It looks like 2013 could be a big year for mergers and acquisitions among strategic buyers and private investors, according to industry observers — due to an easing of credit markets and to the floodgates that will open once Supervalu completes the sale of the former Albertsons banners to a private equity consortium.
“That Supervalu deal is what we were all waiting for,” Neil Stern, senior partner at McMillanDoolittle, Chicago, told SN. “Once that sale has been digested, it opens up all kind of possibilities for re-shifting the competitive landscape.”
In addition to the pending sale of five chains by Minneapolis-based Supervalu to a group that includes Albertsons LLC, Cerberus Capital Markets and three real estate companies, there is also potential M&A activity on the horizon involving Harris Teeter, Safeway, A&P and Delhaize America, according to some analysts and industry observers.
Some strategic buyers could have a heightened interest in mergers or acquisitions this year, according to Jon Hauptman, a partner in Willard Bishop Consulting, Barrington, Ill.
“All large supermarket chains are under pressure to grow, and simply expanding their base through new-store openings in existing markets is difficult because most markets are already saturated, especially given the wide range of retailers offering groceries today.
“Consequently, many companies are finding growth through mergers and acquisitions more appealing.”
In addition, M&A activity could involve alternative methods of doing business as supermarket operators seek ways to revitalize how they interact with shoppers, both in-store and online, Hauptman pointed out.
“Some companies will be looking to acquire advanced personalized capabilities via M&A, while others will be looking to leverage their investments by enlarging their store and shopper base. And for companies who are not willing to go down that road, there is interest in selling to those who are.”
David Schoeder, partner in The Food Partners, Washington, D.C., said retailers now have easier access to credit, “and the low cost of financing should continue for the near term.”
The industry’s underlying fundamentals are improving, with the U.S. economy slowly on the mend, he added. “There is light at the end of the tunnel, and it is not an oncoming train — it is more a recognition of how to strategize for success in troubled times.”
However, with sales flat, increased promotional spending having little impact, margins under pressure and health care costs rising, “retailers are facing the reality that the current stagnant environment is the new normal,” Schoeder said, “and maintaining or increasing market penetration has become secondary to making money.”
That has led to more investments in remodeling as a defensive strategy — “to be the last man standing,” he said.
Still, Schoeder calculated that there were about 45 mergers and acquisitions in the industry last year — slightly more than the 43 in 2011, he said, although the number of stores that changed hands last year was only 573 — an average of 13 stores per transaction — compared with 907 stores sold in 2011, for an average of 21 units per sale.
Most deals involved what Schoeder calls “trimming” — selling or closing underperforming locations, he explained.
“Years ago a company would never give up any store location, but today more operators recognize the economic realities and are more prone to just give up on certain locations,” he noted — as Delhaize America did when it closed 33 Sweetbay Markets in Florida last month or when it closed 126 Food Lion locations a year ago.
Bob Gorland, vice president in the Harrisburg, Pa., office of Matthew P. Casey & Associates, Clark, N.J., said strategic buyers are being very cautious right now for several reasons, including concerns about the costs of new health care programs.
“Of course, there will always be small acquisitions here and there involving handfuls of stores, but with comparable-store sales for most companies around zero, and with break-evens going up, union contracts to deal with, plus increasing competition, companies are scrutinizing potential deals a lot more carefully and opting not to move forward on them.”
Al Ferrera, a partner at BDO USA, Chicago, and its national director of the retail and consumer products practice, said easier access to financing could spur more M&A activity.
“There is a lot of money available to venture capitalists,” he told SN. “Given the kind of cash flow supermarkets generate, there is considerable interest among private equity companies to look for investment opportunities.”
SN Data Points: Retail CFOs Expect More Merger Activity
A survey conducted by BDO USA among 100 chief financial officers indicated 94% expect M&A activity to increase or at least to remain steady this year.
Brian Todd, president and chief executive officer of The Food Institute, Upper Saddle River, N.J., also said there seems to be an ongoing interest from “the private equity crowd” about investing in the supermarket industry.
A Food Institute report indicated M&A activity is likely to follow the same upward trend this year as it did in 2012.
Don MacLellan, senior managing partner for Faris Lee Investments, Irvine, Calif., said institutional investors are broadening the way they look at grocery operators, “recognizing that what was once determined a non-traditional grocery may not be such a bad thing,” pointing to companies like Sprouts Farmers Market, “[which] is now considered a viable, strong grocery operator that has effectively captured its own customer niche,” and dollar stores, “[which] are expanding their grocery offerings and emerging as a tenant recognized as a legitimate junior anchor of a neighborhood center.”
The Supervalu properties — whose sale is scheduled to close in about 10 days — include 877 stores operating under a variety of banners, including Albertsons, Acme, Jewel Osco, Shaw’s and Star Markets.
Schoeder of Food Partners said the Cerberus-led group is likely to close underperforming stores; extract the value of the real estate from those stores; focus on fixing specific banners; and liquidate those that have no brand value.
The consortium could do a series of sale-leasebacks on many of the properties it is acquiring, Schoeder pointed out, “so it can operate and improve the store base while getting value from the real estate to pay down acquisition debt.”
Rich Mitchell, a U.S.-based senior retail analyst for Planet Retail, London, offered a similar view. “It remains to be seen if the new owners will retain all the outlets they are acquiring. What’s more likely, given the stores’ valuable real estate as a key factor in the purchase, is that underperforming outlets could likely be sold or closed and the buildings leased.
“At least that was the formula followed by the Cerberus-led consortium in 2006 when it acquired 665 underperforming stores from Albertsons Inc. — it closed some, sold others and increased profits at many that it retained.”
