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Supervalu expands on West Coast with Unified acquisition

Merger builds scale, expands opportunities for both companies

Supervalu will expand its footprint dramatically along the West Coast with the planned $375 million acquisition of Unified Grocers, announced late Monday.

The two wholesalers had combined 2016 sales of about $16 billion and distribute to more than 3,000 retail locations. Commerce, Calif.-based Unified, a member-owned distributor, operates from six distribution centers serving independent retailers and regional chains primarily in California and the Pacific Northwest. It had $3.76 billion in sales in its most recent fiscal year, which ended last October, but has reported a loss in each the last four years.

Supervalu, based in Minneapolis, operates 18 distribution facilities across the country and generated sales of about $9.57 billion through the first three quarters of its most recent fiscal year, about 62% of which came from wholesale distribution. The company is scheduled to report its full-year financial results on April 25.

The acquisition, which is scheduled to close by mid to late summer and is subject to Unified shareholder approval, is expected to yield a run rate of at least $60 million in annualized synergies, excluding certain costs related to the transaction, Mark Gross, president and CEO, Supervalu, said in a conference call on Tuesday. 

Areas of opportunity include administrative overhead and operational efficiencies, he said. 

In the Pacific Northwest, for example, the two companies operate a total of three distribution centers, all of which are underutilized, Gross explained.

“The larger combined customer footprint will allow us to explore different alternatives for the DC network in an effort to lower our overall operating costs and enhance our customers' competitiveness,” he said.

Unified operates about 4.5 million square feet of warehouse space, according to its most recent 10-K filing with the Securities and Exchange Commission. Its facilities include:

  • A dry grocery warehouse in Commerce, Calif.;
  • A frozen/refrigerated warehouse in Santa Fe Springs, Calif.;
  • A bakery manufacturing facility in Los Angeles;
  • A dry grocery and refrigerated/frozen warehouse in Stockton, Calif.;
  • A dry grocery and refrigerated/frozen warehouse in Milwaukie, Ore.; and
  • A dry grocery and refrigerated/frozen warehouse in Seattle.

In addition, Unified subleases a facility in Stockton from Raley’s Supermarkets, from which it distributes general merchandise and health and beauty care items to Raley’s and other customers.

In response to an analyst’s question, Gross described Unified’s warehouse assets overall as “very strong,” although he said there were opportunities for process improvements, citing in particular the Los Angeles market. 

“That's a fast-growing market with a lot of SKUs, and we see an ability to reorganize the way some of that product is flowing through,” he said.

The combined purchasing power of the companies should also help improve margins for both the wholesaler and its customers, Gross said.

Gross said Supervalu also envisions opportunities to expand its offerings of retailer back-end services, which have been a key area of focus at the company, to Unified’s customer base.

Unified has posted a loss in each of the last four years, including a loss of $7.6 million in the fiscal year that ended last October. The company said it has seen its membership decline annually since 2008 as the independents it has served have closed, consolidated with other retailers, defected to other wholesalers or chosen to operate as non-members. 

Unified had 345 members at the end of fiscal 2016, down from 520 at the end of fiscal 2008.

“We believe this transaction will benefit the members and customers of Unified Grocers as they look for new and innovative ways to serve the communities in which they operate,” said Unified Grocers’ president and CEO, Bob Ling, in a statement.

Gross said providing a broad range of services to a diverse network of operators is a challenge for wholesale distributors that lack sufficient scale.

“The infrastructure necessary to support a wide variety of different formats is very expensive,” he said. “It’s a tough world out there for smaller distributors who want to give a broad-based level of services and different types of product support. The world of having a vanilla-set warehouses has long disappeared. But item variety is expensive, and IT infrastructure and sophisticated leadership all come with cost. And that's what drives this type of deal and why I'm so excited that this creates this platform for the innovative, progressive, independent to compete in today's market.”

Market Centre opportunities

Gross said Unified’s specialty and ethnic distribution arm, called Market Centre, which operates out of the company’s Stockton warehouse, would provide opportunities for Supervalu to extend those fast-growing product categories to its own customers.

“Unified’s retailers operate some of the most exciting and responsive Hispanic and other ethnic formats, in addition to specialty, gourmet, price-impact and traditional stores,” said Gross. “Clearly the knowledge and experience Unified has developed in serving these formats can and will make us a better wholesaler.”

Supervalu said it would purchase 100% of the stock owned by Unified’s members for about $114 million in cash and would assume and pay off at closing Unified’s existing debt of about $261 million. The company will use $175 million in surplus cash that Supervalu obtained from the sale of its Save-A-Lot banner last year and cash from operations to finance the deal, with the balance to be financed through borrowing from Supervalu’s existing credit facility.

Supervalu also said it expects to incur transition and integration costs of up to $60 million during the first two years following the completion of the transaction.

“The transaction should help Supervalu gain scale and drive efficiencies, which makes a lot of sense given the very challenging environment facing grocery wholesalers today,” said Shane Higgins, an analyst with Deutsche Bank, in a research note. “We believe the acquisition is important for Supervalu to drive scale for its longer-term strategic positioning, as consolidation in the space should continue.” 

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