As the Staples commercial goes: “That was easy”. On my birthday, SuperValu (SVU) gave you – my valued readers/followers – a present. The gift came in the form of an agreement to sell its “banners” to an acquisition consortium lead by Cerberus. The deal consists of $100 million in cash and the assumption of $3.2 billion of debt. More importantly, for SVU shareholders, the transaction comes in the form of a $4.00 per share tender offer for 30% of the outstanding shares.
At the time of my bullish post, the shares traded at $2.68. At Friday’s close, the shares were trading at $3.53 – a nice return of 31.7%. If successfully completed, the total return since my post would equal 49%, an additional 13% higher than the current price. Similar to my post “Down So Long it Looks Up – Zipcar”, the announcement of the SVU transaction touted the fact that it the offer was a 50% premium to the 30 day average closing price. However, it failed to mention that SVU shares traded north of $7.00 one year ago (or that it was trading at $5.29 in July when it announced that it had hired bankers to perform a “strategic review”). So the question remains, is the offer high enough and what is a shareholder to do now?
In my previous post, the numbers suggested that SVU had the potential to be worth even more than the $4.00 bid. The range of value I placed in my based case for 2012 was $3.65 – $6.31 depending on which valuation metric you target. To get there, however, a number of things had to go right for the company. The consortium is only tendering for 30% of the shares, so investors now have a choice: take the money and run or ride out the turn-around story. Unfortunately, management did not go into great detail on Thursday’s conference call outlining earnings and the transaction. Shareholders are now left waiting for the tender documents to be filed to see some hard numbers. Nonetheless, there were a number of positives (and a few negatives) that could be taken from the information that was provided.
In the prior post, I noted a number of issues I thought investors were missing, most notably, valuation. We won’t know what multiple of EBITDA the consortium is paying until we see the tender. Therefore, I will focus on the issues that we do know.
Third quarter results, quite frankly, were not impressive. I wrote that the company had significant room to improve gross margins. The turn-around initiatives the company is working on with Alix Partners is taking time to bear fruit. Continued slowing sales means deleveraging which continued to hurt margins. While the adjusted earnings met my expectations (but less than consensus), sales dropped 5% (vs. my expectation of -3.4%) and gross margin contracted to 21.2% (better than my expectation of 20.7%).
SVU never recovered after the Albertson’s acquisition. It was crushed under a mountain of debt that it took on just as the economy was going into a tailspin. The announced acquisition gives the company a mulligan. Taking away the albatross that was $3.2 billion of debt and 877 stores. In fact, management even hinted at a dividend once the deal is completed.
I also highlighted the potential value of the company’s owned real estate. It is worth pointing out that the buyer consortium is made up of several well respected real-estate investment groups. Kimco Realty (KIM), a member of the buyer group, is North America’s largest owner and operator of neighborhood and community shopping centers. Their expertise in the sector should allow the consortium to maximize the value of the underlying real-estate that is being sold. SVU would not have been able to do this on its own; however, the question is – could they have negotiated a higher price?
Lastly, I wrote that SVU is an “execution” story. The announced transaction significantly adds to that part of the story. After the acquisition, Sam Duncan will become the CEO of SVU. Mr. Duncan is a well respected executive with significant retail experience. Many people had lost faith in the current CEO. Bringing in a new leader with an impressive background should breathe new life into the team, facilitating the execution plan. Moreover, given that the buyer consortium will own a significant piece of the shares, they will provide an ever watchful eye on the progress of new strategy – with a greater sense of urgency.
Investors have a big decision ahead. Sell now and leave 13% upside on the table; tender for $4.00 in hope that the deal closes; or hold on and wait for the story to play out. At the close of the transaction, SVU will consist of the Independent Business, leaving SVU with approximately $600 million in pension liabilities (down from $1.8 billion). The company will have a group of new owners (some may consider “smart money”) who have an incentive to make the company successful. While these are positives, nothing will be certain until we see the filing and the associated carve-out financials.
Good luck and happy investing.
Full disclosure: as previously noted, I own SVU and have not sold any shares since the previous post. I may sell my shares at any time without notice. I do not personally know any of the management team and have no business relationship with the company.