No Shortage of Shoppers for Supervalu Assets

April 9, 2018

By Cathaleen Chen | The Deal

Supervalu Inc. (SVU) may be contending with a nasty proxy fight right now and a long-plummeting stock, but the grocery wholesaler and retail chain won’t likely struggle to find a buyer, sources told The Deal.

Reports emerged last week that the Minneapolis-based grocer is exploring strategic options including a potential sale with Lazard Ltd. and Barclays plc, on the heels of activist investor Blackwells Capital’s nomination of six candidates for the company’s board.

Supervalu has yet to confirm that it’s looking to sell itself, but industry sources say there won’t be a shortage of interested buyers with significant potential for synergy, paying up to nearly $1.1 billion for the ailing chain. “This is not new information. Supervalu has been considering options for a while now,” said Telsey Group analyst Joseph Feldman, who follows the grocer. Supervalu itself said in a statement in February that it would continue “exploring options for specific banners” under its retail arm, which accounts for a quarter of its revenue.

“On the retail grocery side, there should be plenty of regional players interested in at least one or more of Supervalu’s retail banners,” including Cub Foods, which is located in Illinois and Minnesota, or the East Coast-based Farm Fresh,” Feldman said. “On the wholesale side, it’s unclear if they’re trying to go private or sell the whole thing.”

Depending on whether the buyer is a strategic player or a financial one, there are multiple ways in which a deal could pan out for the lightly-levered Supervalu.

The most likely strategic buyers, according to SRG Insight’s Burt Flickinger, a retail expert who has followed Supervalu since the 1970s, are other major wholesalers such as SpartanNash Co. (SPTN), Canada-based retailer Sobeys Inc., or the Jim Pattison Group, which operates the Overwaitea Food Group, all of which would keep the retail and wholesale arms intact.

Strategics like C&S Wholesale Grocers and Sysco Corp. (SYY), which solely distribute food, would most likely sell off the retail portion of Supervalu if they were to pursue the merger.

These industry giants would pay up to $27 or $28 for the company, which currently has a market cap of $588 million, Flickinger said. That’s more than a 70% premium to what the stock was at before news of the strategic exploration.

“A strategic buyer would have a lot of synergies to cash in, and they’d get a couple of Supervalu’s private label crown jewels, like Market Centre, a major import-exporter,” he told The Deal. “If the buyer keeps the retail portion, it’d also be pretty easy to whip them into shape considering how mismanaged they are.”

Private equity firms such as KKR & Co. (KKR), which bought supermarket chain Mills Fleet Farm for more than $1.2 billion in 2015, would also see a fit in Supervalu, Flickinger added. These investors, however, would pay a lower price — “between $23.50 to $27.50.”

Other possible buyers could emerge from Europe and Asia, he said, such as Germany’s Metro AG and Stop & Shop owner Ahold Delhaize. Foreign interest could percolate from Saudi Arabia, the Middle East or Chinese investors, though the regulatory environment remains murky for some foreign buyers. China’s Shuanghui International Holdings Ltd., however, did acquire pork processor Smithfield Foods Inc. for $4.7 billion in 2013.

“There’s a lot of interest from foreign buyers right now to buy into food wholesale in the U.S., especially to get money out of politically unstable countries and build up liquid assets through food retail distribution,” he said.

If Supervalu’s two arms are split, it’s likely that the retail portion would go first, Feldman said. “It may seem like [Blackwells] came in and laid out this thesis that Supervalu should make a bunch of changes, but the truth is that the grocer was already planning an overhaul.”

Supervalu could not be reached for comment. Reuters reported Friday that the company is working with Lazard Ltd. and Barclays plc as advisers in its strategic exploration. Its shares are 8% down Monday afternoon, trading at $15.38.