On Eve Of Vote, Albertsons, Rite Aid Call Off $24 Billion Merger Agreement
On paper, the $24 billion merger between Albertsons Cos. and Rite Aid Corp. seemed like a good fit. Two retailers in segregated but somewhat connected channels searching for new identities that would join forces to create an organization where the whole would be greater than the sum of its parts.
And the type of organic and financial synergies that could be created by such an alliance portended of a lot of opportunities for each company to better compete in a world where other existing and emerging retailers have taken away market share from both Albertsons and Rite Aid.
The deal would have combined the assets of the second-largest supermarket operator with the third-largest drug chain in the U.S. The two retailers would have joined to form a company with annual revenue of approximately $83 billion and with 4,900 total stores – 4,350 pharmacies and 320 in-store health clinics across 38 states and the District of Columbia.
Of course, there were other compelling reasons why this deal needed to be done in the minds of the decision makers at both retailers. And in the end, it was those issues that ultimately killed the deal.
If you buy my premise that a merger (in which Albertsons would control 71 percent of the equity) would help both companies potentially transform their identities, you probably aren’t a Rite Aid shareholder.
Those investors could see other issues that were germane to their interests, primarily the value that they would receive for potentially becoming a minority stockholder in a deal they believed was undervalued (Rite Aid holders would have swapped 10 of their existing shares for one share in the new company plus $1.83 in cash, or as an alternate, 10 shares for 1.079 new shares).
Clearly the momentum was strongly against the deal, especially when some of Rite Aid’s largest institutional and private investors said they would not vote to approve the merger, and the deal was killed by both parties less than 12 hours before Rite Aid’s shareholders would have voted on it.
And while several analysts we spoke to acknowledged that the deal could have helped both companies, they also said that one of the catalysts that drove the deal was Cerberus Capital management’s strong desire to ultimately pull out of its 12-year investment in Albertsons (if the deal was consummated, the company would have become a publicly-traded one because of Rite Aid’s current status). They also noted that Rite Aid has lost more than 20 percent of its value over the past six months (its share closed at $1.74 on August 8) and recently announced it would absorb an $80 million hit because of its weaker negotiating position with pharmaceutical companies.
Obviously, Albertsons was disappointed about the news, stating, “Albertsons Companies believes that the strategic rationale of the Rite Aid combination was compelling, including the $375 million of cost synergies and $3.6 billion of identified revenue opportunities. We disagree with the conclusion of certain Rite Aid stockholders and third-party advisory firms that although they acknowledged the strategic logic of the combination, did not believe that Albertsons Companies was offering sufficient merger consideration to Rite Aid stockholders. Consistent with Albertsons Companies’ disciplined approach to mergers and acquisitions, and after careful consideration of all information available to our board of directors through today, we were unwilling to change the terms of the merger.”
It would have worked out much better for Rite Aid if the original Walgreens deal had been completed. However, FTC concerns about store overlap killed the initial offer which ultimately became a diluted transaction where only about 1,900 Rite aid stores were sold to the Deerfield, IL-based drug chain.
While the price of that deal was considerably better than the one Albertsons offered ($4.38 billion for those stores – a market value of approximately $2.25 million per unit), it weakened Rite Aid, which had made a nice comeback in recent years under the leadership of CEO John Standley (who at one time worked for Albertsons CEO Bob Miller at both Ralph’s and Rite Aid where Miller once served as chief executive himself).
So, now both companies will continue to go about it on their own. “We remain excited about the improving momentum, financial strength, and industry leadership of Albertsons Companies. Our team has remained laser focused on execution to drive our financial and operating performance, while ensuring we continue to meet and exceed the needs of our customers. As a result, we have achieved a number of significant milestones, including delivering consecutive quarters of top-line and bottom-line growth, and as part of the Safeway merger, which is delivering higher than expected synergies, we will be completing the systems integration of the Albertsons stores to in-house systems in September. We also have continued to differentiate ourselves through our best-in-class ‘own brands’ portfolio that is expected to add over 1,100 new items this year as well as through our expanding eCommerce offerings, which grew 108 percent year-over-year in the first quarter. The operational improvements we are making to meet our customers’ needs are driving our improved results. We are confident that our 275,000 dedicated employees will continue to execute on our business plan to enhance our customers’ experiences and lead the grocery industry with new innovations.”
