Cerberus Seen as a ‘Stopping Point’ for Chains

Cerberus Seen as a ‘Stopping Point’ for Chains

“Cerberus may merely be a stopping point for some of the Supervalu assets before they find a permanent home with operational buyers.” — John Heinbockel, managing director, Guggenheim Securities

NEW YORK — The investor group led by Cerberus Capital Management here that is buying five retail chains from Supervalu [2] is likely to operate some and sell off others, though it remained unclear last week which could be sold, who the buyers might be or when those deals might transpire.

“Cerberus is a money-generating company that definitely would flip whatever it can flip as quickly as it can flip it to get some of its cash back,” one industry observer told SN last week.

The chains Cerberus is acquiring are Shaw’s and Star Market in New England; Acme Markets in Philadelphia; Jewel in Chicago; and Albertsons in Southern California — a total of 877 stores, including the Sav-on and Osco pharmacies within the stores, accounting for combined sales of approximately $17.5 billion — plus the distribution centers serving those stores.

A source at Boise, Idaho-based Albertsons LLC [3], which will oversee the acquired chains, told SN that the company “has always operated on the same philosophy since day one — we plan to run as many profitable stores as possible.

“In 2006 we brought in veterans [to run the Albertsons stores it operated] and brought the company operations back to basics, putting the decision-making close to the customers. It’s been successful for us in the past, and we see no reason to change that model.”

The source implied the company will operate the acquired stores for at least the short term, saying, “We’re excited to have the opportunity to drive growth in the market areas [served by those chains].”

Neil Stern, senior partner at McMillanDoolittle, Chicago, said that as a group, the retail chains “all have fairly strong positions in their markets from a revenue standpoint, so they can be turned around.”

According to Patrick Roquas, an analyst with Netherlands-based Rabo Securities, “Cerberus has a track record of selling and closing stores as well as improving the results of the remaining parts.”

Among potential buyers, the name that comes up most frequently is Kroger Co. [4], which does not operate in the Northeast or Chicago. “But Ahold [5] and Delhaize [6] are active players, along with regional chains, and any of them could be potential buyers as well,” one observer said.

John Heinbockel, managing director at Guggenheim Securities, New York, said he believes most of the banners will ultimately be sold to strategic buyers. “Cerberus may merely be a stopping point for some of the Supervalu assets before they find a permanent home with operational buyers,” he explained.

“That has been Cerberus’ historical approach, with two-thirds of the stores it bought in 2006 being quickly recycled and a clear willingness to sell any store at any time if the price is right.

“So consolidation is not done, and we may yet see some of these assets fall into the hands of Kroger and Safeway.”

Others echoed similar opinions. “The acquisition by Cerberus is a first move and likely not its last one,” Stern said. “It didn’t purchase these chains to run them, so we’re likely to hear a lot over the next 12 to 18 months about what it will do — either small moves like selling real estate assets or larger ones like selling entire banners.

Read more: Supervalu Gets 'Vote of Confidence' From Cerberus [7]

“If you look at what Cerberus has done in the past, it has sold some assets immediately — like the Albertsons stores in Northern California to Save Mart [8] in 2006 and the stores in Florida to Publix [9] — and kept others over time and continued to manage them, as it’s done with the Albertsons LLC stores.”

One indication Cerberus may plan to hold onto the acquired assets for a while was evidenced by reports last week that Supervalu was in the process of disbanding its centralized marketing and merchandising operation here — which has been overseeing the retail chains — with personnel moving from Minneapolis to each of the individual chain headquarters to work with Cerberus on localizing those chains’ operations.

“That means Cerberus won’t have to invest a lot in terms of new managements,” one observer pointed out. “It will enable the investors to make do with the existing managements, abetted by personnel from the former centralized operation.”

Another observer said that process “certainly would make sense. Clearly the synergies promised by centralizing those operations did not materialize, but helping Cerberus localize the businesses individually makes sense.”

A Supervalu spokesman told SN the company had not announced any decisions about its centralized marketing and merchandising operations.

Jewel, Albertsons Analyzed

Industry speculation regarding the retail chains Cerberus is acquiring includes the following:

Jewel, Itasca, Ill., with 178 stores in the Chicago area and a volume estimated at $7 billion, is considered the strongest of the assets. Observers told SN they expect Jewel to remain part of Cerberus for three to five years, though it’s possible Kroger Co. or Ahold could make an offer to buy the chain sooner.

