Taking Stock

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SVU Sale Process: It Looks Like It’s Cerberus’ To Lose

As the process to sell Supervalu continues to unfold, multiple sources have pointed to Cerberus Capital Management, LP as being the front runner to acquire all of Supervalu’s assets.

When the Eden Prairie, MN retailer/wholesaler first announced in July that it had hired Goldman Sachs and Greenhill & Co. to perform an asset review of the troubled firm, many industry observers wondered if Supervalu was saleable in one piece.

And in an October 2 story, Bloomberg reported that not only was Cerberus interested but so were other private equity firms Yucaipa, KKR and TPG Capital. However, the story added that those three investment firms were looking to acquire only pieces of Supervalu, not the entire corporate entity.

Several sources noted that they believe that Cerberus will be the only player willing to step up to the plate and acquire all of Supervalu’s assets, although one source believed that a deal could be announced with Cerberus as the lead player with additional organizations interested in specific pieces of SVU’s operation.

“First off, there has been a solid relationship between Supervalu and Cerberus (in 2006 Cerberus acquired 655 stores as part of the sale of Albertsons) and they continue to license the Albertsons name from Supervalu,” saidone Wall Street analyst. “I think Cerberus would have a keen interest in Supervalu’s Southern California and Intermountain (Washington, Oregon, Idaho) operations. Additionally, by selling the entire company (rather than in pieces), Supervalu could potentially escape future debt (currently at $6 billion) and pension fund obligations.”

If Cerberus did acquire all of Supervalu, another Wall Street analyst suggested that it could follow its Albertsons LLC strategy of selling stores in markets that were not a fit for the retailer (i.e. Northern California, where it sold 132 stores to Save Mart) or closing or selling stores in existing markets where it faces tough competition (i.e. Florida, where it has sold many of its stores to Publix and now only operates four units). Of those original 655 stores, there are now only 190 stores remaining, which trade as Albertsons Market.

“At the end of the day, the real estate value of its assets will be of major concern to any financial buyer,” that analyst noted. “A total entity deal would not only be preferable for Supervalu, it could be beneficial to a financial buyer for the value of the real estate (more than 1,100 supermarkets alone). I would guess that if Cerberus gets the whole Supervalu enchilada there will be other minority partners included, too.”

Asked who those might be, he responded, “You can never count out Yucaipa. Burkle likes these kinds of deals and he is the best candidate to acquire Acme and Shaw’s, both from a real estate potential and his ability to possibly lessen the burden of existing onerous labor contracts, as he did with the A&P deal. Beyond that, one could make an argument that strategic retailers like Ahold USA, Kroger or Harris Teeter would be interested in a smaller entity like Farm Fresh, or Kroger could work a deal with Cerberus to acquire Jewel, which might be backsliding, but has many great locations and is still very profitable. Or Cerberus could opt to keep some of their better performing properties like Save-A-Lot and look to flip them in a few years. There is an advantage to both sides for a ‘one entity’ deal,” the analyst stated.

We have also learned that Sam Duncan, former president of Fred Meyer, is involved with the diligence process for Cerberus and could emerge as CEO of the new entity if the private equity firm does gain control of Supervalu. Interestingly,Duncanhas previously worked with Bob Miller (current CEO of Albertsons LLC) at Albertsons and Fred Meyer and has also worked with Sam Martin, who now serves as president and chief executive of Yucaipa-owned A&P. Duncan began his career with Albertsons.

That indeed is a somewhat surreal example of “six degrees of separation” that centers on Ron Burkle (Yucaipa). Burkle’s realm has included Miller, Duncan and Martin. I wonder when John Standley and Ken Martindale (Pathmark, Rite Aid) will enter the picture?

We have also learned that the original October 15 deadline to receive all bids (a prospectus detailing all properties was issued by Supervalu in late August) has been extended, although our sources all agreed that a potential Cerberus-led deal could be completed by November 15.

Clearly, this story remains very fluid and could see an outcome occur more quickly than many expected.

And on a related note, 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 who I have communicated with, 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.

Clearly, 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 internally, Supervalu would still be burdened by its 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.

And that takes us back my dialogues with those independent retailers. Because not only did those aforementioned merchants 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.