After months of speculation about a pending Supervalu deal, Cerberus Capital Management made it happen on January 10. The New York based private equity company announced that it will acquire Albertsons, Acme, Jewel-Osco, Shaw’s and Star Market stores and related Osco and Sav-On in-store pharmacies from Supervalu for $3.3 billion and create a new affiliate – AB Acquisition LLC. That organization also includes minority equity partners Kimco Realty Corporation, Klaff Realty LP, Lubert-Adler Partners and Schottenstein Real Estate Group.
Specifically, the sale will consist of the acquisition by AB Acquisition of the stock of New Albertsons, Inc. (NAI), a wholly-owned subsidiary of Supervalu, which owns the banners original acquired from Albertsons in 2006, for $100 million in cash. NAI will be sold to AB Acquisition subject to approximately $3.2 billion in debt, which will be retained by NAI. As part of the transaction, which includes 877 stores, AB Acquisition-owned Albertsons LLC will reunite its Albertsons stores with the acquired NAI Albertsons stores. Albertson LLC, based in Boise, ID, currently operates 192 stores in Texas, Florida, Louisiana, New Mexico, Arkansas, Arizona and Colorado.
In addition to the sale of those 877 units, a newly-formed acquisition entity owned by a Cerberus-led investor consortium (Symphony Investors) will conduct a tender offer for up to 30 percent of Supervalu’s outstanding common stock at a purchase price of $4.00 per share in cash The tender offer represents a 50 percent premium to Supervalu’s 30-day average closing share price as of January 9, 2013, and provides Supervalu’s shareholders with the opportunity to maintain an equity stake in Supervalu moving forward.
In the event that Symphony Investors does not obtain at least 19.9 percent of the outstanding shares of Supervalu common stock pursuant to the tender offer, Supervalu will be obligated to issue new shares of common stock to Symphony Investors at the tender offer price such that after giving effect to the tender offer and the potential issuance of new shares, Symphony Investors would own a number of shares representing at least 19.9 percent of Supervalu’s outstanding common stock prior to the issuance.
Moreover, Supervalu also will have the option to issue to Symphony Investors additional new shares of Supervalu common stock at the tender offer price (“optional issuance”), subject to: an overall cap of $250 million on Symphony Investors purchase of common stock pursuant to the tender offer, the issuance and the optional issuance (“tender offer process”); and a total issuance of primary common shares of not more than 19.9 percent.
The transactions described above are subject to customary closing conditions, including the fully underwritten refinancing of certain Supervalu debt as described below. The closing of the sale is also conditioned on, among other things, the satisfaction of the conditions to the tender offer process, and the closing of Symphony Investors acquisition of Supervalu common stock pursuant to the tender offer process is conditioned on, among other things, closing of the sale, Supervalu stated. Closing of the deal and the tender offer process is expected to occur in early March. The proposed acquisition is not subject to shareholder approval.
Following the closing of the transactions, Supervalu will be headed by grocery retail veteran Sam Duncan as president and CEO, replacing current president, chief executive officer and chairman Wayne Sales.
In addition, effective upon the closing of the transactions, five current Supervalu directors will resign. Immediately following the closing of the transactions, the size of the board will be reduced to seven members from the current ten members. This seven member board will consist of five current Supervalu directors and two board members designated by Symphony Investors, one of whom is industry veteran Robert Miller, current president and CEO of Albertsons LLC, who will also serve as non-executive chairman of the board at theEden Prairie,MNfirm. Following the completion of a search process, the board will be increased to a size of 11 directors, with the four new directors to consist of Sam Duncan, an additional director appointed by Symphony Investors and two additional independent board members to be selected by the initial seven directors.
Following the sale, Supervalu will consist of the following divisions: independent business, a leading food wholesaler which serves 1,950 stores across the country; Save-A-Lot, the large extreme value grocery chain with approximately 1,300 stores; and Supervalu’s regional retail food banners Cub, Farm Fresh, Shoppers, Shop ‘n Save and Hornbacher’s. As such, the company noted, Supervalu is expected to generate annual revenues in excess of $17 billion. Key elements of Supervalu’s go-forward business plan include continued focus on right-sizing operations and maximizing efficiencies across the company.
Supervalu and AB Acquisition also will enter into a Transition Services Agreement pursuant to which the parties will provide each other with various services.
On the financial side of the business, Supervalu has negotiated a new and fully underwritten $900 million asset based revolving credit facility led by Wells Fargo and a $1.5 billion term loan secured by a portion of the company’s real estate and an equity pledge of Moran Foods, LLC (the parent entity of the Save-A-Lot business) led by Goldman Sachs Bank USA, Credit Suisse, Morgan Stanley, Bank of America Merrill Lynch and Barclays. The proceeds of these financings will be used to replace the existing $1.65 billion asset-based revolving credit facility, the existing $846 million term loan, and to call and refinance $490 million of 7.5 percent bonds scheduled to mature in November 2014.
