With Safeway Deal, Cerberus Would Be Number Two U.S. Supers Chain

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News Analysis

Ending months of speculation, Safeway last month finally found a new partner. Not surprisingly, it was private equity firm Cerberus Capital Management, the large New York City based private equity company, which has been the most active player in the retail food industry over the past year, acquiring Supervalu (its Symphony Investors unit bought Supervalu’s wholesale, Save-A-Lot and regional chain units) and its AB Acquisition/New Albertsons subsidiary acquired 877 former Albertsons stores. Late last year, Cerberus also purchased United Family Markets in West Texas.

The Safeway deal is valued at approximately $9.2 billion ($40.10 per share) and includes 1,335 stores, 13 distribution centers and 20 manufacturing plants. Pending Federal Trade Commission approval, the deal is expected to close late this year. The Safeway deal is one of the largest private equity acquisitions in industry history and the largest since Kroger acquired Fred Meyer, the large West Coast retailer, for approximately $13 billion in 1998. And if approved, New Albertsons would become the second largest “pure play” supermarket chain in the U.S. behind Kroger.

There remain several key questions about the deal that should be answered with the next 12 months including: Which stores will have to be closed or sold and who might acquire those overlapping locations, given significant store overlap issues in several key markets (particularly on the West Coast)?; How radically will Cerberus/New Albertsons/AB Acquisition rearrange infrastructure and personnel at the corporate and divisional levels?; How much will the new organization invest in cap-ex, especially in building new stores or significantly remodeling many older stores that resemble “Lifestyles (of the 1990s)”?; And as a private equity firm, how long will Cerberus stay in the game?

As for store overlap issues, industry observers believe the big conflict regions are Southern California (Vons, Albertsons) and the Pacific Northwest (Safeway, Albertsons). However, there are geographic store overlaps in Phoenix, Denver and even in parts of Texas (a Safeway train wreck with its Randalls and Tom Thumb stores). It’s anybody’s guess who will end up with these potentially divested locations, but Kroger (which contrary to published reports did not make a bid for the entire company, we learned) seemingly would be interested in some fill-in locations (however, it too would have even more potential overlap issues in many of the markets where both Safeway and Albertsons operate stores). With the glut of retail locations in most markets, analysts said they wouldn’t be shocked if many of the closed locations remain dark.

Regarding personnel changes, trade analysts expect a further streamlining, perhaps not as deep at the divisional level although there will be local shifts, too.

In fact, Safeway CEO Robert Edwards, who will become chief executive of the new organization, has quietly made significant moves involving senior staffers over the past several months. Additionally, with industry icon Bob Miller to serve as executive chairman and de facto Cerberus tactician Justin Dye, currently chief strategy officer at New Albertsons (and another key Cerberus link), trade observers believe that several former Albertson veterans will hold key posts within the “new” Safeway. And several sources also acknowledged that New Albertsons’ current smallish corporate headquarters in Boise, ID will ultimately shift to Safeway’s larger corporate offices in Pleasanton, CA.

As for significant capital expenditure increases resulting in an accelerated new store pipeline, don’t bet on it, analysts predict. Spending significant capital in new stores is generally not in the game plan of private equity firms and hasn’t been the case over the past year in analyzing Cerberus’ acquisition of Albertsons.

However, monetizing real estate assets and exploiting the advantages that supermarket cash flow brings to the table are two of the primary reasons this deal is happening and are part of a bigger end game which insiders believe is to ultimately take the beefed up company public.

In analyzing Cerberus/New Albertsons/AB Acquisition’s 877 store acquisition by Cerberus/New Albertsons from Supervalu a little more than a year ago, there are several changes that have been implemented that are worth noting. New Albertsons has done a fine job of reinstilling pride in the associates at store level, it has lowered retails, and it has restored a more “local” presence to its divisional operations (Safeway’s issues in those areas need far less radical surgery).

New Albertsons also brought in new leadership, primarily comprised of “Miller’s posse,” executives who once toiled for the original Albertsons organization in the 1970s and ‘80s and have brought supermarket professionalism to Acme Markets, Shaw’s, Jewel-Osco and Albertsons. But new stores, no.

In those past 13 months, other than Jewel/Osco’s recent acquisition of several former Dominick’s (Safeway) stores in the Chicago area, there has been virtually no new store activity. However, to be balanced, the now controlled Cerberus stores look more refreshed and there have been limited improvements to the physical plants.