Proxy Battle For Control Of SVU Board To Be Decided August 16

The proxy battle between Supervalu and minority holder Blackwells Capital for control of the wholesaler/retailer’s board will be decided by the company’s shareholders during the shareholders meeting scheduled for August 16 at Supervalu’s headquarters in Eden Prairie, MN.

For more than a year, New York City-based Blackwells has sought board control of Supervalu through its six proposed directors, citing SVU’s “misguided and unfocused strategy” which has yielded poor results and disappointing returns to shareholders.

Not surprisingly, Supervalu disputes those contentions and has continually noted that Blackwell’s effort is an attempt to gain control of the company without paying a premium to all shareholders (according to Supervalu, based on Blackwells’ definitive proxy statement filed on June 29, 2018, Blackwells holds 5.3 percent of the company’s outstanding shares outright). Taking into account Blackwells’ net short call position, it has a net long position of 3.9 percent of the company’s outstanding shares. In addition, Blackwells holds a net long position of put options – which pay out more as the stock price declines- representing 4.2 percent of Supervalu’s outstanding shares.

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Supervalu also believes that its current nine-member board is highly qualified and in a letter to shareholders on July 9 outlined its ongoing strategic plan.

Below is an edited version of the letter that chairman Donald Chappel and CEO Mark Gross sent to shareholders.

Dear Fellow Stockholder:

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Your board of directors and management team are committed to enhancing the value of your investment in Supervalu, Inc. and we continue to proactively develop and pursue opportunities to achieve that goal. We have been taking decisive actions to create stockholder value by rapidly and strategically transforming Supervalu into the wholesale supplier of choice in the U.S. grocery industry – and we continue to make meaningful progress.

At Supervalu’s upcoming Annual Meeting of Stockholders on August 16, 2018, you will be asked to make important decisions regarding the composition of the company’s board and the future structure of your company, which we believe will impact the value of your investment. Blackwells Capital, a New York-based alternative investment firm, is trying to seize control of your board by proposing to replace six of nine directors. Blackwells’ attempt to seize control of your company, without paying a premium to all stockholders, is highly disproportionate to its actual ownership stake in Supervalu.

Any claim Blackwells could make to act on behalf of Supervalu’s stockholders is belied by the fact that, through short sales of call options and the purchase of put options, Blackwells’ exposure to the company is substantially less than it represents. In fact, while Blackwells claims that it has a 7.7 percent ownership interest in Supervalu, analysis of the detailed information it has provided in its filings shows that, taking into account its various options contracts, Blackwells’ exposure to the company’s shares is materially lower than 7.7 percent.

We believe that there is significant risk to the important progress the company is making in executing its ongoing strategic plan by supporting Blackwells and its proposal to replace the majority of your board.

Your vote is very important. We encourage you to protect the value of your investment in Supervalu and votefor all” of the company’s director candidates listed on the enclosed white proxy card.

Supervalu has been in business for more than 140 years, with our roots in the wholesale grocery industry. Over the years, our business evolved to include grocery retail and other supply chain services. Just as the company has always sought out new ways to improve efficiency and better serve customers, we have also remained committed to identifying and executing on the highest potential market opportunities and taking actions that would drive value for all stockholders.

Long before Blackwells first contacted members of the Supervalu management team, and before Blackwells purchased a single share of Supervalu, your board had taken bold steps to fundamentally shift the direction of the company and return Supervalu to its roots by becoming the wholesale supplier of choice for grocery retailers across the U.S.

Your board laid the foundation for Supervalu’s transformation by intentionally recruiting and hiring a wholesale industry leader with a strong track record of delivering growth, Mark Gross, to serve as president and chief executive officer in February 2016. Under Mr. Gross’ leadership, the company has taken major steps to position Supervalu as the grocery wholesale supplier of choice, while also ensuring that certain of the company’s well-positioned retail assets are strategically used to add value to the overall business.  These steps began long before Blackwells came on the scene and include:

-Completing the Sale of Save-A-Lot. As an important early step in the strategic transformation of the business, your board and management team pursued and completed the sale of the company’s Save-A-Lot business in December 2016. This sale enabled Supervalu to utilize the $1.3 billion in proceeds to significantly reduce the company’s debt and create flexibility to execute transformation initiatives and pursue important strategic acquisitions and growth opportunities.

