Supervalu: About To Call Private Equity Or Circling The Drain?

Jun.17.12 | About: SUPERVALU Inc. (SVU)

Supervalu (NYSE:SVU), the third-largest U.S. grocery store chain, has been in a state of decline that brought it to a 30-year low this week. Supervalu now has a market valuation of less than one billion dollars, with over six billion dollars in debt. Worse yet, it is facing tough competition from discounters like Target (NYSE:TGT) and Wal-Mart Stores (NYSE:WMT) on the lower end, and Whole Foods Market (NASDAQ:WFM) on the higher end. The growth of these powerful competitors contributed to the bankruptcy of A&P less than two years ago, and has hurt most traditional grocers for several years.

These days, SVU stands less for Supervalu, and more for the special victims unit. See a recent performance chart:

(click to enlarge)Click to enlarge

On Thursday, June 14, SVU shares climbed over 8% as rumors of a potential purchase swirled around Wall Street. More specifically, speculation appears to indicate the potential attractiveness of SVU to private equity firms, which may be lured to the grocery chain by its free cash flow and potential to turn a profit. Moreover, SVU owns property across the nation and some targeted asset sales could help reduce the significant debt burden that plagues the company.

Supervalu operates over 2,000 stores under brands such as Acme, Albertsons, Cub Foods, Farm Fresh, Hornbacher's, Jewel-Osco and Lucky, among others. Supervalu acquired Albertsons in 2006, in one of many moves to consolidate grocery retailers and circle the wagons. The acquisition effectively doubled SVU's number of stores, but the economy subsequently declined and so has SVU. Since SVU's peak in June of 2007, it is down about 90%.

Worse yet, SVU has declined considerably more than its peers, such as Kroger Co. (NYSE:KR) and Safeway Inc. (NYSE:SWY). Both of these competitors are far larger than SVU, with far lower debt loads in relation to their market value or EBITDA. Over the last five years, Kroger is down 24.23% and Safeway is down 48.03%. Though neither performance is worthy of a pat on the back, both have considerably outperformed SVU through that term. In fact, either may be interested in acquiring SVU for the right price, given most large grocers were at least partially interested in acquiring Albertsons when Supervalu did.

If a private equity firm were to take over SVU, substantially reduce its overhead, including selling off a healthy chunk of its real estate and/or terminating leases on nonperforming, non-owned locations, the company may be able to survive, but such actions would likely have to occur shortly. The company owns approximately 24 million square feet of retail space and leases, roughly, another 40 million square feet.

Large sales may not be as difficult as they might appear at first blush. Supervalu has maintained numerous brands of grocery stores, with many having a particular regional footprint, and the company may be able to sell one or several such chains in order to reduce its substantial debt load. Such options may actually be far easier than finding a private equity buyer, many of whom may be disinterested in acquiring all of that debt, including pension and retirement liabilities, of about one billion dollars.

All things considered, it appears that many individuals are now speculating that a private equity buyout of SVU may occur, but many also speculated that such would happen to A&P in 2010, only to lose that highly speculative bet. The company now trades for about the same value per share it lost last year, and that may not present the value proposition private equity wants these days. If SVU cannot find a buyer for some or all of its parts, or return to full-year profitability, it may be the next large traditional grocer to file for bankruptcy.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Disclaimer: This article is intended to be informative and should not be construed as personalized advice, as it does not take into account your specific situation or objectives.