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Cerberus’ $3.3B Deal for 877 Grocery Stores Could Mean More Store Closings

Future of SuperValu, Albertsons Now in the Hands of Real Estate Guys
January 16, 2013
Cerberus Capital Management is putting grocery store chain Albertsons back together again.

A Cerberus-lead investment group has cut a deal to acquire 877 stores from SuperValu Inc., including its Albertsons, Acme, Jewel-Osco, Shaw’s and Star Market chains. The deal also includes related Osco and Sav-on in-store pharmacies and totals about $3.3 billion.

Cerberus currently owns and operates 192 Albertsons stores across the South and Southwest. The pending deal will unite the chain under one management again.

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The sale ends SuperValu’s current strategic review. ( See CoStar’s previous coverage: With Tesco, SuperValu Reviewing Strategic Options, Big Changes Coming to Grocery Ownership.). However, the deal will usher in a new round of strategic reviews for the now separated entities.

Already speculation is mounting that another major round of store closures could be started when the deal is closed.

Cerberus - no stranger to real estate investing - is joined in the buyout by a consortium that also includes real estate heavyweights Kimco Realty Corp., Klaff Realty LP, Lubert-Adler Partners and Schottenstein Real Estate Group.

What’s Next for Albertsons
"It is hard to know for sure what Cerberus will do, or how many stores that they will close, but we don’t think that it unrealistic that at least 200 of these stores may be shuttered in the near to mid-term," Garrick H. Brown, research director for Terranomics, wrote his clients this week. "Of course, this is just our forecast and it would remain to be seen which stores from which banner and where. But, the overwhelming majority of these stores would be traditional grocery stores within neighborhood centers that generally utilize between 50,000 and 70,000 square feet."

Assuming an average store size of 60,000 square feet per store and the closure of 200 locations nationally, Brown estimates about 12 million square feet of retail space could be returned to the market. "We think that it likely that this 12 million square feet of space (+/- 2 million square feet) will mostly impact neighborhood centers and our assumption is that the process of closing underperforming stores will begin quickly," said Brown, although he believes the timeframe for the closures could stretch to 18 months.

The question of where these closures will take place, of course, remains to be seen. But Brown said he has some ideas.

At last count (these numbers are from October), the Jewel/Osco brand had about 182 stores, the overwhelming majority (174) of which were in the Chicago area.

"We think that Jewel/Osco may be the jewel in the crown in terms of the strengths of the banners that Cerberus has bought,” Brown said. “Jewel/Osco had nearly a 33% share in its primary Chicagoland marketplace as of late last year. Still, we anticipate that there are still likely a few underperformers here that could go. But we anticipate the hit to Illinois landlords to be light.”

Shaw’s/Star Markets had about 169 stores in late 2012. About 103 of those were within the Boston marketplace, according to SuperValu.

"Their total market share in Boston was about 18%, making them a little more vulnerable to closures than Jewel/Osco in Chicago, but these are still very respectable numbers for the grocery world,” Brown said.

Acme has about 114 total markets, of which 98 are in the greater Philadelphia marketplace that amounted to a 17% market share as of late last year, Brown said.

The Albertson’s/Supervalu and Lucky banner accounted for about 444 stores as of late last year. Las Vegas is where the chain has its highest market share was in Las Vegas with more than 17%. San Diego is the strongest California market, with 43 stores producing nearly a 16% market share. The numbers drop off from there. In the highly competitive Los Angeles/Orange County market, the chain had just over 100 stores and about a 10% market share. In the Inland Empire, it breaks down to 34 locations with a 9% market share. In the Seattle area, 40 stores produce an 8% market share, Brown estimated.

While Brown believes store closures will be scattered across all of the brands that Cerberus has purchased, he believes the highest concentration will be within the Albertson’s/Supervalu and Lucky banners on the West Coast.

