Taking Stock

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Sales Accessible As He Presides Over SVU’s Asset Dump

Several of my independent retailer friends in the Mid-Atlantic have called me in the past month to note that they have either met with, been called by or received a letter from new Supervalu chief executive Wayne Sales.

What, a Supervalu CEO who actually communicates with his customers? Of those independents the consensus was that Sales was outgoing and a very good listener, and someone who clearly wants to change the company’s image of inaccessibility and clandestineness.

But good PR is not only good for Supervalu’s, customers, associates and vendors, it’s also good for Wayne Sales, who would love nothing better to see the sale of the beleaguered retailer/wholesaler happen quickly, smoothly and in one piece.

Although Sales is being well compensated for his role as Supervalu’s top dog, he is in a challenging and unique position – needing to improve the company’s morale while hoping his marketing agent – Goldman Sachs – can put some lipstick on this pig.

And the quicker that happens, the better it will be for the many (but not all) people involved in this process. Lord knows, Wayne Sales won’t get any relief from Supervalu’s upcoming second quarter earnings report (the period ended on September 8 and financials will be released on October 16), so he needs to keep all the intangible pieces of the company propped up until Supervalu can find a buyer.

As we reported on page 1 of this issue, it appears there is momentum that could lead to a relatively quick deal (perhaps by next month) involving a single buyer. That, of course, would be the best scenario for Sales and Supervalu. However, if the company is broken up, Supervalu would still be burdened by it cavernous debt ($6 billion), its continued participation in several underfunded pension plans and untold months of attempting to sell the many diverse and disconnected pieces of the company.

And let’s assume private equity firm Cerberus does walk away with the prize (?). Not only does that unshackle SVU from all if its problems, the new owners would have greater flexibility and more time to determine how to best utilize those assets.

For instance, Cerberus could hold on to Save-A-Lot (where licenses control more than 60 percent of the stores) and then flip it in a few years. And just because Kroger might have an interest in Jewel it doesn’t mean they’ll walk away with the 182 store chain. Despite downsliding market shares over the past five years, Jewel still has the best real estate in Chicagoland and remains a cash cow – two prized elements that might entice a PE firm to hold on to its tarnished gem.

We’ve heard from several sources who stated that Cerberus is very interested in Supervalu’s West Coast divisions (Southern California and Intermountain West) even though its stores in SoCal similarly are suffering from labor issues, underfunded pension plans and consistently declining market shares.

If Cerberus (or another private equity house) wanted to dump some of the original Supervalu retail divisions (Farm Fresh, Shoppers, Cub, Shop ‘N Save inSt. Louis, Hornbacher’s) it could probably sell most of those units to single entities.

So that would leave Acme and Shaw’s as well as Supervalu’s distribution and independent business on the table.

In the worst case scenario, Acme and Shaw’s units could be auctioned off in medium sized or individual pieces or an opportunistic buyer like Ron Burkle (Yucaipa) could parlay those two chains into his A&P foundation and become a real player in the Northeast. Based on the six month scorecard since he officially acquired A&P, we haven’t seen much improvement in store conditions, morale or sales, but Burkle is now operating a significantly skinnier model – one with favorable labor deals, a more efficient distribution arrangement with C&S and control of A&P’s valuable real estate portfolio (are you listening Food Emporium prospective buyers?).

Even though it would be a riskier investment (based on the recent performances of Acme and Shaw’s), Burkle’s angle would be potentially different than any other interested party.

As for distribution, this remains Supervalu’s strongest but least sexy asset. The company’s depots are all well run and in relatively good physical shape, but face the dilemma of supplying both its corporate banners and independent retailers from the same warehouses (in the Mid-Atlantic and Midwest) who at best have short-term supply contracts with Supervalu. You could make a case for C&S in this scenario, where a Cerberus would acquire those corporately-owned units with C&S in tow as its prime distributor while still potentially servicing independents who are also being currently under contract to Supervalu.

And that takes us back to where this story began. Because not only did those aforementioned independent retailers call me to alert me about how pleased they were to see Supervalu’s new CEO be so proactive, they also called to express their concerns about their future supply situations should Supervalu sell its wholesale division.

And all of them told me they are aggressively talking to other Northeast wholesalers, just in case the Supervalu wholesale outcome isn’t to their liking.