Cerberus/New Albertsons Poised To Become Nation’s Second Largest Supermarket Chain
OK, most of us now recognize that Cerberus Capital Management’s pursuit of Safeway has been one of the worst kept secrets in recent memory. Now that both sides have agreed to the $9.2 billion deal, the heavy lifting will begin in about eight or nine months.
And there will indeed be some heavy lifting, because this is one of the biggest private equity acquisitions in the history of the retail food business.
The obvious “to be determined” questions are: 1) Considering that there are store overlap issues in several key markets, which stores will have to be closed or sold and who might acquire those overlapping locations? 2) How much will Cerberus/New Albertsons/AB Acquisition rearrange the deck chairs in terms of corporate and divisional personnel? 3) 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 4) As a private equity firm, how long will Cerberus stay in the game?
Although I’d never make it as a professional gambler, let me take a very subjective stab at answering those questions and add a few more opinions and observations of my own.
As for store overlap issues, 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 location in most markets, don’t be shocked if any of the closed locations remain dark.
Regarding personnel changes, 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. 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), look for at least several former Albertson veterans to hold key posts at the new “Safeway unit” for the soon-to-be 2,400 store supermarket chain. And don’t be shocked if the smallish current New Albertsons headquarters in Boise, ID ultimately shifts to Safeway’s larger corporate offices in Pleasanton, CA.
Cap-ex increases? Accelerated new store pipeline? I wouldn’t make that bet. First, that’s not the M.O. of private equity. Monetizing real estate assets and exploiting the advantages that supermarket cash flow brings to the table are the main reasons this deal is happening and are part of a bigger end game which I will reveal at the end of this piece. If you view the 877 store acquisition by Cerberus/New Albertsons from Supervalu just about 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 more of a “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 12 months, I can’t recall one new supermarket opening under the New Albertsons regime and there hasn’t even been very much major remodeling of stores in need. To be fair, at least at Acme and Shaw’s, the stores look more refreshed and there have been limited improvements to the physical plants. So, while I expect Safeway to continue with its half-dozen or so new store projects, don’t look for a lot of cap-ex devoted to expanding the current real estate pipeline.
For those keeping score, here’s a consolidated recap of the deal.
- Cerberus will pay approximately $9.2 billion ($40.10 per share) to acquire Safeway Stores. The breakdown of the deal includes: $32.50 per share in cash; $3.65 per share of the estimated after-tax net proceeds from sales of primary non-core Safeway assets – Property Development Centers (its shopping centers unit) and Casa Ley (the Mexican supermarket chain of which Safeway holds a 49 percent stake). Shareholders will receive either a cash payout by closing or through Contingent Value Rights post-closing; and $3.95 per share which is the estimated value of its 37.8 million shares of Blackhawk, Safeway’s gift card business (which launched an IPO 11 months ago).
- AB Acquisition plans to fund the deal in part with debt financing of approximately $7.6 billion, equity contributions from its current investors and their affiliates, partners and co-investors of approximately $1.25 billion, and cash on hand of Safeway.
- Closing of the deal is estimated in the fourth quarter of this year after regulatory approvals are granted; Safeway’s shareholders will vote on the deal in quarter three.
- The newly combined organization promises lower prices, better local assortment, an improved shopping experience and a stronger management team.
- Any new bidders will have a 21-day “go shop” window and additional 15-day negotiation period if bona fide offers are received during the “go shop” period. However, as a deterrent to new bidders entering the process, break up fees of $150-$200 million would be paid to AB acquisition/New Albertsons depending on timing of a successful superior proposal. And if AB Acquisition/New Albertsons fails to close the transaction under certain circumstances, a $400 million reverse break up fee would be awarded to Safeway.
- The newly expanded company (prior to any potential FTC store divestitures) would operate 2,410 stores (1,075 New Albertsons units and 1,335 Safeway supermarkets) in 34 states and WashingtonDC. Additionally, it would employ 250,000 associates, operate 27 distribution centers and 20 manufacturing plants and operate under the following banners: Safeway, Vons, Pavilions, Randalls, Tom Thumb, Carrs, Albertsons, Acme, Jewel-Osco, Lucky, Shaw’s, Star Market, Super Saver, United Supermarkets, Market Street and Amigos.
