Now that Cerberus has outlined the details of its planned purchase of Supervalu Inc. (SVU) what will a "new" Supervalu look like? The deal details for the Cerberus partial takeover of the grocer includes the sale of Albertsons, Acme, Jewel-Osco, Shaw's and Star Market for $100M cash and $3.2B debt. This could be a blessing for the struggling grocery store. Supervalu's stock has been beaten down 90% over the past five years.
The planned sell-off includes five retail grocery chains (a total of 877 stores), including Albertsons, Acme, Jewel-Osco, Shaw's and Star Market stores. Cerberus will be able to add the Albertsons chains to the ones it acquired in the 2006 breakup of the grocery chain. The deal includes creating a subsidiary called New Albertsons, which will pay $3.3B [$100M in cash and assumption of $3.2B of Supervalu debt]. The other part of the deal includes Cerberus making a $4 per share offer for up to 30% of the "new" Supervalu shares. The tender offer is contingent on at least two-thirds of the 30% total tendering their shares for purchase. Even if not enough shareholders tender their shares, the company will sell new shares to give Cerberus at least 19.9% of the grocery company.
Major pressure for Supervalu sales has come from the likes of Wal-Mart Stores, Inc. (WMT) and The Kroger Co. (KR). These stocks trade with better multiples and also reward investors with dividends. Wal-Mart pays a 2.3% dividend yield (37% payout ratio) and Kroger pays a 2.4% yield (20% payout ratio). Wal-Mart not only offers customers groceries and consumables, but essentially every imaginable consumer stable or discretionary item. Kroger has kept its position as one of the top grocery chains by effectively remodeling stores and implementing loyalty programs.
The before picture...
Even though the grocery stock now trades close to $3.50, Supervalu has been under immense pressure, down 40% over a 12-month period. Safeway Inc. (SWY) and Harris Teeter Supermarkets Inc. (HTSI) are two other struggling grocery stores, but they only down 20% and 0%, respectively, for the same period. Supervalu currently has an operating margin that is sub 1%, but its 5-year average is 3%. Before the deal, Supervalu has one of the industry's greatest debt loads with a debt ratio at 53%. Other heavily debt loaded grocery store Safeway has a debt ratio of 43%. Supervalu has reported negative same store sales successively for the past four years and stopped its dividend payment following the 2Q 2012 payment. Before that the stock had a dividend yielding 7%. Safeway still pays its dividend which yields 4%, on a 40% payout. Supervalu EBITDA margins continue to be robust at 4.5%, as does return on equity of at 15%.
The after picture...
Supervalu, after the 5-grocery chain sell-off to Cerberus company, will be the independent business, Save-A-Lot, and regional retail food stores Cub, Farm Fresh, Shoppers, Shop 'n Save and Hornbacher's. The debt position will be cut down by 60% to $1.8B. The "new" Supervalu is expected to reduce that debt by another $500M in its first fiscal year. Before the planned sale to Cerberus, Supervalu had a breakdown that included retail making up 64% of sales and 24% for independent. The two segments: retail and independent business (wholesale), are very different businesses, with their own customers, marketing and overhead. After the sell-off, the breakdown for "new" Supervalu should be 50/50 for revenues generated from retail versus independent.
After deal pro forma...
It appears that the $4 per share offer could be very fair to shareholders. Enterprise value-to-revenue for Supervalu comes in at 0.16x pre-deal, with other notable competitors Kroger and Safeway trading at EV-to-revenue multiples at 0.15x and 0.12x. Assuming the multiple remains 0.16x after the deal, the "new" Supervalu stock would trade sub $4. The new retail and independent business breakdown should lead to higher margins following the sell-off. The operating margins for the retail segment is only 0.6%, but Save-A-Lot is at 3.2% and the independent business segment at 2.6%. Following the store reduction, the "new" Supervalu will have a greater weighting toward higher margin businesses.
"New" Supervalu expects to generate around $17B in revenue for its first fiscal year. Profit margins should be increased after the deal based on an advantageous business model mix - which would also happen to put the margins more in line with Safeway and Kroger. Also, assuming the worst case that Supervalu sells 20% more shares, the 2013 EPS should come in around $0.66. Based on its current 6x forward earnings multiple, the stock should trade near $4 within the next year. As a result, I am not sure I would be sticking it out with the "new" Supervalu.
Disclosure: I am short SWY.