-Executing a Dramatic Turnaround of the Wholesale Business. Building on an annual sales base of approximately $8 billion, the company added $5 billion in sales on a run-rate basis to the Wholesale business in just two years – a growth rate of over 60 percent. We were able to accomplish such significant growth and increase Wholesale to 80 percent of total company sales from just 44percent two years ago, through a combination of organic business growth and by completing the acquisitions of Unified Grocers (“Unified”) in June 2017 and Associated Grocers of Florida (“AG Florida”) in December 2017. These two acquisitions significantly expanded our customer base, geographic footprint, product offerings and expertise. In fact,

we are currently executing the integration of Unified and AG Florida and have raised our 3-year synergy estimates by $20 million so that we now expect to achieve annual cost savings of at least $96 million.

-Unlocking the value of our owned real-estate portfolio. We monetized a significant portion of our owned real-estate portfolio through the sale and leaseback of eight distribution centers, totaling nearly six million square feet of space. This transaction will generate net proceeds of approximately $445 million, which we are using to further reduce outstanding debt. We continue to work with a nationally renowned real estate advisory firm to assess the remaining approximately 13 million square feet of owned real-estate, while ensuring we maintain strategic and operational flexibility.

-Reducing our retail footprint. In March 2018, we completed the sale of a majority of our Farm Fresh retail stores and pharmacy assets for a total of $53 million and sold our minority stake in a multi-store Cub Foods LLC that generated proceeds of $14 million. In April 2018, we announced that we are pursuing the sale of our corporately owned Shop ‘n Save and Shop ‘n Save East retail operations in order to further optimize our asset base and provide us flexibility to invest capital in select, innovative store remodels and in-store merchandising initiatives within certain of our stronger retail assets.

-Pursuing new initiatives. Consistent with our focus on growing our Wholesale business, we also pursued new initiatives designed to position us for success in our rapidly evolving industry. For example, our recent entry into a multi-year reseller agreement with Instacart creates a new professional services offering and expands our digital capabilities by allowing Supervalu to offer the benefits of online shopping and delivery services to more than 3,000 independent retail stores supplied by Supervalu, as well as other retailers across the U.S. in the over 240 metro areas where Instacart operates.

These actions are translating into measurable results. Adjusted EBITDA in our wholesale segment grew approximately 19 percent between fiscal 2016 and fiscal 2018.   Further, as a result of our prudent and targeted investments in stronger retail assets, identical store sales for our three retail banners in continuing operations have sequentially improved every quarter over the past four reported quarters.

We have taken decisive actions at both the Wholesale and Retail levels to enhance our competitive position within the changing food industry, strengthen our balance sheet and most importantly, to position the company to deliver long-term value to all stockholders.

Our wholesale and retail leadership teams remain dedicated to managing the successful execution of our go-forward, four strategic pillar strategy: grow our core Wholesale business, optimize our asset base, de-lever our balance sheet and pursue strategic and opportunistic mergers and acquisitions.

To further support our strategic transformation, we are proposing to reorganize Supervalu’s corporate structure (which we refer to in our proxy statement as the “Holding company Proposal”). Our proposed holding company reorganization, for which we are seeing stockholder support at the upcoming annual meeting, is expected to:

-Organize and further segregate our wholesale and retail operations in an operationally efficient and strategic manner, including to separate the wholesale and retail operations held by Supervalu INC., our current public company entity;

-Facilitate our previously announced strategic transformation plan to sell certain retail assets to third parties;

-Better segregate the liabilities of the company into their respective business segments;

-Increase our strategic, business and financial flexibility; and

-Enable us to achieve our strategic transformation plan in a tax efficient manner that may facilitate the ability to utilize a material portion of Supervalu’s capital loss carryforward, which could generate approximately $300 million of cash tax benefits for the company over the next approximately 15 years.