In commenting on the definitive agreement, Sales said: “The transactions announced today represent the successful culmination of the in-depth strategic review process we commenced this past summer. Following the sale, Supervalu will have three strong, market-leading business units with more consistent cash flows and improved EBITDA growth potential. Symphony Investors’ tender offer provides our shareholders with an attractive premium to recent trading values of our shares and they will acquire an equity stake in a newly refocused Supervalu with solid long-term prospects. At the same time, the stores being sold to AB Acquisition are complementary to Albertsons LLC’s current operations, which are focused primarily on traditional retail grocery.”
Duncan said: “I am excited by the opportunity to lead Supervalu. The company has very solid market positions and I see great potential in our ability to successfully build on each of these three core businesses.”Duncancontinued, “The Independent Business is one of the largest food wholesalers in theUnited States, serving many of the country’s most successful independent operators. Save-A-Lot is the nation’s largest hard discount grocer, providing the company an important presence in this fast growing segment of food retail. Additionally, the company’s streamlined retail operation consists of five strong regional banners. I’m looking forward to working with Supervalu’s team members to quickly and effectively improve the company’s business.”
Miller noted: “As chairman of Supervalu’s reconstituted board, working closely with Sam Duncan and the Supervalu management team, we will focus on strengthening the company’s market leading positions and delivering compelling value to our shareholders. Sam, whom I had the pleasure of working with at Fred Meyer, is an extremely talented retail executive, with more than 40 years of experience in retail, including turnarounds. He is well positioned to build upon the foundation Wayne Sales laid for improved performance. In addition, the acquisition by Symphony Investors of up to 30 percent of the company is a strong vote of confidence in the future of Supervalu. I share their strong belief in the company’s future potential.”
“We are pleased to be making this investment and look forward to helping build long-term value for all stakeholders,” said Lenard Tessler, co-head of Global Private Equity and senior managing director at Cerberus. “We believe these transactions will create stronger, more competitive businesses.”
Goldman Sachs & Co. and Greenhill & Co., LLC served as financial advisors to Supervalu in connection with the company’s strategic review and the transactions. Wachtell, Lipton, Rosen & Katz served as Supervalu’s legal counsel. Cerberus was advised by Lazard along with Barclays. Barclays will also serve as dealer manager for the tender offer. Schulte Roth & Zabel LLP served as Cerberus’s legal counsel.
On that same day, Supervalu announced its third quarter earnings and, while it managed a small profit ($16 million vs. a loss of $750 million in last year’s third quarter), the overall metrics remained the same as they’ve been for the past five years.
Net sales for the period ended December 1, 2012 were $7.9 billion compared to $8.3 billion last year. The $16 million profit, or $0.08 per diluted share, included a$26 million after-tax gain related to a cash settlement received from credit card companies which was partially offset by $15 million in net after-tax charges primarily related to previously announced store closures. Third quarter net cash flows used in operating activities were $57 million compared to $61 million last year, reflecting the company’s historically higher inventory levels at the end of the third quarter.
Third quarter net sales were $7.9 billion compared to $8.3 billion last year, a decline of 5.0 percent. The decrease in net sales primarily reflects a decline in identical store sales of negative 4.5 percent for retail food and negative 4.1 percent for Save-A-Lot network identical store sales, the disposition of a majority of the company’s retail fuel centers which contributed $112 million in sales in the third quarter of fiscal 2012, and the impact of previously announced store closures. Identical store sales were influenced by the stressed consumer, the competitive environment, and continued investment in achieving competitive pricing.
Gross profit margin for the third quarter was $1.68 billion, or 21.2 percent of net sales, compared to $1.81 billion or 21.7 percent of net sales last year. The decrease in gross margin as a percent of net sales reflects the negative rate impact from additional promotional activity, an increased level of continued investment in competitive pricing, and a change in business mix which was partially offset by the rate benefit from lower fuel sales (approximately 20 basis points), a lower LIFO charge, and the favorable impact of higher generic drug sales in the company’s pharmacies.
Selling and administrative expenses in the third quarter were $1.52 billion, or 19.3 percent of net sales, including a $19 million net pre-tax benefit comprised of income related to a cash settlement received from credit card companies which was partially offset by net charges primarily related to previously announced store closures. Excluding these items, third quarter selling and administrative costs were $1.54 billion, or 19.5 percent of net sales compared to$1.61 billion, or 19.3 percent of net sales last year. The 20 basis point increase in the adjusted selling and administrative expense rate as a percent of net sales in the third quarter of fiscal 2013 reflects a 20 basis point negative impact from lower fuel sales. The impact from sales deleveraging was offset by the company’s cost reduction initiatives.