Rite Aid, too, said it would persevere, adding that it would consider corporate governance changes and continue to speak to its shareholders.
“While we believed in the merits of the combination with Albertsons, we have heard the views expressed by our stockholders and are committed to moving forward and executing our strategic plan as a standalone company,” said Standley. “We remain focused on leveraging our network of conveniently located retail pharmacies, our EnvisionRxOptions PBM and our trusted brand of health and wellness offerings. We will continue building momentum for key areas of our business like our innovative Wellness store format, highly successful customer loyalty program and expanded pharmacy service offerings, as we also enhance our omni-channel and own brand offerings to strengthen our competitive position and create long-term value for stockholders.”
Something tells me that there’s more to come from both parties in terms of deal making. Don’t even discount the possibility of Albertsons sweetening the deal at a later date.
C&S Bid Helped Drive Up Price Of UNFI Acquisition of Supervalu
As one of 6,000 people who attended last month’s Supervalu national expo in St. Paul, MN I felt a bit privileged when the company announced it would be holding a half-day media session with trade journalists on July 25 to update and discuss the company’s recent trends and future plans.
Most of the company’s senior leaders including CEO Mark Gross were scheduled to speak in what proved to be an informal and interactive series of presentations that lasted more than three hours.
Except Mark Gross never showed. Neither did Jeff Swanson, SVU’s VP-communications, who organized the event. Apparently, both were “tied up” preparing for Supervalu’s second quarter earnings report which was slated for release the next day. I thought little of it and enjoyed the openness and accessibility shown by Supervalu’s leadership team (Mike Stigers, Anne Dement, Joe Falvey, Beka Swan, Tom Kraus and Jody Barrick).
That afternoon I walked the show floor and chatted with Supervalu customers and vendors, many of whom expressed cautious optimism about the company’s transformational plan which most likely included the sales of its corporate retail stores and greater focus on helping the independent retailers, who as a group are being extremely challenged by the competitive landscape that affect virtually every market in the U.S.
That evening at the entertainment gala, attended by several thousand people, Gross once again never appeared. Executive VP-wholesale Mike Stigers filled in as emcee which struck me as curious. I mentioned to the group of retailers sitting at my table that Gross also didn’t post at the media session earlier in the day. I sensed something was up – my first thought being that Gross was working on a settlement with Blackwells Capital, the hedge fund that was trying to blow up Supervalu’s board and take control of the company. My guess was that a “peace offering” might be included in the upcoming earnings announcement.
The next morning there was a collective jaw dropping (including mine) when it was announced the Supervalu would sell and that the buyer would be UNFI. All of sudden, the impact of the show, the battle with Blackwells and Supervalu’s aggressive future plans seemed meaningless.
So, here’s my take. At $32.50 per share, Gross and the SVU board were obligated to accept the UNFI offer. After seeing its shares hover in the $20 per share range for most of the past year (and that after a 1-for-7 reverse stock split last August), Supervalu would never see anything close to $30 per share in its front view mirror. In fact, several months ago I asked two financial analyst friends that if Supervalu were to sell what might it fetch. Both answered in the $24-$26 range.
And it only got to that elevated level after both C&S Wholesale Grocers (where Gross used to work) and UNFI were engaged in a reportedly aggressive bidding war. In an internal email, C&S confirmed to its key associates that it indeed was engaged in the process, but dropped out when the price reached a level where it could not foresee the value it needed (this was somewhat surprising since not only are C&S chairman Rick Cohen and Mark Gross industry cohorts, acquiring Supervalu – a publicly-traded company – would have seemed like the ideal succession strategy for privately-owned C&S, which Cohen controls).
At $32.50, UNFI won the lottery, but at a hefty price. The $2.9 billion deal creates a lot of debt for the Providence, RI firm (including the assumption of SVU’s liabilities) and it’s anybody’s guess if UNFI CEO Steve Spinner can create a new dynamic – effectively blending a large full-service traditional wholesaler into a specialty, organic, natural and ethnic warehousing, logistics and customer service organization.