Acquiring Jewel was “the primary reason for Cerberus to do the transaction with Supervalu because it is still a viable operating entity, with a lot of equity,” said Jim Hertel, managing partner at Willard Bishop, Barrington, Ill. “So Jewel will probably end up as an ongoing operation for Cerberus for a period of time, and Cerberus will be very careful to make the right deal if it sells, or else the deal with Supervalu won’t have made much sense.”

If he were a betting man, Hertel said, he’d bet that Kroger will be the ultimate buyer of Jewel, though he said he doesn’t count out Ahold.

If Jewel does come up for sale, Roquas told SN, “we do not believe Ahold would be very tempted to expand to the Chicago market as it would be a big restructuring deal.”

Stern agreed with Hertel that Jewel is “the most valuable asset in the group, and I suspect that’s the one Cerberus will keep and invest in for at least three to five years, which is a reasonable timeframe to get the value out of the acquisition.

“It’s possible a sale to Kroger has been pre-arranged, but I doubt that will happen.”

Albertsons, Fullerton, Calif., with 421 stores in Southern California, is expected to remain as a Cerberus-owned operating entity and be reunited with the Albertsons stores Cerberus acquired in 2006.

Hertel said he expects Cerberus to “wind the clock back” and combine the Albertsons stores it is buying from Supervalu with those it acquired in 2006, when Supervalu acquired the original Albertsons chain, kept the so-called best stores for itself and spun off the rest to Cerberus.

“Cerberus already operates a base of Albertsons stores, and Bob Miller [chairman of Albertsons LLC] knows that company, so it’s a keeper,” Hertel said.

Heinbockel said pricing at the Albertsons “remains well above its peers, [and] we question Cerberus’ ability to really turn them around and exert pressure on its competitors.”

One West Coast observer said Cerberus is likely to close more Albertsons stores than the 16 non-productive stores Supervalu closed at the end of 2012. “The new owners will have no emotional ties to the stores, and they will draw a line in the sand and say they will close any stores that cannot cross the line,” he noted.

Read more: Supervalu Gets 'Vote of Confidence' From Cerberus [7]

The observer said sales at the Southern California Albertsons stores were dropping between 14% and 16% throughout last year — though with the store closings, the decline has been slowed to about 12%.

It’s likely Unified Grocers, Los Angeles-based member-owned cooperative, will look at the Albertsons stores for opportunities to finance purchases for some members, particularly some of its Hispanic members who are looking to expand, he added.

Shaw's/Star Market, Acme Analyzed

• The two New England chains — Shaw’s, West Bridgewater, Mass., with 152 stores, and Star Market, with 14 — could remain with Cerberus for up to 18 months before they are spun off, observers told SN, then be sold as a whole to a strategic player, possibly Ahold, or sold off piecemeal to competitors like Stop & Shop, Demoulas Market Basket [10] and other competitors.

“The Shaw’s-Star stores have been on the market for five or six years without any takers,” Hertel said. “Maybe the asking price was too high or maybe buyers didn’t want to be the third-place operator in the market.

“Those stores will require more investment than some grocery operators will want to make, so it’s possible Stop & Shop or Market Basket could buy the best locations and leave the rest for non-grocery operators.”

Stern said another possibility is for the stores to be sold in a leveraged buyout to managements hooking up with a private equity partner.

Acme Markets, Malvern, Pa., with 112 stores, controls just under 20% of the Philadelphia market, observers noted. They said Ahold-owned Giant Foods, Carlisle, Pa., or ShopRite operators could pick off some of its best locations, with the majority of the remaining stores sold over time to non-grocery operators.

Hertel said Cerberus might sell the Acme stores in groups of twos and threes to food operators “looking for specific locations and then let the rest go as part of a real estate play for other businesses. It’s likely to be a combination of both.”

According to Stern, “Ahold is very strong in the region and is the likeliest potential buyer, though there’s a lot of overlap between Giant and Acme locations.

Read more: Supervalu Sells Off Big Chains [11]

Roquas told SN the sale of the retail chains to Cerberus is a positive for Ahold “because it means the relatively easy competition from [these] chains is unlikely to change for the next two to three years. Ahold’s banners — Stop & Shop in New England and Giant Foods in Pennsylvania — might benefit from the rationalization that will take place at Shaw’s/Star and Acme.”

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