Net interest expense for the third quarter was $126 million compared to $119 million last year. The increase is primarily related to a higher average interest rate compared to last year associated with the company’s refinanced secured term-loan facility.
Supervalu’s income tax expense was $15 million, or 48.4 percent of pre-tax income, for the third quarter, compared to an income tax benefit of $77 million, or 9.3 percent of pre-tax loss in last year’s third quarter. Income tax expense in the third quarter included $3 million of net provisions related to certain tax positions. The tax rate for the third quarter of fiscal 2012 reflects the impact of the impairment charges, the majority of which was not deductible for tax purposes. Excluding these items, the tax rate for the third quarter of fiscal 2013 was 38.7 percent and the tax rate for the third quarter of fiscal 2012 was 37.4 percent.
Diluted weighted-average shares outstanding for the third quarter were 214 million shares compared to 212 million shares last year. For the third quarter of fiscal 2012, diluted loss per share is computed using the basic weighted-average number of shares outstanding and excludes all outstanding stock options and restricted stock as their effect is anti-dilutive when applied to a loss. As of January 7, 2013, Supervalu had 213 million shares outstanding.
Third quarter retail food net sales were $4.96 billion compared to $5.36 billion last year, a decline of 7.4 percent, primarily reflecting identical store sales of negative 4.5 percent and the disposition of a majority of the company’s retail fuel centers which contributed $112 million in sales in the third quarter of fiscal 2012.
Retail food (corporate chains and regional retail banners) operating earnings were $84 million and included a net $21 million pre-tax benefit comprised of $41 million related to a cash settlement received from credit card companies which was partially offset by charges of $20 million related to previously announced store closures. For the third quarter of fiscal 2012, Retail food operating loss was $818 million, including $907 million in pre-tax non-cash goodwill and intangible asset impairment charges. Excluding these benefits and charges in both years, third quarter Retail food operating earnings were $63 million, or 1.3 percent of net sales compared to $89 million, or 1.7 percent of net sales last year. The change in Retail food operating earnings as a percent of net sales was primarily due to increased promotional activity, an increased level of continued investment in competitive pricing, and the deleveraging impact of negative identical store sales which were partially offset by a lower LIFO charge and the favorable impact of higher generic drug sales in the company’s pharmacies.
Third quarter Save-A-Lot net sales were $966 million compared to $982 million last year, a decrease of 1.6 percent, reflecting the impact from network identical store sales of negative 4.1 percent and recently announced store closures partially offset by the benefit from 20 net new stores being operated at the end of the third quarter of fiscal 2013.
Save-A-Lot operating earnings in the third quarter were $28 million and included $10 million in pre-tax charges primarily related to previously announced store closure costs. Excluding these costs, Save-A-Lot operating earnings for the third quarter were $38 million, or 3.9 percent of net sales compared to $59 million, or 6.1 percent of net sales last year. The decline in operating earnings as a percent of net sales was primarily attributable to lower gross margin rates attributable to competitive price investments and the de-leveraging impact of negative identical store sales.
Third quarter independent business net sales remained flat at $1.99 billion.
Independent business operating earnings in the third quarter were $49 million, or 2.5 percent of net sales, compared to $66 million, or 3.3 percent of net sales last year. The decline in independent business operating earnings as a percent of net sales was primarily attributable to gross margin investment.
Third quarter net cash flows used in operating activities were $57 million compared to $61 million last year, reflecting the company’s historically higher inventory levels at the end of the third quarter. Fourth quarter operating cash flows historically reflect the inventory reduction associated with the holiday selling season. Third quarter cash flows used in investing activities were $52 million compared to $82 million last year, reflecting lower payments for capital expenditures. Third quarter cash flows from financing activities were $117 million compared to $124 million last year.
Year-to-date net cash flows from operating activities were $357 million compared to $518 million in the prior year. Year-to-date net cash flows used in investing activities were $360 million compared to $285 million last year, reflecting lower proceeds from asset sales and higher payments for capital expenditures. Year-to-date cash flows from financing activities were $1 million compared to a use of $209 million last year, reflecting a higher level of debt reduction in the prior year.
Supervalu said it expects debt reduction for fiscal 2013 to be approximately $400 million. Cash capital spending is projected to be approximately $500 million, including expenditures for technology, maintenance of fleet and facilities, new Save-A-Lot stores, and approximately 40 store remodels.