While UNFI has clearly created a unique platform (and now has a great opportunity) which will give it complete access to all retail departments, I’m concerned about the significant debt and its ability to provide the same level of customer service that Supervalu customers expect.
UNFI has proven it can be a national player in the natural/organic/specialty business with a large catalogue and a solid pricing structure. However, if you ask retail customers who did business with Millbrook Distributors (a company UNFI acquired in 2008) or Haddon House (another specialty distributor it purchased in 2016), the most common criticism of UNFI has been the decline of customer service in supplying their accounts.
In fact, just in the Mid-Atlantic region, more than a handful of Haddon House customers – including Weis Markets and Kings/Balducci’s – have shifted to other distributors at least in part because of what they perceived as eroding customer service.
And in the two weeks since the deal was announced, several Supervalu customers (who are currently using UNFI for their natural/organic/specialty food needs or are simply worried about potential change) have expressed concern about whether any specialty foods distributor can manage a business that’s much larger, more diverse and complicated.
I’ve also received about a dozen inquiries from Supervalu associates both on the regional level and also from those based in corporate headquarters in Eden Prairie, MN. They’re worried about job security and wonder if UNFI will alter or scrap SVU’s current wholesale transformational strategy which they believe is beginning to pay dividends.
It’s certainly too early to predict what course UNFI will take (the deal isn’t likely to close until late in 2018), but if history is any type of lesson, you can expect UNFI to deploy an aggressive cost-cutting strategy to lower debt and become more efficient at least by its definition.
Regional offices or distribution centers closing? Personnel realignments? Job cuts? It’s all possible.
‘Round The Trade
While Amazon’s “Prime Day” posted record numbers (Amazon would not provide a specific dollar amount), the ecommerce king shouldn’t be fully applauded. Yes, it sold 100 million products during the 36-hour event, topping Amazon’s sales for any “Cyber Monday,” “Black Friday,” or any previous “Prime Day” events, but for its website to crash and create a 45-minute shutdown was inexcusable, especially since Amazon prides itself as being one of the country’s leading technology companies. And Amazon’s weak apology for the breakdown felt far short of acceptable in my book. When a supermarket retailer is out of stock, the results are visceral and real. And while it’s likely that Amazon’s sales would have been higher if the crash hadn’t happened, the Seattle-based company seemed to suffer little pain. Whatever the final sales number is, it’s certain to break last year’s $2.4 million figure and by adding Whole Foods to its “Prime Day” mix, Amazon generated additional momentum (BTW, the best-selling WFM item during the event was organic strawberries). Additionally, beyond just selling products, the hidden asset behind the event was Amazon’s ability to sell a lot more “Prime” memberships (at a $119 annual fee). And while the company won’t say how many more annual subscribers it gained, it acknowledged that it signed up more new members on July 16 than on any other day in its history. And one other statistic that seems to prove that Amazon can do no wrong despite the website glitch: Amazon’s stock price rose from $1,813 per share on Friday July 13 (the last full day before “Prime Day” began) to a whopping $1,843 per share on Wednesday July 18 (the first full day after the event ended). And the hiccup didn’t slow down the Amazon express in the earnings department, either. In its second quarter ended June 30, “Godzilla” posted a profit of $2.53 billion, up from $197 million a year ago, and amassed sales of $52.9 billion for the 13-week period ended. And Amazon’s closing stock price on August 10 (the day we went to press) was a startling $1,898 per share. One more Amazon-related note: beginning on August 8 with Whole Foods’ stores in Virginia Beach and Sacramento, the company began offering grocery pickup to its “Prime” members. Those members can place their orders through Amazon’s “Prime Now” app and can receive free pickup in an hour on orders of $35 or more. Amazon plans to roll out its new pickup program nationally by the end of this year… jet.com, whose founder Mark Lore sold his Quidisi diapers business to Amazon in 2011, will open a 200,000 square foot distribution center in the Bronx this fall that will help accelerate same-day and next-day deliveries (including groceries) in the metro New York market. While pressure from a lot of fronts (labor unions, local politicians) has prevented Walmart (parent of