Taking Stock

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C&S Bid Helped Drive Up Price Of UNFI Acquisition of Supervalu

As one of 6,000 people who attended last month’s Supervalu national expo in St. Paul, MN, I felt a bit privileged when the company announced it would be holding a half-day media session with trade journalists on July 25 to update and discuss the company’s recent trends and future plans.

Most of the company’s senior leaders including CEO Mark Gross were scheduled to speak in what proved to be an informal and interactive series of presentations that lasted more than three hours.

Except Mark Gross never showed. Neither did Jeff Swanson, SVU’s VP-communications, who organized the event. Apparently, both were “tied up” preparing for Supervalu’s second quarter earnings report which was slated for release the next day. I thought little of it and enjoyed the openness and accessibility shown by Supervalu’s leadership team (Mike Stigers, Anne Dement, Joe Falvey, Beka Swan, Tom Kraus and Jody Barrick).

That afternoon I walked the show floor and chatted with Supervalu customers and vendors, many of whom expressed cautious optimism about the company’s transformational plan which most likely included the sales of its corporate retail stores and greater focus on helping the independent retailers, who as a group are being extremely challenged by the competitive landscape that affect virtually every market in the U.S.

That evening at the entertainment gala, attended by several thousand people, Gross once again never appeared. Executive VP-wholesale Mike Stigers filled in as emcee which struck me as curious. I mentioned to the group of retailers sitting at my table that Gross also didn’t post at the media session earlier in the day. I sensed something was up – my first thought being that Gross was working on a settlement with Blackwells Capital, the hedge fund that was trying to blow up Supervalu’s board and take control of the company. My guess was that a “peace offering” might be included in the upcoming earnings announcement.

The next morning there was a collective jaw dropping (including mine) when it was announced the Supervalu would sell and that the buyer would be UNFI. All of sudden, the impact of the show, the battle with Blackwells and Supervalu’s aggressive future plans seemed meaningless.

So, here’s my take. At $32.50 per share, Gross and the SVU board were obligated to accept the UNFI offer. After seeing its shares hover in the $20 per share range for most of the past year (and that after a 1-for-7 reverse stock split last August), Supervalu would never see anything close to $30 per share in its front view mirror. In fact, several months ago I asked two financial analyst friends that if Supervalu were to sell what might it fetch. Both answered in the $24-$26 range.

And it only got to that elevated level after both C&S Wholesale Grocers (where Gross used to work) and UNFI engaged in a reportedly aggressive bidding war. In an internal email, C&S confirmed to its key associates that it indeed was engaged in the process, but dropped out when the price reached a level where it could not foresee the value it needed (this was somewhat surprising since not only are C&S chairman Rick Cohen and Mark Gross industry cohorts, acquiring Supervalu – a publicly-traded company – would have seemed like the ideal succession strategy for privately-owned C&S, which Cohen controls).

At $32.50, UNFI won the lottery, but at a hefty price. The $2.9 billion deal creates a lot of debt for the Providence, RI firm (including the assumption of SVU’s liabilities) and it’s anybody’s guess if UNFI CEO Steve Spinner can create a new dynamic – effectively blending a large full-service traditional wholesaler into a specialty, organic, natural and ethnic warehousing, logistics and customer service organization.

While UNFI has clearly created a unique platform (and now has a great opportunity) which will give it complete access to all retail departments, I’m concerned about the significant debt and its ability to provide the same level of customer service that Supervalu customers expect.

UNFI has proven it can be a national player in the natural/organic/specialty business with a large catalogue and a solid pricing structure. However, if you ask retail customers who did business with Millbrook Distributors (a company UNFI acquired in 2008) or Haddon House (another specialty distributor it purchased in 2016), the most common criticism of UNFI has been the decline of customer service in supplying their accounts.

In fact, just in the Mid-Atlantic region, more than a handful of Haddon House customers – including Weis Markets and Kings/Balducci’s – have shifted to other distributors at least in part because of what they perceived as eroding customer service.

And in the two weeks since the deal was announced, several Supervalu customers (who are currently using UNFI for their natural/organic/specialty food needs or are simply worried about potential change) have expressed concern about whether any specialty foods distributor can manage a business that’s much larger, more diverse and complicated.

I’ve also received about a dozen inquiries from Supervalu associates both on the regional level and also from those based in corporate headquarters in Eden Prairie, MN. They’re worried about job security and wonder if UNFI will alter or scrap SVU’s current wholesale transformational strategy which they believe is beginning to pay dividends.

It’s certainly too early to predict what course UNFI will take (the deal isn’t likely to close until late in 2018), but if history is any type of lesson, you can expect UNFI to deploy an aggressive cost-cutting strategy to lower debt and become more efficient at least by its definition.

Regional offices or distribution centers closing? Personnel realignments? Job cuts? It’s all possible.