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Group to Buy Albertsons for $9.8 Billion
January 23, 2006 · Wire Services
An investor group led by Supervalu Inc. agreed on Monday to buy struggling grocery chain Albertsons Inc. for $9.8 billion in cash and stock, ending an intense auction that only weeks before had fallen apart. Albertson's owns the Jewel, Acme and Shaw's grocery stores and Sav-on Drugs and Osco Drug stores.
The deal is a significant leap for Supervalu, which will shoulder most of the transaction and become the second-largest supermarket company in the United States.
The agreement reached with both retailers and financial buyers brings to a close a closely watched and complicated auction that collapsed at the last minute in late December, in part over anti-trust concerns.
Under terms of the current agreement, Minneapolis-based Supervalu said it would buy 1,124 stores from Albertsons for an estimated $12.4 billion in cash and stock. The amount includes $6.1 billion of Albertsons debt.
Woonsocket, R.I. drugstore chain CVS Corp. for its part, will buy 700 stand-alone Sav-On and Osco pharmacies and a distribution center from Albertsons for $2.93 billion.
The other purchasers, led by Cerberus Capital Management L.P., include real estate investment trust Kimco Realty Corp., Schottenstein Stores Corp., Lubert-Adler Partners and Klaff Realty. The Cerberus-led group will acquire 655 stores in Dallas/Ft Worth, Northern California, Florida, the Rocky Mountains and the Southwest. The group plans to operate those stores under the Albertson's name.
The deal values Albertsons at $26.29 a share, a 9 percent premium based on Friday's closing stock price of $24.11. The total transaction value is estimated at $17.4 billion, including debt. Albertsons shareholders will get $20.35 in cash, plus 0.182 shares of Supervalu stock, which closed on Friday at $31.85. The value of the Supervalu stock, based on a $32.65 average stock price using the 20 day trading average of the closing price of Supervalu stock through Jan. 20, is $5.94.
Shares of Albertsons, based in Boise, Idaho, rose 3.2 percent today in pre-market trade to $24.89 on Inet.
Albertsons put itself up for sale last September, having struggled with rising costs and increased competition from discounters such as Wal-Mart Stores Inc.
Its shares fell from around $60 in 1999 to near $20 in the spring of 2003, and stayed in that lower range until takeover speculation fueled a gain.
"We strongly believe this new opportunity will result in a bright future for all stakeholders," Albertsons Chairman and Chief Executive Larry Johnston said in a statement.
SUPER BUYOUT
To alleviate any anti-trust risk associated with the deal, Supervalu said it would sell 26 Cub Foods stores in the Chicago area to a Cerberus-led group.
Supervalu's annual revenues are expected to more than double to $44 billion, from about $20 billion now.
Standard & Poor's analyst Mary Lou Burde said she expects to lower Supervalu's credit rating well into junk status if the deal is completed.
The expected four-notch downgrade to a "BB-" rating "reflects the substantial execution challenges of acquiring a company larger than itself, managing a much larger and more complex group of retail operations, maintaining corporate overhead functions for the other two buyers for a period of time, and operating with greatly increased financial leverage," she wrote.
Still, the deal will catapult Supervalu to the No. 2 spot behind Kroger Co. in the U.S. supermarket sector, and expand the company's presence in key urban markets including Chicago and Southern California.
But it also puts the retailer head-to-head with Wal-Mart Stores Inc., which is expanding rapidly in California and preparing to open its first Chicago store.
Through massive supercenters that include a full line of groceries as well as discount store merchandise, Wal-Mart already sells more food than Kroger, and its low-cost strategy has put intense pressure on traditional grocers.
Supervalu, which has more than 1,500 stores catering primarily to the low-price market, has been looking for ways to reach a broader consumer base. It opened its first organic food store earlier this month.
Acquiring Albertsons stores would allow the company to grow quickly in key urban markets, such as Chicago and Philadelphia.
Goldman Sachs & Co. and The Blackstone Group L.P., served as financial advisers and Jones Day served as legal adviser to Albertsons. Sullivan & Cromwell, LLP served as advisers to Albertsons' board of directors.