jet.com) from building bricks and mortar stores in New York City, the world’s largest retailer is slowly gaining traction in the five boroughs through use of its ecommerce businesses. Walmart has also teamed up with Microsoft to enhance the Bentonville, AR company’s cloud platform which is expected to provide shopping experience convenience and efficiency to its customers. In other words, the “Behemoth” is engaging the services of one of the world’s biggest and most respected technology companies to better compete against “Godzilla” (Amazon). And in Walmart legal news, Zest Labs, a San Jose, CA-based ag tech company, is suing the Behemoth for $2 billion, claiming Walmart stole proprietary technology that it invented to prolong the shelf life of produce. Earlier this year, the world’s largest retailer unveiled its own “Eder” technology program which Zest said “looks, sounds and functions like its own design. Zest and Walmart have worked together for several years and the complaint said that Walmart used years of unfettered access to plaintiffs’ trade secrets, proprietary information and know how to steal its own technology and misappropriate it for Walmart’s own benefit…Wegmans and Teamsters Local 118, both based in Rochester, NY, have agreed on a new five-year contract at the company’s general merchandise warehouse. The new pact includes wage increases of 16.5 percent over the length of the contract and a $500 ratification bonus. Next year, the two parties will bargain over new deals for Wegmans’ primary grocery warehouse and for its transportation workers…activist investor Dan Loeb, who controls hedge fund Third Point LLC, has acquired more than a $300 million stake in Campbell Soup in an apparent effort to force a sale of the troubled manufacturer. Selling Campbell’s will be no easy chore though, not only because of years of slumping earnings (and dwindling sales of its core soup line), but also because surviving descendants of the founding Dorrance family control more than 40 percent of the Campbell’s stock, which yields more than $40 million annually in dividend income alone to the Dorrance clan…a tip of the hat to PepsiCo CEO Indra Nooyi, who will step down from her leadership post at the large beverage producer on October 3 after 12 years at the helm. As one of the first women to lead a global food company, Nooyi, who was born in India, has seen Pepsi’s stock rise about 80 percent since she was named CEO in 2006. She will be replaced by Ramon Laguarta, a 22-year PepsiCo vet, who was named president in 2017…even though it’s a small slice, I applaud Kroger for taking a position against Visa by no longer accepting its credit cards at its 21-store Food Cos. banner based in Northern California. This is all about the increasing (and some think usurious) swipe fees and Kroger appears to the first grocery chain taking a stand, albeit a small one. Also at Kroger, Valerie Jabbar, currently president of the company’s Ralph’s division in southern California, will be relocating back to corporate headquarters in Cincinnati to become group VP-merchandising, effective September 1. Kroger also announced that it is considering selling its Turkey Hill brand (ice cream and iced tea), which is based in Conestoga, PA (Lancaster County). The exploration is part of Kroger’s ongoing initiative to redeploy assets into its core businesses while also continuing to invest in technology.
One of the sidebars in the UNFI/Supervalu deal was the official announcement of the badly kept secret that all 111 remaining Supervalu corporate stores would be sold in a “thoughtful and economic manner” (apparently a free hug will be given to those retail associates as they’re shown the door). For the past six months, Supervalu has openly shopped stores that carry the Shop ‘n Save banner in the St. Louis area as well as 21 former Food Lion stores in Western Maryland, Central Pennsylvania and West Virginia. Thirteen of those stores will be closing by September 8 including stores in: Hagerstown, MD (four units); Waynesboro, PA; Chambersburg, PA (two stores); Winchester, VA (five supermarkets); and Kearneysville, WV. Stores that will remain open (and presumably are of interest to potential buyers) are located in: Smithsburg, MD; Greencastle, PA; Berryville, VA; Front Royal, VA; Purcellville, VA; Martinsburg, WV (two stores); and Hedgesville, WV…. and kudos again to Ahold Delhaize USA, Redner’s and Weis Markets on their respective golf outings which collectively raised millions of dollars for local charities. Great work by all three retailers…speaking of Weis Markets, the Sunbury-PA retailer cut the ribbon on its newest store on July 19 – a 54,000 square foot unit in Randolph, NJ (Morris County), the regional chain’s sixth store in the Garden State. The new location is Weis’ first to feature a CO2 refrigeration system. The store is off to a fast