Taking Stock

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Cerberus Deal Seen As ‘Very Close;’ But Collapse Could Be Catastrophic For SVU

Sources tell us that a potential deal that would see Cerberus Capital Management (and additional financial partners) acquire the assets of Supervalu (SVU) remains very much alive and seemingly close at hand. However, those same analysts believe that if a potential agreement falls apart then Supervalu would have to wait many months to dismantle its ailing company and would still be burdened with many of its current problems.

“It still remains Cerberus’ to lose, and I’m told an announcement of a deal is very close to being announced” said one of our Wall Street sources. “They’re the only ones that will offer to buy the entire entity and, short of selling the whole enchilada, Supervalu’s options then become very limited.”

The key for Supervalu is that any deal at this juncture must be fully inclusive – a total asset sale of the Eden Prairie, MN-based retailer/wholesaler would mean that some of the company’s most burdensome financial issues – including its $6 billion debt, its onerous labor contracts and related pension liability issues – would be somebody else’s responsibility. Anything short of a one-step sale would mean that Supervalu would have to continue operating with those handicaps, even if it could gain more value if it sold its assets in a more piecemeal arrangement.

“I think Cerberus will wrap this up before the end of the year,” said another Wall Street analyst. “I’ve heard that they have made their deal with Supervalu and have gained the necessary financing that’s needed. And I’m hearing the deal will be in the $5-$6 per share range. Obviously, with all of that comes the assumption that Cerberus has its leadership team in place as well as a strategy for what assets it will look to keep and what to sell as well as a theoretical timeline of when these asset decisions will be made.”

We’ve been hearing for the past several weeks that Bob Miller, CEO of Albertsons LLC, would be spearheading Cerberus’ expanded grocery presence if they can consummate a deal with SVU.

Miller is a veteran grocery executive who began his career with Albertsons in the late 1960s. He’s had many big jobs in the industry, including CEO of Fred Meyer (which was controlled by hedge fund magnate Ron Burkle and was sold to Kroger in 1998), CEO of Wild Oats and chairman of Rite Aid Corp. He became Cerberus’ point man when the big New York private equity player acquired most of the Albertsons stores (about 600 units Florida, California, Texas, Louisiana, Colorado) that Supervalu did not purchase in the historic 2006 deal.

Miller would be an ideal candidate to lead the new (or newly expanded) organization, having both the leadership skills and a keen understanding of industry dynamics (people, systems, real estate, etc.). Also apparently coming on board in a senior executive post (if Cerberus wins the bid) would be Sam Duncan, who worked for Miller at both Albertsons and Fred Meyer.

If Cerberus is successful in acquiring all of Supervalu, it will have many critical decisions to make concerning it physical assets. The most saleable pieces of the potentially new company would be Save-A-Lot, Jewel and some of the regional banners that Supervalu owned prior to the 2006 deal. At the top of that list would be Farm Fresh, Shop ‘n Save, Hornbacher’s and Cub. Shoppers Food & Pharmacy (another pre-2006 SVU property) is most likely a tweener and I’d bet that Cerberus’ first instinct would be to hope to sell it. Other banners like Acme and Shaw’s would likely be on the sales block from day one (if Cerberus would be fortunate enough to be able to find buyers – a tall task, indeed). While the Albertsons units on the West Coast (SoCal and Seattle/Portland) hold real estate value, their performance has been as abysmal as Acme’s and Shaw’s (which earlier this month laid off another 700 associates). Other assets such as independent wholesale and warehousing and logistics will also have to be considered – but probably not right away.

And don’t underestimate the value of the fact that, if the Cerberus deal occurs, the new company would operate as a privately-held organization, allowing one of the country’s largest equity firms the necessary time and flexibility to make crucial decisions about the futures those assets. Cerberus then could take its time and decide to hold on to certain properties, either to milk the real estate or attempt to improve existing banners that it then could eventually sell during the next 18-24 months. Of course, that would mean that Cerberus would have to invest in improving the physical plants, merchandising and pricing structure, as well as find effective new leadership, both corporately and at some of its divisions. Beyond that, if it were to hold on to certain banners, a more regional approach to merchandising, marketing and community affairs (translation: minimize centralization) would prove to be beneficial.

And just before presstime, we’ve been told that a Cerberus acquisition could happen as quickly as December 1. As we’ve been saying for the past 90 days, it’s Cerberus’ deal to lose. And other than the folks at Goldman Sachs who are brokering this arrangement, the happiest man in the world might be Supervalu’s new chief executive Wayne Sales, who stands to make mucho, mucho dinero if this transaction occurs.