Although our May 2012 investment in SUPERVALU (SVU) was able to generate a total return of 40% and exceed the majority of its peers as well as the S&P 500, we acknowledge that we were living in "interesting times" with our position in SVU. Although SVU had to sell the stores it acquired from Albertsons to Cerberus earlier in the year at a significant discount to what it paid to acquire the stores in 2006, at least it was able to shed $3.2B of interest bearing debt. Although those stores represented 57% of SVU's FY 2013 free cash flows, at least SVU will be able to focus better on its remaining operations rather than a far-flung nationwide portfolio of retail food stores.
Fitch and Moody's each upgraded its ratings on SVU due to the sale of its legacy Albertsons operations and investors have bid up SVU's shares by 150% since the end of last year. We believe that part of this surge in SVU's share price during the year was due to relief that SVU was able to strike a deal to shed its New Albertsons Inc. grocery store banners (Albertsons, Acme, Jewel-Osco, Shaw's and Star Markets) and relief that SVU isn't going bankrupt any time soon. Also, part of this surge is because investors are expecting the slimmed down SUPERVALU to stabilize its revenue, reorganize the firm from a top-down corporate driven model into a bottoms-up business unit driven decentralized mode and recovery from its poor performance since 2006 based on its new management and new strategy.
Based on the weak performance of SUPERVALU since its 2006 acquisition of the legacy Albertsons operations, we were relieved to see some fresh blood come in to SVU's Board of Directors. On March 20th, five of SUPERVALU's legacy board members Ronald Daly, Susan Engel, Edwin "Skip" Gage, Steven Rogers and Kathi Seifert voluntarily resigned after the completion of the $4/share tender offer that Cerberus's affiliate Symphony Investors floated to SVU's shareholders. We weren't surprised that Mr. Rogers and Ms. Engel were two of the directors that resigned as they were nearing the end of their 15-year term limit for serving on SVU's Board of Directors.
Although Skip Gage had been serving on the board longer than Mr. Rogers and Ms. Engel, he wasn't limited to serving a maximum of 15 years as he was hired before SVU limited the amount of time non-employee directors could serve on the board. However, he was expected to retire at the annual meeting following the date he attains the age of 74 and he was 72 years old when he resigned. Ronald Daly (2003) and Kathi Seiffert (2006) had been a part of SVU's board on or before the day it acquired Albertsons. Cerberus replaced these five members with John Standley (Rite Aid (RAD) CEO), Lenard Tessler (Co-Head Global Private Equity and Senior Managing Director of Cerberus), Mark Neporent (Chief Operating Officer and General Counsel of Cerberus), Robert Miller (SVU's new Non-Executive Chairman and is also serving as the CEO of Albertsons LLC) and its new CEO Sam Duncan.
SVU's new CEO has also shaken up the company's executive management suite. With the exception of Janel Haugarth (President of SVU's Independent Business), every executive position in the new SVU is staffed by a different person than who was serving under the old SVU (or will be in the case of the SVU suite). Here are some of the new faces:
- Chief Information Officer Randy Burdick, who came to SVU from OfficeMax (OMX) where he worked with SVU's new CEO Sam Duncan
- Save-A-Lot Division President and CEO Ritchie Casteel, who previously worked with Duncan at Albertsons Inc. for over 30 years and also worked with Duncan at ShopKo
- Human Resources and Communications EVP Michele Murphy was promoted from her role as SVP of corporate human resources and labor relations and has been a senior leader with SUPERVALU and its predecessors (Albertsons, Acme and American Stores) since 2002
- General Counsel and Corporate Secretary Karla Robertson was promoted from her role as Vice President of Employment, Compensation and Benefits. She has been with SVU since 2009 and previously worked with Target (TGT).
- Merchandising and Marketing EVP Mark Van Buskirk, who worked with Duncan at Fred Meyer and recently served as Kroger's (KR) VP of meat and seafood merchandising and procurement
- Chief Strategy Officer Rob Woseth, who previously worked with Casteel at Albertsons Inc. and also worked as the VP of Business Development and Strategy at Albertsons LLC when Cerberus acquired stores from Albertsons Inc.