start. Weis also posted its Q2 sales and earnings and for the first time in 16 quarters, it did not post positive comp store sales. Overall revenue was $871.1 million versus $876.6 million a year ago and adjusted comps declined 0.3 percent. The company said the timing of this year’s Easter holiday which fell in Q1 (vs Q2 last year) was the primary cause of the slight reduction in comp store revenue. However, Weis’ profit increased in this year’s second quarter by 3.4 percent to $19.1 million. Ahold Delhaize also released its Q2 financials (ended July 1) and much like many of its peers, U.S. comp store sales were flat (negative 0.1 percent excluding fuel; positive by 1 percent when adjusting for the Easter holiday timing). The company said that the adjustment of its U.S. banners to its newly unveiled (January 1) decentralized model was also a factor, particularly at its largest “brand” – Stop & Shop. Frans Mueller, Ahold Delhaize’s new CEO (he assumed the helm on July 1) singled out Hannaford and Food Lion for their performance while also suggesting increasing challenges faced by Stop & Shop. We can also tell you that, not surprisingly, Giant/Martin’s was the best performing unit of the three original Ahold USA brands. At Giant Food, one of its original stores in the Baltimore area – the Milford Mill unit on Liberty Road – will be closing on August 16. According to the company, “The primary reason this decision was made is that new investment was not a practical alternative at this older or outdate location. We believe other existing or new Giant stores will effectively service our customers currently shopping at this store.” The store debuted in 1959…while most of the company’s attention over the last week has been focused on the collapsed Albertsons/Rite Aid proposed deal, the Boise, ID-based merchant did release its second quarter financials last month. Albertsons posted slightly positive comps (0.2 percent excluding fuel) during its recently completed (June 16) 13-week period, but posted an earnings loss of $17.7 million. “Enhancing the customer experience, improving our digital marketing, loyalty and e-commerce efforts and innovations in own brands, coupled with successful cost reduction efforts, including continued improvements in shrink and completion of the fiscal 2018 synergies from the Safeway acquisition, should allow us to generate improvements in sales and achieve our target for adjusting the EBITDA $2.7 billion in fiscal year 2018. We expect to realize $375 million in annual run-rate cost synergies within three years and have the opportunity to generate $3.6 billion in annual sales synergies to fuel our future growth,” said Jim Donald, Albertsons’ president and COO. In other Albertsons-related news, the very popular Paul Gossett, who once served as chief merchant for Acme Markets, has been named president of the company’s Jewel-Osco division, the market leader in Chicagoland. He replaces veteran Albertsons executive and former Jewel president Doug Cygan who unexpectedly passed away last month. Most recently, Gossett, who’s been with Albertsons for 41 years, was president of the merchant’s Shaw’s/Star Market unit in New England. Michelle Larson will take over the top leadership spot at Shaw’s/Star. A 23-year Albertsons associate, Larson served most recently as senior VP-marketing and merchandising for the company’s Southwest division based in Tolleson, AZ. And just before presstime, we learned of the promotion of Tom Lofland, who is now the new president of Safeway’s Eastern division (see page 1). I’m very happy for Tom – he’s one of the hardest workers in a business of hard workers and is also a skilled merchant whose roots go back nearly 30 years ago to an Albertsons store in Seminole, FL. Tom will report to Jim Perkins – a man cut from the same cloth – who will go back to supervising day-to-day activities at Acme Markets full time while still having oversight of Safeway-Eastern. The Eastern division will be part of a test in which parent company Albertsons will utilize same-day online grocery delivery from Shipt, a Target-owned company. Albertsons has deployed rival Instacart for same-day grocery deliveries in most of its marketing areas, but Shipt will be now be available in Phoenix and Tucson, AZ; Boulder, Colorado Springs, Denver and Fort Collins, CO; Las Vegas and Reno, NV; Eugene and Portland, OR; Seattle and Spokane, WA…Sprouts cut the ribbon on its second Maryland store at the site of a former hhgregg electronics store in Towson, MD. We’re told that Sprouts is eyeing about a dozen more Mid-Atlantic locations including its first store in Center City Philadelphia which will open next month. The Phoenix, AZ-based natural/organics/specialty quasi-discount merchant also named Dave McGlinchey its chief merchandising officer. McGlinchey, a native New Englander who worked at both Stop & Shop