Cerberus/New Albertsons Poised To Become Nation’s Second Largest Supermarket Chain

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A few more thoughts about this whole process: although Kroger apparently attempted to enter the bidding arena at the 11th hour, trade observers have speculated that its interest was primarily to drive up the price of the deal, especially since New Albertsons will soon be Kroger’s primary competitor in many markets. As stated above, Kroger may indeed be interested in specific overlap locations, but Kroger’s corporate grid would have created more overlaps than the New Albertsons-Safeway deal.

And speaking about price, I noticed the hype about the “significant premium” Safeway shareholders would receive based on the closing share price during the past year (a 72 percent gain in value over a year ago; a 56 percent premium over six months ago; and a 17 percent increase since February 18, the day before Safeway revealed its was in sales discussions). Those are nice gains, but we’ve heard from several insiders who believed that Safeway was looking to garner an offer in the $46-$49 per share range.

However, timing is everything. Without another serious bidder, Cerberus held all the leverage. Still, it’s hard to believe that Harris Teeter, a much smaller company with infrastructure assets (real estate control, distribution centers, and manufacturing plants) that can’t match Safeway’s, sold for nearly 25 percent more than the Pleasanton, CA-based chain on a per share basis.

Give former CEO Steve Burd and current CEO Edwards credit – they’ve streamlined Safeway to such a degree over the past two decades that it unintentionally became the optimal poster child for any PE company to desire, especially taking into account the vanilla and centralized way Safeway operates. To a hedge fund or private equity firm, Safeway became the ideal turnkey supermarket chain to target.

And Edwards is certainly a man of his word – since his elevation to chief executive last May, he’s preached “maximum shareholder value.” He’s now achieved his mission, even though the final number may be a little lighter than he and Safeway’s board might have hoped.

Oh, and as for the answer to Question 4: How long will Cerberus/New Albertsons stay in the game? My hunch is no more than three years (although the stores will certainly still exist).

I believe that once Bob Miller (and Robert Edwards) perform their makeover, Cerberus Capital Management will follow in the steps of Bi-Lo Holdings/Lone Star Funds/Southeastern Grocers (Bi-Lo, Winn-Dixie, Sweetbay, etc.), Sterling Investment Partners (Fairway Market) and even Safeway (Blackhawk Network Holdings), and seek to launch a public offering.

That’s where the real treasure trove lies – break up fees, bonus compensation and a potential windfall for the core executives and insiders, which represents hundreds of millions of dollars to be potentially reaped by those inner circle investors.

Because at the end of the day, all of these PE deals are less about selling groceries and enhancing the shopping experience and more about Wall Street leaving an indelible mark on what used to be an exciting and entrepreneurial business.