In our last article in July, we had advised investors against investing in Supervalu (SVU) because of it consistently being a laggard in the grocery stores industry. The short ratio since then has risen from 16 days to 23 days and the stock is down 8.5%. This article is an update of the news that has come since then. We still think that SVU is still not a buy because of its high debt levels and if it can secure buyers for parts of its business.
The news of several buyers being interested in buying parts of the supermarket chain has been making the rounds for quite some time now. Because of such low valuations SVU is a good acquisition target. However, the concerns are related to its debt levels and cash generating ability. It is still unclear whether an offer will be made any time soon. SVU had hired Goldman Sachs (GS) and Greenhill & Co. to assist in finding a buyer. Though the company would want the acquirer to buy SVU as a whole, it seems unlikely that it will happen given the company's size. It also remains to be seen how much debt would go to the buyers who acquire parts of the company or whether the remaining parts of SVU would be left to deal with the enormous debt.
According to a Bloomberg article, Cerberus Capital Management is looking into a deal regarding Albertsons chain. In 2006, SVU had paired with Cerberus, a private equity firm, and CVS Corp (CVS) to acquire Albertsons. SVU had paid $12.4 billion in stock, cash and by assuming $6.1 billion of debt. Royal Ahold is also said to be interested in Shoppers chain, though this may just be another rumor. According to the latest news, Ronald Burkle and firms like KKR & Co (KKR) and TPG Capital have also shown interest. The stock was up 2.6% after hours on the news.
The company completed debt transactions worth $2.5 billion which includes: $1.65 billion 5 year revolving credit facility secured with inventory, credit card receivables and other assets and $850 million 6 year loan secured with real estate and equipment. These are meant to replace $1.5 billion credit facility maturing in 2015 and the two loans of $574 million and $446 million maturing in October 2015 and April 2018 respectively. While this refinancing is good for flexibility reasons, the company still has $6 billion of long term debt outstanding and an underfunded pension plan.
Supervalu's troubles are far from over. The company announced closing 60 stores in early September in continuation of its turnaround strategy. These stores include those running under the Albertsons, ACME and Save-A-Lot brand names along with a Jewel-Osco store. These stores would likely be closed before December 1st (Q3 end). According to the company, this would mean a charge of $80-$90 million (pretax) in 2013 of which only $3 million of severance pay is cash. $50-55 million of this can be expected in Q2 results. The company would realize a gain of $80-$90 million cash through these closures and real estate transactions in the next 3 years (about $35 million within a year). This cash would be utilized to reduce debt. A Jefferies & Co.'s analyst said that the closures can be a hint that a sale is not happening any time soon. Moreover, in the long run what matters is the cash flow from operations which keeps declining. The operating cash flows have been declining since 2009 and are now stand at $1.04 billion (trailing twelve months).
The company continues to face competition from the likes of Kroger (KR), Wal-Mart (WMT), Whole Foods (WFM) and Safeway (SWY). SVU lags behind competitors in pricing, which is a key driver in these tough economic conditions. The Save-A-Lot chain's same store sales have also been declining though we think this chain would be a good acquisition target considering the recent success of discounters like TJX (TJX) and Target (TGT). A Citigroup analyst estimated that SVU can get $1.94 billion for Save-A-Lot.
The stock is currently trading at EV/EBITDA multiple of almost 4x compared to 5x for KR and 4.6x for SWY. The company is expected to release Q2 2013 earnings on October 16th. Analysts are expecting a 4.7% decline in revenues for Q2 and 4.3% for the entire year. The Q2 EPS expectations are $0.14/share, which is half of the year ago value of $0.28/share.
We advise against investing in SVU at the moment, the stock would see some volatility following news of the interest of other firms and individuals in SVU. The revenue and EPS expectations are not encouraging and we do not see any certain acquisition offer in the short run mainly because of the company's deteriorating cash position and high debt levels.