and Shaw’s/Star Market, joined Sprouts in 2017 as senior VP-merchandising services…Streets Market & Café, which operates six stores in the B-W area – three in Washington DC, and in Arlington, VA, Alexandria, VA and Baltimore – will open two new stores in the District next year on 22nd Street NW and M Street NE. Streets’ strategy is to open stores between 5,000 and 15,000 square feet that occupy the ground floor of apartment buildings that offer a combination of organic, conventional and convenience foods… Publix, which in the opinion of many (including me) has underperformed in its first year in the Richmond market (clean stores, good customer service with vanilla merchandising, mediocre perishables and too much private label), opened two new stores last month including its ninth in Richmond (on Forest Hill Avenue). It also cut the ribbon on its first Fredericksburg store, a 49,000 square foot unit located at the junction of Route 1 and Spotsylvania Parkway. Despite the slow start, Publix has no plans of slowing down its Richmond area expansion with conversions of former Martin’s store under way on W. Cary Street, Three Chopt Road (both in Richmond); West Broad Street in Glen Allen and on Monticello Avenue in Richmond. There could be two underlying reasons Publix is so resistant to change to become more effective in a new more competitive market: 1) it’s loyal to its formula of waiting out the competition as it has done successfully in markets such as Atlanta and Nashville; and 2) it’s so profitable that soft sales in an emerging market like Richmond (or Raleigh and Charlotte) aren’t a priority in the near term. To wit: in its recently completed second quarter (ended June 30
) the Lakeland, FL-based juggernaut posted an overall revenue gain of 4 percent, a comp store increase of 1.7 percent and a profit jump of 24.5 percent (15.3 percent without the benefit of the one-time Federal tax refund). Moreover, Publix’s stock (available only to directors and associates) has risen more than 15 percent to $42.55 per share since the first of the year. It is clearly the most profitable supermarket chain in the U.S. (for those who report earnings)…and from the death desk, we have a few obits to report. I was very sad to learn of the passing of Fred Hess, 70, one of the owners of the Hess Bros. Fruit Company, based in Lancaster, PA. I can tell you that Fred was the most knowledgeable “apple guy” I have met in my 45 years of covering the food industry. But more than that, Fred Hess was a gentleman and a tremendous advocate for his industry. He took a business begun by his father and uncle, and with his late brother Gerald turned it into a regional powerhouse…from the sports world, one of the greatest hockey player that I have ever watched play, Stan Mikita, who spent his entire 22-year career with the Chicago Blackhawks, has passed away at the age of 78. While he grew up in Canada, Mikita was born in Czechoslovakia and was the first Czech born player to play in the National Hockey League. Although slight of frame, Mikita had a feisty temperament. It was his smooth skating and uncanny scoring ability that made him a special player, (he led the league in scoring four times). He played on some great Blackhawks teams that included Bobby Hull and Glenn Hall. He was also awarded the Hart Trophy as the league’s MVP and was inducted in to the Hockey Hall of Fame in 1983. “Pound for pound, Stan Mikita was one of the greatest players of all time,” said fellow Hall of Famer Hull, who played with Mikita for more than a decade…Charlotte Rae has also passed on. The veteran character actress, who was best known for her co-starring roles in the long running TV series “The Facts of Life” and “Diff’rent Strokes,” was 92. I never watched those two popular series, however, I did see her small screen series debut as Sylvia Schnauser, wife of Police Officer Leo Schnauser (played by the incredible Al Lewis who is best known for playing Grandpa in “The Munsters”) in the TV series “Car 54, Where Are You?” which debuted in 1961…RIP (maybe) to the Necco factory. Yes, it is true, the country’s oldest continuously operating candy company shut down its Revere, MA manufacturing plant last month after being sold by private equity firm Round Hill Investments (owned by private investor Dean Metropoulos who purchased Necco at a bankruptcy auction earlier this year) to a new company which has not yet been identified. The plant employed about 230 associates and it is unclear if the plant will reopen under the new ownership. I feel badly for the workers who were given virtually no notice of the plant closure. But I have to admit that a product that tastes like chalk perhaps shouldn’t qualify as candy. I could also say the same thing about another product the company produced, Sweethearts – the heart shaped Valentine’s Day candy that tasted worse than chalk.mcg