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Supervalu Seeks To Create Holding Company To Segregate Wholesale, Retail Businesses

As it meanders down a path that many predict will ultimately see the end of most or all of its corporate retail operations, Supervalu proposed a new corporate structure in which its core wholesale grocery business will operate separately from its struggling company-owned retail stores.

In a preliminary proxy statement/prospectus issued on June 7, the Eden Prairie, MN-based firm said the reorganization would change Supervalu’s current corporate structure into a holding company which would “organize and further segregate Supervalu’s wholesale and retail operations in an operationally efficient and strategic manner, including to separate the wholesale and retail operations” held by its current public company entity.

Additionally, Supervalu said the proposed changes would: facilitate the company’s previously announced strategic transformation plan to sell certain retail assets to third parties; better segregate the liabilities of the organization into their respective business segments; increase Supervalu’s strategic, business and financial flexibility; and enable the company to achieve its strategic transformation plan in a tax efficient manner that may facilitate the ability to utilize a material portion of Supervalu’s capital loss carryforward, which could generate approximately $300 million of cash tax benefits for the organization over the next approximately 15 years.

“We have been executing a strategic transformation of our business over the last two years to become the wholesale supplier of choice for grocery retailers across the United States, while also executing initiatives to deliver long-term stockholder value,” said Mark Gross, SVU’s president and CEO. “The proposed holding company structure is another significant and important undertaking by our team that would support and advance our transformation by further separating our wholesale and retail operations in a tax efficient manner.”

More than 75 percent of Supervalu’s revenue is derived from its wholesale business.

Supervalu also advised shareholders not to support any new board members nominated by New York investment firm Blackwells Capital, which has an ongoing proxy battle with the wholesaler/retailer to accelerate its restructuring efforts in an effort to bolster Supervalu’s share price, which was $19.89 at the close of business on June 13. About a year ago, Supervalu initiated a “1-for-7” reverse stock split in an effort to increase trading activity and value. Blackwells, which holds a 7.3 percent equity stake in Supervalu, is seeking to add six of its own candidates to join SVU’s board. Shareholders will vote on the new restructuring at the company’s annual shareholder’s meeting which still does not have a scheduled date.

If this plan is successful, it is yet another indicator that most or all of Supervalu corporate retail will be toast within a year. The probable exception is Cub Foods, the company’s largest retail banner and one that has not experienced the same level of deterioration that has befallen Shoppers, Food & Pharmacy, Shop ‘n Save and the now defunct Farm Fresh banners.

As I’ve said several times recently, Gross is in a pressurized situation which he largely inherited. The pressure from Blackwells certainly exacerbates things, but he’s taken the right approach by attempting to dump much of corporate retail. Unfortunately, many of SVU’s corporately-owned stores aren’t in great physical shape and the current market isn’t exactly a seller’s delight.

Even if the separation of wholesale and retail buys Gross more time and breathing room, he probably won’t get much money or many supply contracts with these store sell-offs. As painful as the process has been (and it will become even more painful), Gross is plotting the right course for Supervalu and he and the board shouldn’t allow any tinhorns from Wall Street to disrupt their reshaping plan.