When SUPERVALU acquired Albertsons, it had to devote a significant portion of its free cash flows towards paying down the debt that was used to underwrite the deal. As SVU's revenues and operating cash flows saw steady erosion, we had concerns that SVU would be facing challenges pertaining to refinancing a portion of its 2016 debt maturities. SVU also had to pay a steep price in terms of interest, issuance fees and collateralization when it refinanced its revolving credit facility and term loans in August in the wake of its weak FQ1 FY2013 results. Although SVU's acquisition of Albertsons certainly qualifies as a "deal-from-hell" SVU could make the claim (but granted it's quite lame) that it at least paid down over nearly ~$3.5B of its debt levels from when it acquired Albertsons.
In an interview our firm gave with the Chicago Sun-Times about prospective buyers for SUPERVALU in general and its Jewel-Osco operations in particular, we suggested that SVU could sell some of its stores in exchange for the buyer relieving it of a fair amount of debt. When SVU sold its New Albertsons Inc. stores to the Cerberus consortium, SVU only received $100M in cash but was at least able to shed $3.2B worth of debt relating to the New Albertsons Inc. stores. Although SVU gave up a lot of upside potential in the New Albertsons Inc. stores in order to close the deal with the Cerberus group, SVU had some indirect benefits as well. Cerberus floated a tender offer for up to 30% of SVU's shares at a $4/share price, although the tender offer has expired, we believe that this offer has established an implicit floor in SVU's shares in the short term. We believe that investors felt that SVU was worth more than $4/share as only 5.5% of SVU's shares were tendered. SVU issued new shares to an affiliate of the Cerberus group (Symphony Investors) in an amount that equaled 19.9% of SVU's previous outstanding share amount.
Now that Cerberus has a significant stake in SVU, other notable investors have taken an interest in SVU as well. SVU recently sought to refinance $300M of its 8% May 2016 senior notes via a tender offer and investors tendered $372M. The company had issued $400M worth of its senior notes due in 2021 in order to fund this tender offer. SVU also recently completed the refinancing of its existing $1.5 billion senior secured term loan agreement. The amendment reduces the interest rate margin from 5.0 percent to 4.0 percent and reduces the LIBOR floor from 1.25 percent to 1.00 percent for LIBOR based loans. The amendment also expands the ability to increase the term loan, subject to a secured leverage test, by up to $500 million (previously $250 million). The maturity date of the term loan remains March 2019. Since the term loan was refinanced within the first year of its inception, the Company paid the existing term loan lenders a 1 percent refinancing premium per the terms of the loan agreement. Goldman Sachs and Credit Suisse were the joint lead-book-runners on the deal.
In conclusion, we're not alone in that we are relieved that SUPERVALU will survive as an ongoing independent concern and it was able to sell its weakest grocery store banners. We believe that SVU's new management team will stabilize SVU's revenues and profits, which will help SVU's stock price recover. We regretted that we gave SVU's former CEO Craig Herkert the benefit of the doubt after SVU's performance in 2012 because although SVU made progress towards turning around in 2012, it regressed and resumed its declining momentum in 2013. We can take some comfort in that Herkert's inability to stabilize sales forced SVU's board to seek stronger outside assistance by striking a strategic deal with the Cerberus consortium. Considering that it was SUPERVALU's involvement with the consortium that got it in financial trouble, we think it was real big of Cerberus and company to throw SVU a lifeline. At least Cerberus's presence has enabled SVU to shed debt, upgrade its executive talent, present an attractive investment case to deep value investors and refinance its remaining debt.
Additional disclosure: This article was written by an analyst at Saibus Research. Saibus Research has not received compensation directly or indirectly for expressing the recommendation in this article. We have no business relationship with any company whose stock is mentioned in this article. Under no circumstances must this report be considered an offer to buy, sell, subscribe for or trade securities or other instruments.