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Activist investor targets Supervalu

Blackwells Capital seeks seats on Supervalu board, unlocking real estate value, and possible “consolidation opportunity” with a peers

Blackwells Capital LLC, an alternative investment management company holding a 4.35% stake in Supervalu Inc., today sent a letter to the wholesaler’s board of directors announcing its intention to seek seats on the company’s board so it can institute “a plan to unlock significant value.”

That could include selling $1.8 billion worth of company-owned real estate, examining weak retail operations and possibly pursuing “consolidation opportunity” with a peer, such as SpartanNash, United Natural Foods, C&S or a vertical strategic company. Such a move, Blackwells Capital suggests, “could create enormous competitive advantage, synergies and up to 77% buyer accretion.”

Blackwells said it had met with Supervalu’s non-executive chairman, Donald Chappel, and president and CEO Mark Gross on Jan. 17. At the meeting, Jason Aintabi, managing partner at New York-based Blackwells, communicated Blackwells’ frustration with Supervalu’s performance and the need for “real change” in the company’s approach to operations, strategy and governance.

“In the spirit of constructive, open collaboration, Blackwells has made good faith efforts to engage with the Company,” Aintabi said in a statement. “The Board’s passivity and the Company’s persistent underperformance have left us with no alternative but to run an election contest and give shareholders an opportunity to vote for enhanced Board leadership and support a mandate to explore all alternatives to unlock value.”

In its letter to Supervalu’s board, Aintabi wrote, “In our view, the lackadaisical, misguided and value-destructive complacency of the Company’s leadership necessitated our request for representation on the Board of Directors for three Blackwells nominees, to explore concrete measures of realizing shareholder value. The Company summarily rejected our requests.”

Supervalu’s board consists of nine members who are elected annually at the company’s annual shareholders meeting, historically held in July.

Blackwells noted that of the nine, only one has any direct retail operational experience, and that directors Phil Francis and Irwin Cohen have not had any food sector experience for the past 15 years. It also notes that current chairman Chappel’s background is in waste management, while prior chairmen Wayne Sales and Gerry Torch came from Canadian Tire and “the now bankrupt” Toys “R” Us, respectively.

According to Blackwells, Supervalu’s performance has been “disastrous” with “only 19 companies currently in the S&P 500 and Russell 2000 that have performed worse than Supervalu over the last 10 years.”

In response, this morning Supervalu issued the following statement:

“The Supervalu Board and management team are confident that their ongoing efforts to transform the Company are driving growth and enhancing Supervalu’s unique competitive position. The Board and management team are committed to delivering value for all stockholders, have been and continue to proactively develop and pursue all opportunities to create stockholder value, and remain open-minded and receptive to ideas that enhance stockholder value.”

The statement noted that over the past few months Supervalu’s board and management team have met with representatives of Blackwells on several occasions. “Discussions encompassed a variety of topics pertaining to the business and the Company’s ongoing initiatives as well as our Board refreshment efforts — initiatives that have been underway substantially since before Blackwells became a stockholder.

“Despite our efforts to reach a constructive path forward and to discuss overlapping objectives, Blackwells has decided to threaten an unnecessary and counterproductive proxy contest,” the statement continued.

Supervalu noted that it has been rapidly transforming its business to become a wholesaler, with sales from its wholesale operations accounting for 75% of total sales, up from 44% two years ago. It noted that it had sold its Save-A-Lot limited assortment store division for $1.3 billion, significantly reducing its debt.

According to Blackwells Capital, Supervalu’s retail operations “are valued by the market negatively, based on their drain on cash flow and lack of competitive advantage which is masking a strong wholesale turnaround.”

Supervalu still continues to operate several conventional chains across the country, including Cub Foods, Farm Fresh, Hornbacher’s, Shop ‘N Save and Shoppers.

“We continue to invest in well positioned retail assets, which remain important customers of our growing wholesale business,” Supervalu said in its statement. “Retail assets that are now well positioned for long-term success are being operated to maximize cash flow, including limited capital investment. Capital investment into our retail stores will continue to be targeted, prudent and focused in areas designed to generate incremental sales. We continue to pursue store sales and closures for underperforming locations while exploring options for specific banners.”

Blackwells Capital believes if it is green-lighted by shareholders to upend Supervalu’s board and implement its changes, Supervalu’s share price can reach approximately $45.05 per share, or an increase of 215%. In mid-day trading on Feb. 7, Supervalu stock was trading at $15.28, up 67 cents.

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