We believe that the company’s directors – Donald R. Chappel, Irwin S. Cohen, Philip L. Francis, Mark Gross, Eric G. Johnson, Mathew M. Pendo, Francesca Ruiz De Luzuriaga, Frank A. Savage and Mary A. Winston – have played critical roles in launching and overseeing the successful execution of Supervalu’s transformation.

Supervalu has a diverse and independent board that benefits from a breadth of skills and expertise to position the company for success. Eight of our nine directors are independent, and all of our directors are proven leaders with decades of experience spanning the wholesale, retail, finance, accounting and food industries, in addition to public company leadership and board experience.

We have made board refreshment a priority, and as a result of this effort, we have appointed new directors who are playing an integral role in overseeing Supervalu’s transformation. Two of our directors have joined the board in the past two years, six of our nine directors have served on the board for less than five years and a new independent chairman was appointed in July 2017.

Your board has been – and will continue to be – a significant agent of change to improve Supervalu’s performance and deliver enhanced value to our stockholders. With a mix of new and tenured directors, your board collectively brings the skills, expertise and knowledge of Supervalu and our industry needed to oversee execution of the company’s operational and strategic plans.

Your board and management team are committed to delivering value for all stockholders and remain focused on the continued execution of a transformation strategy that is demonstrating strong momentum and is already delivering measurable results.

We appreciate your support.

Sincerely,

Donald R. Chappel

Chairman of the board

Mark Gross

President and Chief Executive Officer

Blackwells, which was founded in 2016 by managing partner Jason Aintabi and calls itself an “alternate investment manager,” sent out a letter of its own (along with green proxy cards) a week before Supervalu’s letter, seeking approval from SVU’s shareholders of its proposed board slate.

Aintabi, current managing partner at Blackwells, said, “We have lost faith in the current Supervalu board, but not in Supervalu. Blackwells has attempted to actively engage with the current board and management in good faith and offered solutions and skills that would help stem the constant decline at Supervalu. Each time, our efforts have been rejected, misrepresented, or, in our view, co-opted incompetently. The current board even refuses to sit down, face-to-face, with our highly qualified, independent nominees, who offer decades’ more relevant experience than the current directors.

“To protect the investment of all shareholders and help Supervalu achieve its full potential, Blackwells has recruited and nominated six extremely talented professionals to the company’s board. With their extensive industry and public board experience, we are confident these nominees will better set Supervalu’s future course and more effectively oversee it. We strongly encourage you to join us in voting for change…”

Below is an edited version of Blackwells letter to Supervalu shareholders.

Dear Fellow Supervalu Shareholder,

Over the last ten years, Supervalu has lost more than $5 billion of shareholder value, with its stock declining more than 90 percent. During those ten years – and the tenure of five different CEOs – the company has alternated strategies, including several complete reversals in strategy, but has yet to find a winning formula.

In 2016 and 2017, the current board and management team claimed to have implemented yet another sure-fire strategy and turnaround plan, encapsulated by the less than inspiring, three-prong statement to “retain existing customers,” “sell more to all customers” and “serve more customers.” Unsurprisingly, the results bear the same discouraging hallmarks of the past: In fiscal year 2018, Supervalu’s stock fell a further 50 percent.

We beneficially own 7.73 percent of Supervalu’s outstanding stock. While we have lost all confidence in Supervalu’s board, we believe strongly in Supervalu’s opportunities under the proper leadership.

In February 2018, we released a detailed strategic plan for the company. While the mere prospect of our value-creating plan being implemented has led the stock to rally by more than 40 percent, we do not believe it is wise to entrust the future of Supervalu to the same individuals who have failed for so long to create long-term shareholder value. This board has, in our view, repeatedly shown that they lack any measure of agility, expertise or independence.