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.
Amazon Continues Building Distribution Centers; New ‘Fresh’ Depots Being Added To Network
There’ll be no press releases, no advance warning and no public acknowledgement by the company. Despite being publicly-traded, Amazon’s modus operandi has long been to reveal only information about itself that the SEC deems material to its shareholders. So, as part of the iconic online merchant’s “web of mystery” and its known accelerated pursuit to cement and expand infrastructure (particularly with the addition of dozens of new distribution centers), don’t be surprised to see the construction of new warehouses to appear seemingly out of thin air.
That was apparently the case last fall when one of Amazon’s newer stealth ventures was outed – the construction of a one million square foot Amazon general use warehouse that is now being built in southeast Baltimore (which will also house dry groceries along with many other products). And even stealthier is word that, adjacent to that large warehouse, Amazon plans to build a new 346,000 square foot “fresh” depot.
That Amazon has chosen Baltimore to conceivably expand its perishables business isn’t that surprising, for several reasons. The Seattle based online juggernaut is making a huge push to open distribution centers in more than a dozen markets nationally to achieve its objective of one day service on the hundreds of thousands of items it now ships. And while the “fresh” business is a more complex distribution and logistics challenge, Amazon seems determined to accelerate the pace of linking its general business with the ability to supply fresh food items in key metropolitan markets.
Amazon Fresh currently operates in Seattle, Los Angeles and San Francisco and is currently revamping a 564,000 square foot former Pathmark warehouse in Avenel, NJ which is scheduled to open later this year. That perishables facility would be able to serve Metro New York and Philadelphia consumers with perishable items and would complement another new dry grocery depot – a one million square foot facility that should open in the next three months in Robbinsville, NJ, about 40 miles south of Avenel.
And, as reported by us earlier, the Mid-Atlantic expansion comprises only a fraction of Amazon’s distribution center network expansion plans.
In September 2013, the explosive online merchant announced that it would hire 7,000 workers, with 5,000 of those positions at new distribution centers (marking a 25 percent increase in current staffing levels) slated to be built over the next 24 months. Most jobs offer pay and benefits far above typical retail wages, the company said. Additionally, Amazon will add about 2,000 service positions at new and existing customer service locations.
The 5,000 fulfillment center jobs would represent a 25 percent increase in current staffing in that department. Amazon has been increasing its network of fulfillment centers and warehouses in order to offer quicker shipping to more of its customers. Many Amazon customers now have the option of next-day delivery and the company is looking to offer same-day delivery on many more items, especially when this infrastructure expansion is completed in the next three years.
Analysts see Amazon’s expansion as an effort to more effectively compete (and gain market share) against other bricks and mortar and online merchants such as Wal-Mart (the world’s largest retailer) and eBay.
In the Mid-Atlantic alone, Amazon listed that fulfillment center jobs are available at current distribution centers in Breinigsville, PA (Lehigh Valley), Huntington, WV, Middletown, DE and Chester, VA, the latter two being depots that opened in the past 18 months.
Nationally, jobs are being added at new distribution centers in: Chattanooga and Murfreesboro, TN; Charleston and Spartanburg, SC; Patterson, San Bernadino and Tracy, CA; Coppell, Haslet and San Antonio, TX; Hebron, KY; Indianapolis and Jeffersonville, IN; and Phoenix, AZ. The customer service jobs are in Grand Forks, ND, Kennewick, WA, Huntington, WV and Winchester, KY.
In the Mid-Atlantic region, in addition to new depots opened in the past 18 months in Middletown, DE and Chester, VA, Amazon has also opened a new warehouse in Petersburg, VA.
The e-commerce giant is also nearing sainthood with Wall Street. Despite continued lower than expected earnings, the brainchild of CEO Jeff Bezos seemingly gets a pass from the financial community, which believes that Bezos’ long-term focus on revenue growth and innovation will ultimately yield higher profits. Their faith may be rewarded.
For example, in its recently completed fourth quarter ended December 31, Amazon posted earnings that had increased to $239 million, resulting in earnings of 51 cents per share. While that number was an improvement over 2012’s profit, it fell short of analysts’ projections, which called for earnings of 66 cents per share.
