Harris Teeter Sale Process Moving Forward with Reported Bid By Cerberus

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According to several sources, Cerberus Capital Management LP, which recently completed the purchase of 877 former Albertsons stores from Supervalu (New Albertsons) and also acquired a 30 percent controlling interest in the Eden Prairie, MN-based retailer/wholesaler, has made a bid for Harris Teeter Supermarkets Inc, the well-run and very profitable 211 store regional grocery chain which earlier this year acknowledged it was exploring the possibility of a sale.

Cerberus’ involvement was first reported by the Wall Street Journal and later substantiated by other financial sources.

Other sources also told us that Ahold remains interested in Harris Teeter leading to what could shape up as a battle between strategic and financial bidders.

One thing seems certain: the price tag for Harris Teeter will be high. The Matthews, NC based chain has performed well above its industry peers and, at presstime on July 3, its stock was trading at $47.82 per share. Harris Teeter’s current market cap is approximately $2.3 billion and in its recently completed second quarter (ended April 2), the retailer earned $432.9 million on sales of $1.17 billion, up 4.3 percent. Same store sales rose 3.66 percent and the publicly-traded (but closely held) merchant said it plans to spend $200 million in fiscal 2013, which ends October 1. For the remainder of the year, Harris Teeter plans to open seven new stores, including one replacement. It will also remodel seven stores, three of which will be expansions.

According to the sources we spoke to concerning a potential sale of the company, most were in agreement that they expect the company to sell for a premium, perhaps as much as seven or eight times earnings, a multiple that has not been reached by other retail organizations that have been peddled in recent years.

Some of those sources said they wouldn’t be surprised if another private equity company also bid on the chain, but all were in agreement that Ahold would still be the favorite if they desire the chain.

“I’ve said it from the beginning,” noted a Wall Street investment executive, “this is Ahold’s deal to lose. Cerberus isn’t going to pay nearly what Ahold will and nobody has more free cash than Ahold does for an acquisition of this type. Harris Teeter’s stores are adjacent to Ahold’s current market and attract the type of customer that Ahold covets. Throw in the fact that Ahold has about $6 billion in free cash and that Harris Teeter in a non-union operation, and the fit on paper is nearly perfect.”

A majority of those sources also believed that neither Kroger (which operates stores in parts of Harris Teeter’s marketing area) nor Publix (which announced it plans to establish a separate operating division in Charlotte) would pursue a bid for the upscale merchant.

This entire process began in February when Harris Teeter announced it had hired financial services firm J.P. Morgan to explore strategic alternatives. The company said it had made this move after two private equity firms expressed an interest in purchasing the company. On May 8, the company said in a securities filing that it is in discussions with “certain parties” about strategic alternatives but that it is unknown whether talks will result in a deal.

According to the Wall Street Journal story, Cerberus hasn’t decided if it would attempt to acquire the entire company or if it would buy a major piece and leave some part in the hands of public shareholders, adding that the acquisition of Harris Teeter would be somewhat of a departure for Cerberus, which has typically sought far more distressed companies. The WSJ’s sources also noted that Cerberus could realize savings in combining Harris Teeter with the Supervalu business while keeping Harris Teeter management team (Fred Morganthall, president, and former Albertsons executive Rod Antolock, executive VP) and its North Carolina headquarters intact, unlike the recent Supervalu deals, where it brought in its own leadership team.

Our sources told us they believed that an announcement about this situation would be forthcoming no later than Labor Day.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and is considering a structure in which a part of the East Coast grocery chain would remain publicly traded, according to a person familiar with the matter.

 

 

 

 

 

 

Harris Teeter’s plans include continue expansion of its existing markets, including the Washington metro area, which incorporates northern Virginia, District of Columbia, southern Maryland and coastal Delaware.

The grocer did not offer any new insight into a potential sale of its assets. Harris Teeter confirmed in mid-February that it had enlisted the help of a unit of JPMorgan Chase & Co. in assessing its options.

 

 

 

 

 

 

 

Harris Teeter, a supermarket chain with around 200 stores, has been exploring a potential sale for months. Cerberus earlier this year acquired several grocery chains from Supervalu Inc. and is looking to further expand in the grocery business.

Cerberus hasn’t decided if it would attempt to acquire the entire company or whether it would buy a major piece and leave some part in the hands of public shareholders, the person said. The market capitalization is about $2.3 billion.

It isn’t clear whether others have bid for Harris Teeter. On May 8, the company said in a securities filing that it is in discussions with “certain parties” about strategic alternatives but that it is unknown whether talks will result in a deal.

It is possible Cerberus and Harris Teeter won’t reach an agreement on a price for the company, or that other bidders will emerge, the person said.

An acquisition of Harris Teeter would be somewhat of a departure for Cerberus, which has typically sought far more distressed companies. Harris Teeter produces higher margins and offers higher-end goods compared with Cerberus’s mostly down-market chains.

But Cerberus sees savings in combining Harris Teeter with the Supervalu business, according to the person familiar with the matter.

Cerberus envisions keeping the Harris Teeter management team and its North Carolina headquarters intact, unlike with Supervalu where it brought in its own leadership team.