To protect the investment of all shareholders and help Supervalu achieve its full potential, we have recruited and nominated six talented professionals to the company’s board, with critical experience in food wholesaling, retail grocery, transportation and logistics, turnaround management and sustainability. In our view, shareholders finally have an opportunity to vote for seasoned professionals who are qualified to lead Supervalu.

We therefore urge you to vote at this year’s annual meeting of Supervalu shareholders using the enclosed green proxy card.

Over any meaningful time period, Supervalu’s stock has performed worse than every relevant index and peer group, and worse than nearly every company in the Russell 2000 index.

It did not have to be this way: Other large food distribution businesses – and retail grocers – have done substantially better than Supervalu. Among Supervalu’s own self-selected group of 14 peer companies, Supervalu had the worst shareholder return in fiscal 2018. Over the last two years, companies as diverse as Sysco, US Foods, Performance Foods, and United Natural Foods have all generated positive returns, while Supervalu’s shareholders lost hundreds of millions of dollars.

Supervalu’s earnings per share have declined dramatically since fiscal 2014 and the company has eliminated its dividend. By contrast, each of Supervalu’s grocery peers and each of its wholesale peers have achieved EPS growth, increased their dividends, or both during that period. Supervalu is the only company among its peers to have no capital return policy for its shareholders.

Practically the only thing to increase in recent years at Supervalu is CEO compensation, which has increased more than 20 percent since fiscal 2014. Over the last ten years, Supervalu’s five CEOs have been paid more than $78 million in total. In contrast, Supervalu’s shareholders have lost more than $5 billion.

Supervalu’s notable underperformance stems from what we believe are many strategic and operational failures, including:

-A misguided and unfocused strategy attempting to manage the complexities of both wholesale and retail businesses, which has led to managerial and capital allocation issues as well as clear execution shortcomings;

-Value-destroying deals, demonstrated by major strategic acquisitions such as Albertson’s that were later sold at steep discounts, as well as poorly structured transactions that created unnecessary tax liabilities, confusing and misleading financial statements and valuation concerns;

-Repeated recruiting failures, including the appointment of five CEOs in a seven-year period, hiring of executives with poor track records and, in our view, questionable business ethics, and nominating or re-nominating board members who lack relevant experience to assist management in strategy development and others that had significant conflicts of interest;

-A misaligned culture and compensation system that has rewarded growth and business size, over profitability, operational excellence, and shareholder value creation; and

-A lack of planning and investment in key operational areas, such as logistics, data systems, store maintenance, and promotional deals with key suppliers.

Even Supervalu’s board of directors and management appear to have been surprised by Supervalu’s dramatic underperformance. Since September 2015, in every quarter, except one, Supervalu has been forced to lower the full-year EBITDA guidance it gave investors at the previous year-end. (Notably, the one non-year-end quarter without a guidance adjustment was disappointing in other ways, leading to a two-day stock price decline of 19 percent.)

Though we believe Supervalu’s directors undoubtedly want to do better, they lack the critical grocery and logistics experience that would help inform sound strategic judgment and capable oversight. Three of the last four chairmen of Supervalu, for example, came from the oil and gas, department store retailing and toy businesses. On this current board, who can shareholders rely upon to know Supervalu’s business, customers, suppliers, competitive dynamics and strategic landscape?

If Supervalu shareholders are to expect a different trajectory for our stock in the future, we must demand a different board. Blackwells has nominated six talented professionals, having extensive industry and public board experience, whom we believe can better determine the optimal strategy for Supervalu and more effectively oversee it.

To best serve shareholders, the Blackwells nominees are committed to:

-Creating a culture of accountability that is demonstrated through executive hiring and retention decisions, as well as the executive compensation program;

-Allocating shareholder capital in an optimal fashion, making decisive and timely decisions about the relative attractiveness of various investment and divestment opportunities, including business segments, real estate, Supervalu stock, dividends and other available options;

-Insisting upon a performance-driven operational approach that is efficient and sustainable, eliminating waste (such as the use of the corporate jet for the personal convenience of executives) and considering the interests of Supervalu’s shareholders in all decisions;

-Supporting management and applying the directors’ considerable industry expertise and contacts, in addition to managerial, operational and strategic experience, to drive operational excellence and unlock shareholder value;

-Eliminating conflicts of interest that may jeopardize the company’s economic success (and the company’s proprietary information and trade secrets) and ensuring that the highest standards of integrity are instilled among the company’s leadership; and

-Carefully reviewing, and objectively assessing, all avenues of value creation, including those that involve strategic transactions.