"If there is any good news here it is that the Pacific region’s coastal markets remain among the strongest of any in the country in terms of retail demand," said Brown. "The bad news is that this is not so much the case the more inland one goes, or the more rural the marketplace. And we suspect that inland markets will likely face more closures because economic recovery has been much slower to return to areas like California’s Inland Empire or Central Valley as it has to coastal metros like San Diego, Los Angeles and the San Francisco Bay Area."

What’s Ahead for SuperValu
In addition to the sale of the stores, a newly-formed acquisition entity owned by a Cerberus-led investor consortium (Symphony Investors) will conduct a tender offer for up to 30% of SuperValu’s outstanding common stock. Symphony Investors would then own a number of shares representing at least 19.9% of SuperValu’s outstanding common stock prior to the Issuance.

Following the sale, SuperValu will consist of its Independent Business, a leading food wholesaler which serves 1,950 stores across the country; Save-A-Lot, the largest hard discount grocery chain in the United States with approximately 1,300 stores; and SuperValu’s leading regional retail food banners: Cub, Farm Fresh, Shoppers, Shop ‘n Save and Hornbacher’s. As currently constituted, SuperValu is expected to generate annual revenues in excess of $17 billion.

SuperValu’s Save-A-Lot chain will remain the nation’s largest discount grocery by store count with more than 1,300 stores in 35 states in the Caribbean. Save-A-Lot will continue to represent a growth opportunity and higher discount grocery for SuperValu, company executives said.

"Following the sale, SuperValu will have three strong, market-leading business units with more consistent cash flows and improved EBITDA growth potential,” said outgoing SuperValu president, CEO and chairman, Wayne Sales, who will be replaced with grocery retail veteran Sam Duncan, as president and CEO.

Duncan said he sees great potential to build on each of the three core businesses. "The Independent Business is one of the largest food wholesalers in the United States, serving many of the country’s most successful independent operators. Save-A-Lot is the nation’s largest hard discount grocer, providing the Company an important presence in this fast growing segment of food retail. Additionally, the company’s streamlined retail operation consists of five strong regional banners," he said.

Fitch Ratings said the pared down SuperValu “reflects a moderately improved business mix, as the sale will largely reduce SuperValu’s exposure to the competitive traditional supermarket sector, offset by slightly higher leverage in the low 5.0x range, based on Fitch's estimates. The ratings continue to reflect operating deterioration within each of SuperValu's remaining operating segments, and the refinancing risk related to a sizable $1bn senior note maturity in May 2016.

“Each of SuperValu’s remaining business is currently under considerable pressure, experiencing sales declines and margin contraction,” the Fitch analyst said. “The retail food segment's (traditional supermarkets including assets for sales) ID sales declined by 4.5% the quarter ended Dec. 1, 2012, and has experienced negative ID sales for the past four years. While the remaining banners may be better positioned than the businesses being exited, Fitch still expects future comparable store sales declines in the low single-digit range.”

Fitch said it believes it will be difficult for SuperValu to turn around these businesses, although they have held up somewhat better than the businesses that are being spun off.

Distribution Network Still Up in the Air
The announced sale did not include any mention of how SuperValu would split up its 20.6 million-square-foot distribution network. The company said there was a chance that Cerberus and SuperValu could share distribution as well as purchasing efforts.

In addition, SuperValu said that “our 16 dedicated distribution centers have considerable capacity for growth which will further benefit the [Save-A-Lot] segment in the future. Save-A-Lot provides the company an important presence in this fast growing segment of food retail. This business will represent approximately 25% of our go forward revenues.”

As of last fall, SuperValu reported operating 31 distribution centers. So it looks like Cerberus could be getting a portion of the distribution centers in its deal.

Keep up weekly on national news, trends and property leads with the Watch List Newsletter, a weekly pdf that includes other news and leads not found on the CoStar Group web news pages. Sign up for the Watch List E-Mail Alert. A new issue is published late each Wednesday.

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