After the earnings release, Amazon’s shares took a quick plunge from approximately $403 per share to $346 per share. But don’t feel bad for the company’s shareholders. At presstime on March 14, Amazon’s shares had rebounded to $374.25 per share and the upward spike is continuing. And on a one year basis, Amazon’s stock is up about $115 per share.
Unlike virtually any other publicly-traded firm, a combination of Bezos’ god-like presence and leadership and continued impressive revenue gains (Amazon’s sales grew 20 percent in its fourth quarter to $25.6 billion and the company enjoyed its best holiday shopping season ever) have led to a phenomenon not often seen in American history. Of Bezos’ peers, Microsoft’s Bill Gates and the late, great Steve Jobs would be the only worthy comparisons.
And talk of secret research teams, innovation labs and even delivery drones only seem to heighten Amazon’s mojo. In fact, since Bezos’ interview on “60 Minutes” on December 1 in which he unveiled his “drone initiative,” Amazon’s magical, mystical status has seemingly soared beyond the stratosphere.
From a grocery industry perspective, the buzz factor has also increased. In the past six months, virtually every trade event that I’ve attended has included a speaker or industry panel that mentions Amazon as the new 800 pound gorilla (apparently Wal-Mart’s weight is down to 750 pounds).
There’s nary a mention of FreshDirect’s expansion effort into the DelawareValley or Peapod’s new 300,000 square foot automated distribution center due to open this summer in Jersey City, NJ.
At the recent NGA convention in Las Vegas, Wakefern president Joe Sheridan summed it up best, in my opinion. He termed Amazon’s growing presence as a potential “disturber.” Not a “disrupter” of current bricks and mortar businesses, but certainly enough of a factor for all competitors to be aware and concerned.
As a rapidly growing entity with tentacles that stretch globally, Amazon is already a disrupter and a threat to many other businesses as it grows, innovates and connects with all ages and economic strata.
But unless you’re Peapod, FreshDirect or several other smaller online merchants that compete on a head-to-head basis, Amazon’s aggressive growth effort into the grocery business will likely create more disruption than displacement.
Of course, supermarket retailers by nature are a hardy and resilient bunch, which will work in their favor. In the past decade, they’ve been “carpet-bombed” by the likes of Wegmans, Wal-Mart and Costco and endured many “paper cuts” from dollar stores, drug chains and c-stores.
As impressive as the total Amazon story is, I don’t think its impact on the traditional grocery business will ever yield more than a three percent market share in even its best trading areas.
‘Round The Trade
I can attest that Tom Lenkevich, the man who is replacing Rick Herring as president of Ahold USA’s Giant/Carlisle unit, will have big shoes to fill. Taking over from one of the nicest and most respected executives at AUSA will be a challenge, but Lenkevich has been challenged before and has always been up to the task. I think his cohorts will find him very intelligent, genial and a very hard worker who has been around the grocery business since the late 1970s. It will be interesting to watch his progress, because he’s joining AUSA not only at a time of extreme sales pressure (as witnessed by fourth quarter earnings and sales results), but at a time when the company is also in the midst of a significant culture change.… a tip of the hat to Kurt Schertle who was recently elevated to the post of chief operating officer at Weis Markets. In his five years at the Sunbury, PA retailer, Kurt has demonstrated leadership, creativity, a tireless work ethic and the ability to wear many hats, especially in the last six months following the departure of former CEO Dave Hepfinger. Certainly a priority for Kurt and his boss, CEO and vice-chairman Jonathan Weis, will be to improve the balance sheet. In its recently ended (December 28) fourth quarter, Weis’ earnings, overall sales and comp-store revenue all declined in what all retailers are finding to be a more challenging market than even 12 months earlier. Now, along with a still “not right” economy and outrageous overstoring, comes a reduction in SNAP benefits and virtually no inflation (in fact, deflation in certain categories). However, I believe that the new leadership team of Weis and Schertle is focusing on driving sales and is less interested in short-term profits. That’s sometimes a painful message for publicly-traded companies to deliver, but it’s the only way to get the ship back on course…staying local, Village Super Markets, ShopRite’s second largest member and only publicly-traded operator, posted a 69.1 percent