The professionals we have nominated have studied Supervalu’s businesses carefully and have specific suggestions and initiatives to discuss with shareholders and management. In the coming weeks, Blackwells and its nominees will share more with you about these plans for Supervalu’s promising future.

We need better than a board that only recognizes the company’s failures when shareholders protest, and then must crib a new strategy from those same shareholders. The current board has, in our view, continued to prove itself to be unimaginative, intractable and lackadaisical stewards of the company, to the great detriment of Supervalu’s shareholders

Jason Aintabi

Managing Partner

Blackwells Capital LLC

The proposed new six-person board would be comprised of these corporate executives: Richard A. Anicetti, a 38-year veteran of the retail food industry who has spent nearly a third of his career serving as a CEO, including The Fresh Market and Food Lion; Steven H. Baer, an executive with over 40 years of executive leadership and business turnaround experience, including as a partner of High Ridge Partners, a private turnaround, restructuring and financial consulting firm; Robert “Chris” Kreidler, an experienced C-level executive with some of the largest foodservice and food distribution companies, including Sysco and C&S; Frank Lazaran, a veteran of the food industry, with over 40 years of experience including as serving as CEO of Marsh Supermarkets and Winn-Dixie; James; J. Martell, a veteran public company director with experience in logistics and transportation, including serving on the board of Mobile Mini Inc. and XPO Logistics, Inc.; and Sandra E. Taylor, who has had a long career in corporate social responsibility, with experience as CEO of Sustainable Business International LLC, an independent consultancy which specializes in social responsibility for global businesses; and as senior VP-corporate social responsibility for Starbucks Corporation.

Nine days later on July 18, Supervalu sent another letter to its shareholders noting its “change” initiative which it said will deliver enhanced shareholder value. Also included in the letter was a “Q&A” with Supervalu chairman Chappel and references to its nine board members detailing their contributions to SVU’s improvement and future outlook. The letter also s stated that the six board members nominated by Blackwells “would bring no new or additive expertise” to the board.

Blackwells quickly responded with a letter of its own, stating that Supervalu’s claim of aggressively transforming its business and delivering results was “consistent with a prior pattern of puffery.” Managing partner Aintabi added: “We are astounded that Supervalu believes it can advocate for the re-election of its incumbent directors without so much as attempting to address the tremendous losses shareholders have suffered during the tenure of this board.”

In the Mid-Atlantic, Supervalu announced some staffing changes to its East region wholesale operations. Joe Della Noce, VP of sales, a veteran of 30 years with Supervalu and its predecessor company, Richfood, will retire at the end of July. Another Supervalu veteran, Mark Gossett, who shared VP-sales duties with Della Noce and supervised the Southeast, will now oversee all sales for the east region. He will relocate from Atlanta to Mechanicsville, VA and report to Bill Chew, Supervalu’s senior VP-sales. Mike Danes has been named to fill Gossett’s former post in Atlanta. Additionally, Leon Bergmann, president of Supervalu’s west region, has left the company and joined Harvest/Sherwood, a San Diego-based foodservice and retail distributor, as CEO.

And by the end of this month, the second largest Supervalu-owned retail chain, Shoppers Food & Pharmacy, Bowie, MD, will officially shift its merchandising to the Cub Foods headquarters in Stillwell, MN. About 40 associates will be impacted including president Bob Gleeson, who was with Shoppers for more than 30 years.

It’s going to be a busy and critical next four weeks for Supervalu (including its annual national trade show in late July). Stay tuned.