UNFI Aims To Change Game With $2.9B Acquisition Of Supervalu

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After vowing to fight a proxy effort to assume board control by New York private investment group Blackwells Capital, Supervalu (SVU) instead made a deal on July 26 to sell its wholesale/retail organization to large specialty food distributor United Natural Foods, Inc. (UNFI) for $2.9 billion ($32.50 per share – a 64.5 percent premium from Supervalu’s closing price on July 25) including the assumption of debt and liabilities.

The acquisition, which is expected to close by the end of 2018, will mean that UNFI will seek to sell the remainder of Supervalu’s 114 corporate stores which trade under the Shoppers Food & Pharmacy, Cub, Shop ‘n Save and Hornbacher’s banners.

“This transaction accelerates UNFI’s ‘Build out the Store’ growth strategy by immediately enhancing our product range, equipping us to bring an attractive, comprehensive product portfolio to an expanded universe of customers,” said Steve Spinner, UNFI’s CEO and chairman. “Combining our leading position in natural and organic foods with Supervalu’s presence in fast-turning products makes us the partner of choice for a broader range of customers. Together, we can provide our “better for you” products as well as other high-growth segments, improving customers’ competitive advantages in a dynamic marketplace. These benefits, plus our increased efficiency and productivity, will enable us to create value for our shareholders, enhance opportunities for our suppliers, provide a broader assortment for our customers and create new prospects for our associates over the long term.”

UNFI, whose largest customer is Whole Foods Market, is based in Providence RI and like Supervalu is a publicly-traded firm. Earnings for its last fiscal year (ended September 2017) were $1.6 billion on sales of $9.2 billion. Its share price as of August 8 was $34.23. Supervalu’s fiscal 2018 revenue was $14.2 billion. Its earnings for the 12-month period were $146 million.

“The combination of UNFI and Supervalu provides a substantial premium and delivers certainty of value to our stockholders, meaningful benefits to our customers, expanded opportunities for our employees, and the ability for us and our vendors to efficiently serve a varied customer base,” said Mark Gross, Supervalu’s chief executive, who will be leaving the organization once the transaction is completed. “We have been executing an ambitious strategic transformation for over two years. We believe that this transaction is the best and natural next step for our stockholders, customers and employees. I am very proud of the unwavering commitment and focus of our employees in driving our strategic transformation and serving our customers. I am confident that, together, Supervalu and UNFI will be well positioned to succeed – and to help our customers succeed – in today’s grocery landscape.”

UNFI noted that it believes that the transaction will greatly expand its customer base and exposure across channels, including those where demand for “better for you” products is increasing and UNFI is under-represented. It will also unlock new opportunities through a comprehensive product portfolio, the specialty-food distributor stated. Specifically, UNFI hopes to benefit from its ability to deliver comprehensive and expanded offerings, including the addition of high-growth perimeter categories such as meat and produce to UNFI’s natural and organic products.

Additionally, the wider geographic reach and greater scale of the combined entity is expected to increase efficiencies and effectiveness, both wholesalers noted. And by leveraging scalable systems to streamline its processes, it will more efficiently meet the needs of its customers and reduce future capital expenditures. UNFI said that the acquisition will allow it to realize run rate cost synergies of more than $175 million by year three, and after year one, the transaction is projected to be accretive to adjusted EPS with double-digit adjusted EPS growth after the first year, excluding one-time costs.

UNFI’s Spinner will spearhead the new organization and Sean Griffin, UNFI COO, who was expected to retire shortly, will now stay on to lead the Supervalu integration efforts, post close, and supervise an integration committee comprised of executives from both companies to drive the implementation of best practices from each company and the delivery of important synergies and a rapid and smooth integration.

UNFI expects to finance the transaction substantially with debt and Goldman Sachs provided committed financing in the transaction.

Upon closing, UNFI’s net debt-to-EBITDA ratio is expected to be high. With strong cash flows, proceeds from store divestitures and commitment to reducing debt, the company anticipates reducing leverage by at least two full turns in the first three years.

As for Blackwells Capital, its financial goal having been met, it has agreed to withdraw its director nominees and vote all if its shares (more than 2.2 million – a 7.3 percent stake) in support of Supervalu’s current slate of nine directors at SVU’s upcoming annual meeting on August 16 at company headquarters in Eden Prairie, MN. For an investment of less than two years, Blackwells made an estimated $75 million in profit. Additionally, Supervalu will reimburse Blackwells for all expenses that the investment fund incurred in pursuit of its board control initiative (not more than $700,000).