drop in net income in its second quarter ended January 25. The Springfield, NJ-based regional chain said that profit decline was caused due in part to a $2-million charge for future lease obligations due to the closure of a store in MorrisPlains, NJ, and an $840,000 boost in the prior year’s second quarter following a partnership distribution. Excluding the two items, the 29 store retailer said net income would have declined 42 percent. Overall sales for the quarter rose 2.6 percent to $392.2 million, reflecting the opening of a replacement store in Hanover Township, NJ in November. Same-store sales were flat…and speaking of disappointing earnings, it was a very tough fourth quarter for Wal-Mart as the Bentonville behemoth’s U.S. numbers took their biggest dive in several years. Comp store revenues for the period ended January 31 fell 0.4 percent, marking the fourth consecutive quarter that same store sales have declined, and earnings dipped 21 percent during Wal-Mart’s critical holiday period. Traffic counts also decreased by 1.7 percent. Bill Simon, CEO of Wal-Mart’s U.S. stores, said cuts to SNAP adversely impacted the big retailer’s results. An exceptionally ferocious winter with multiple storms also cut into earnings, Simon noted, and detracted from a positive performance during the six-week holiday shopping period. He added that the storms weren’t an excuse, but merely an explanation. Simon also affirmed that Wal-Mart’s plan to aggressively open new smaller format units (Neighborhood Market, Express) is on track and in 2014 about 270-300 units will open. “Customers’ needs and expectations are changing,” Simon asserted, “and they want to shop when they want and how they want, and we are transforming our business to meet their expectations.” However, at the end of the day, the behemoth’s SuperCenters remain the stalwart engine for the company and 115 new combo units are slated to open this year. And while the boys from Bentonville may be going through a rough patch, let me remind you that Wal-Mart finished the past 52 weeks with a staggering $473.1 billion in annual sales, earned $16.1 billion and plans to spend $12.4-$13.4 billion this fiscal year (2015) in cap-ex…even Costco, the perennial poster child for strong earnings and consistently stellar identical store sales, hit a rough patch (for them) during their second quarter ended February 16. The Issaquah, WA-based club store merchant experienced a 15.4 percent earnings dip and, while comp store revenue gained three percent, that number represented about half of what Costco typically posts for same store sales gains. CFO Richard Galanti noted that Costco was hit hardest during the four weeks leading up to Christmas, adding that weaker sales in several non-food categories impacted the nation’s largest club store operator, as did Costco’s own decision to hold margins in place, particularly in fresh foods. Costco will open its first store in Spain (Seville) on May 11 and is looking to expand to France, perhaps as early as 2015…some recent changes at Cerberus’ Supervalu unit related to the pending Safeway acquisition. Mark Neporent and Lenard Tessler have resigned from Supervalu’s board because of their connection to Cerberus. Neporent is COO and general counsel for Cerberus Capital Management and Tessler is the co-head of global private equity and senior managing director of the New York private equity firm. Both men joined the board following the Cerberus-led acquisition of Supervalu’s assets and its investment in Supervalu. Another Cerberus affiliate, Symphony Investors, owns 21 percent of Supervalu’s stock. Also at Supervalu, Shane Sampson, the veteran Albertson’s executive (part of “Miller’s posse”) who rejoined the company as president of its struggling Shaw’s/Star Market unit in New England (he was most recently with AUSA’s Giant/Landover division) after the Cerberus gained control of Supervalu last March, is moving to Chicagoland to oversee SVU’s large Jewel-Osco unit. Shane, a very strong operator, did a really good job in helping stabilize, then improving Shaw’s. Now he faces another huge challenge in enhancing Jewel, which has been trending downhill for a decade. But Chicago is a changing marketplace, with the closing of Dominick’s stores and the expanded presence of Wal-Mart, Meier, Whole Foods and Mariano’s. However, Shane is entering an arena where Jewel is also expanding by adding nine former Dominick’s stores and pledging to spend $100 million on capital improvements. Moving to New England to become president of Shaw’s is Jim Rice (no, not the former Red Sox player). Another veteran Albertsons exec, Rice was most recently running Jewel-Osco on an interim basis (replacing another “Miller posse” member, William Emmons, who retired in January)…the first