off shoppers. A consortium of investors, led by New York private equity firm Cerberus Capital Management, bought some of the supermarkets, mostly in the South and Southwest. The rest, including all of Idaho’s Albertsons stores, were bought by Minnesota-based Supervalu. For the next seven years, both owners closed or sold hundreds of struggling stores.
Supervalu tried to make its remaining Albertsons stores profitable. Two years ago, Supervalu gave up and sold them to the Cerberus consortium, which took on $3.2 billion in debt to reunite what remained of the two Albertsons chains. Then in January, Albertsons merged with Safeway to form the second-largest supermarket company in the U.S. after The Kroger Co., whose chains include Fred Meyer.
Albertson had $27.2 billion in annual sales last year and a net loss of about $1.2 billion. Had it owned Safeway at the time, sales would have been about $57.5 billion, with a net loss of about $385 million, according to its regulatory filing.
The newly formed Albertsons Cos. is an umbrella that includes the supermarket banners Albertsons, Safeway, Vons, Jewel-Osco, Shaw’s, Acme, Tom Thumb, Randalls, United Supermarkets, Pavilions, Star Market and Carrs.
But analysts told the Statesman they think the IPO stock will appeal to investors who are looking for a reliable company. They said Albertsons is poised to do well in the future.
THE WEAK SPOTS
Albertsons declined to comment for this story, citing the regulatory “quiet period” that precedes a company’s stock offering. The company disclosed the risks it sees in a filing with the Securities and Exchange Commission in which the company announced plans for the IPO. Among them:
• Debt and pension obligations.
• Tens of thousands of unionized employees.
• The low profit margins of the grocery business.
• Albertsons’ ability to stay on top in a highly competitive industry.
• The time-consuming and distracting process of weaving newly acquired grocery companies into the Albertsons organization.
The filing also disclosed more generic risks, including any possible catastrophe such as terrorism, criminal activity “directed at the food or drug store industry or the transportation industry, whether or not directly involving our stores ...,” hurricanes and winter storms that can affect distribution or damage stores.
Albertsons said its reason for going public is “to repay certain existing debt, to pay fees and expenses related to this offering and for general corporate purposes.”
The company’s total debt as of Feb. 28 was $12.8 billion — more than three times its debt load of $3.7 billion a year earlier.
“The increase in fiscal 2014 was primarily the result of the financing for the Safeway acquisition and the assumption of Safeway debt,” it said in the pre-IPO filing. Albertsons said it and Safeway agreed to take a $6.3 billion loan and a $3 billion revolving credit facility.
The company also has taken on more pension obligations. Albertsons started fiscal 2014 with $357 million in pension benefit obligations. The Safeway acquisition included $2.5 billion in pension benefits, bringing the year-end total to $2.7 billion.
During the Safeway takeover, though, Safeway contributed $260 million to its largest pension plan, which kept Albertsons off the hook for making additional contributions until 2018, its pre-IPO filing said.
“If financial markets do not continue to improve or if financial markets decline, increased pension expense and cash contributions may have an adverse impact on our financial results,” the company said.
Analysts said they don’t see much danger to Albertsons’ bottom line from most of the risk factors cited in its disclosure. For example, they said, its highly successful grocery competitor Kroger also has a lot of unionized employees.
What they view as a question mark is whether Albertsons can differentiate itself from its competitors.
“The grocery IPOs that have occurred in the last couple of years, several have been specialty grocers like Sprouts, Fresh Market,” said Andrew Couch, managing director of New York-based DJM Real Estate. “Many of those chains that went public did so with a growth story, so they were basically saying, ‘We’re going to go public. We’re growing; the capital to be raised will help us to grow.’”
Albertsons is asking investors to make a bet on the growth it has already made, since the company plans to use money to pay down debts from acquisitions.
Analysts said Albertsons stock won’t fly off the shelves in its IPO, and its share price won’t shoot up 100 percent on the first day.
“I would imagine that the pricing [Albertsons will seek for IPO shares is] something close to where Kroger is,” said Jim Hertel, managing partner at Willard Bishop, a consulting group that works with food retailers and others. Kroger shares traded from $29 to $36 last week.
“I have a feeling that they haven’t necessarily got enough of a track record yet” to sell shares for that price, Hertel said.
Hertel said Albertsons has “ceded a high degree of autonomy” to its local divisions. In the food retail business, that approach “historically has produced the best results.” At the same time, Albertsons’ acquisitions have given it the scale needed to centralize the functions that don’t need to be under local control, like technologies.
Couch said Albertsons may not be selling a growth story, but that doesn’t mean growth is out of the question. He thinks Albertsons could continue to buy up regional chains and noted that it is bidding for A&P stores in the Northeast that are going through bankruptcy.
Albertsons’ Acme Markets has agreed to buy 76 A&P stores for about $335 million. Albertsons plans to borrow the money to pay for the acquisition, and it expects about $170 million in one-time costs to integrate the stores into the Acme chain, according to Albertsons’ latest pre-IPO filing. The stores had sales of $1.5 billion in the year ending April 30.
Couch does not think Albertsons will sell off stores en masse after going public. If anything, he said, there could be “surgical closings” of stores that aren’t near enough to distribution centers or aren’t making money.
“I think the premise of their IPO is ... based on solid management, good execution at the store level, good store-level employees,” a history of giving local store managers a lot of autonomy to cater to their communities’ needs, and Albertsons’ increased ability to take advantage of its size to lower its operating costs, he said.
Couch and others noted that the neighborhood grocery store is challenged more than ever as consumers get more options.
“The traditional supermarket business is under tremendous pressure from the growth of alternative channels, limited assortment, dollar, fresh, online, as well as from food service, which is growing again,” said Bob Goldin, executive vice president at Technomic, a Chicago food industry research and consulting company. “There’s so much competition, and the bar has been raised so much” by Trader Joe’s, Aldi, Whole Foods, Sprouts and regional supermarket chains.
But when Goldin read through Albertsons’ IPO filing, “I was a bit surprised,” he said. Albertsons and Safeway both seem to have “reasonably good” sales and have focused on increasing their same-store sales, he said.
Albertsons said same-store sales rose 7.2 percent in fiscal 2014, turning around a downward trend at stores it acquired. That was before the Safeway purchase. At Safeway, before the acquisition, same-store sales increased 3 percent. Had the two companies been one, same-store sales would have increased by 4.6 percent. Albertsons said in its pre-IPO filing: “We believe that implementation of our playbook will enable us to further accelerate this rate.”
That might be enough to entice stability-hungry investors, Goldin said.
“I think [investors] look at the supermarket business as pretty stable, by and large — maybe not how they looked at it 15 years ago or 20 years ago,” before the array of consumer options encroached on the industry, he said.
The debt isn’t as much of a problem as what the company does with it, Goldin said. Albertsons and Safeway stores need to be modernized and upgraded, he said.
“To me, that’s their biggest challenge — basically competitive differentiation,” he said. “For a long time, I think both Safeway and Albertsons, independently, relied on the fact that they had good locations. ... Just being the neighborhood grocery story isn’t good enough anymore, especially in urban markets.”
The grocery market is a well-defined pie, with people always needing food and home supplies, he said. What will shape Albertsons’ future is how it keeps its share of the pie as more competitors find ways to split it up, he said.