fallout news from Target’s security breach late last year: Beth Jacob, the mass merchant’s chief information officer (CIO) has “resigned.” And while I’m pretty certain Jacob had no direct involvement in Target’s security and IT problems, the bad stuff happened on her watch and “a company’s got to do what a company’s got to do.” CEO Gregg Steinhafel said a search for an external candidate is under way…former Acme Markets president Dan Sanders has a new job. The bright and outgoing grocery industry executive has reportedly been named to oversee operations at Cardenas Northgate Group Ranch, the newly formed joint venture that was created last month by two large Hispanic retailers (Cardenas Markets and Northgate Gonzalez Markets) after acquiring the assets of Pro Market’s 11 stores which were in bankruptcy. All told, the new organization will operate more than 60 stores in Southern California, Arizona, New Mexico and Texas (Sanders’ native state)…very interesting piece in the February 25 edition of The Wall Street Journal noting that Target is “punishing” Procter & Gamble for the role the large CPG packer has played in assisting Amazon’s exponential growth in recent years. The story states that P&G has literally set up
shop inside Amazon’s many distribution centers (with many more to come) to help create greater efficiencies for the online merchant and Procter. The story adds, “P&G loads products onto pallets and passes them over to Amazon inside a small, fenced-off area. Amazon employees then package, label and ship the items directly to the people who ordered them. The under-the-tent arrangement is one Amazon’s competitors don’t currently enjoy, and it offers a rare glimpse at how the company is trying to stay ahead of rivals, including discount chains, club stores and grocers.” Target, which isn’t having a particularly enjoyable last few months, has allegedly reduced the number of end-caps, moved P&G products to less optimal shelf positions and taken away the “category captain” designation in several key categories. Whether it’s a fair retaliatory practice or not, the age old adage of never pissing off a customer applies here…baseball trivia question: who has almost as many saves as Mariano Rivera? Hint: he never played professionally. The answer: Dr. Frank Jobe, the orthopedist who pioneered elbow ligament transplant surgery (“Tommy John” surgery, which Dr. Jobe termed ulnar collateral ligament reconstruction while using the Palmaris longus tendon). Dr. Jobe passed away earlier this month at the age of 88. After Dr. Jobe put his medical theory to use with Tommy John in 1974, the crafty left-hander went on to play 14 more years and win another 164 games. Dr. Jobe, who was also the Dodgers’ orthopedic doctor for many years, personally performed several hundred “Tommy John” operations (a procedure that’s since been done by other orthopods thousands of times) and also developed a groundbreaking shoulder surgery procedure that’s still deployed today, and according to former Dodgers pitcher Orel Hershiser, “gave me back my career.” The crop of current pitchers whose careers have been extended by “Tommy John” surgery includes: Matt Harvey, Joe Nathan, A.J. Burnett, Tim Hudson and Stephen Strasburg. Also passing on was comedy legend Harold Ramis, 69, who produced, directed and wrote some of the greatest comedies of my generation – “Animal House” (1978), “Caddyshack” (1980), “Stripes” (1981), “National Lampoon’s Vacation” (1983), “Ghostbusters” (1984), “Back To School” (1986), and “Groundhog Day” (1993). Ramis, a Chicago native, began his career with the legendary SecondCity comedy troupe in 1969. For the Ramis movies listed above, here’s a famous line from each of those films. Can you match the line with the movie and the character or actor who delivered it? (send me an email at [email protected]). 1) “Oh, this is your wife, huh? A lovely lady. Hey baby, you must’ve been something before electricity.” 2) “I got laid off when they closed that asbestos factory, and wouldn’t you know it, the Army cuts my disability pension because they said that the plate in my head wasn’t big enough.” 3) “Fat, drunk and stupid is no way to go through life, son.” 4) “C’mon, it’s Czechoslovakia. We zip in, we pick ‘em up, we zip right out again. We’re not going to Moscow. It’s Czechoslovakia. It’s like going into Wisconsin.” 5) “I liked the university. They gave us money and facilities and we didn’t have to produce anything! You’ve never been out of college! You don’t know what it’s like out there! I’ve worked in the private sector. They expect results.” 6) “The football team at my high school, they were tough. After they sacked the quarterback, they went after his family.” 7) “This is pitiful – 1,000 people freezing their butts off to worship a rat.”