According to Stern of McMillanDoolittle, Cerberus is likely to operate most of the stores for a while to get them in better shape for a sale in future years. “There’s probably no timetable to sell anything,” he explained, “but I’m sure it will look for short-term opportunities, and selling off one of the chains would certainly be an option.”
He said he expects the Albertsons-Cerberus group to hold onto Jewel “because there’s significant value to be had turning it around to sell someday at a higher price than it could get now.”
A spokeswoman for Albertsons LLC, which is partnered with Cerberus in the pending deal with Supervalu, said the company “has always operated on the same philosophy since day one — we plan to run as many profitable stores as possible.”
She implied the company will operate the stores being acquired from Supervalu 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].”
If the new owners do decide to put one chain up for sale, that property could be the Shaw’s/Star Markets group in New England, Stern noted. “It’s pure speculation at this point, but it could be first because it’s been for sale for years under Supervalu’s ownership, and it’s an asset that has struggled in recent years.”
Read more: Cerberus Seen as 'Stopping Point' for Chains
An industry observer also said the Shaw’s/Star Markets group is the division where Cerberus is most likely to sell the most stores to other operators in the short term.
“Cerberus could focus on the core stores in the Boston market, with companies like Demoulas likely to be interested in the stores in Rhode Island and chains like Price Chopper and Big Y very anxious to take over the non-union operations in Vermont and New Hampshire.”
According to Stern, the Albertsons stores in Southern California will require more strategic discussions “because Southern California is such a complex market, with a lot of competitors. And the likely availability of Tesco’s Fresh & Easy assets makes for an intriguing opportunity to remake that market.”
While Kroger-owned Ralphs and Safeway-owned Vons have large shares in the overall marketplace, there are local pockets in which each would probably be allowed to buy additional stores, Stern said.
The Acme Markets in the Philadelphia area are “problematic,” the observer told SN, predicting that Cerberus could “operate Acme as a much smaller division than it is now.”
Matthews, N.C.-based Harris Teeter, which said last month it hired a financial adviser, JP Morgan Chase & Co., to evaluate strategic alternatives after it was contacted by two unnamed private investment firms with potential interest in acquiring it.
“With Publix set to come into the Charlotte market in 2014, the competitive landscape is not as good as it was,” Karen Short, an analyst with BMO Capital, New York, pointed out.
“This may be a tough time to try to sell, but Harris Teeter management is focused on creating shareholder value, and after being approached by the two private equity firms, it may have concluded that now is probably a good time to sell.”
Harris Teeter — with 208 stores in North Carolina, South Carolina, Virginia, Georgia, Tennessee, Florida, Maryland, Delaware and the District of Columbia — reported sales of $4.5 billion for the fiscal year that ended Oct. 2.
The chain is strongest in three North Carolina markets — Charlotte, where it competes with Wal-Mart Stores, Food Lion and Bi-Lo; Raleigh-Durham, where it goes head-to-head with Food Lion, Wal-Mart and Kroger; and Greensboro, where the competition is Food Lion, Wal-Mart and Lowe’s Foods — and in Washington, D.C., where it competes with Ahold’s Giant Food, Safeway and Wal-Mart.
If the chain is sold, industry observers said it could go to a strategic buyer — possibly Publix, Kroger or, most likely, Ahold.
Short said she doubts a private equity buyer would be interested in the chain “because Harris Teeter leases its store base and most private equity transactions involve owned real estate, and because Harris Teeter is not broken, there is no low-hanging fruit.”
Harris Teeter could sell for $50 per share, for a total of approximately $2.5 billion, despite an expected decline in operating income this year because of the aggressive competitive position the chain took in its first quarter.
Lakeland, Fla.-based Publix Super Markets has sufficient capacity on its balance sheet to finance a transaction, Short pointed out, although she also noted that Publix rarely makes acquisitions.
Still, Gorland of Matthew P. Casey & Associates said Harris Teeter would be “a natural fit” for Publix, “because the two chains are so compatible in the way they do business. And though Publix does not usually acquire other chains, it stands to benefit the most strategically if it were to acquire Harris Teeter.”
SN Infographic: Harris Teeter by the Numbers
Although Kroger could finance the acquisition of Harris Teeter, Short said she believes it might prefer to hold onto its money and wait to bid on Jewel Osco in Chicago if it goes up for sale. “Kroger would probably prefer to maintain financial flexibility in the near term until plans for Jewel are finalized,” Short pointed out.
Ahold has no presence in the Carolinas, though it does compete with Harris Teeter in Washington, D.C., and Virginia. Like Publix and Kroger, it has “more than adequate” capacity on its balance sheet to acquire Harris Teeter, Short said, and it appears to be the most likely bidder, she added, given its acquisitive history; its mix of union and non-union stores; and its 2010 acquisition of Ukrop’s in Richmond, Va., “which would indicate Ahold has some interest in moving into more Southern states.”
Patrick Roquas, an analyst with Amsterdam-based Rabobank, said he regards Ahold as the most likely buyer for Harris Teeter. “It would entail a midsized deal in adjacent markets, and Ahold has cash available, though synergies seem limited,” he noted.
However, price would be a major concern, he added. “It seems unlikely that Ahold management will risk its track record by paying too steep a price,” he said.
Safeway, Pleasanton, Calif., could put its Canadian assets on the market at some point over the next 12 to 18 months, some observers said.
When Steve Burd, chairman and chief executive officer, was asked by analysts last month about the possible disposition of Safeway’s Canada assets, he replied, “We will do the sensible thing, and what’s sensible for us is to downstream the value of every asset we have.
“Canada is a very good business for us, and we’re all about creating shareholder value, which is why we plan to bring Just for U [its digital marketing platform] to Canada.”
According to Meredith Adler, managing director for Barclays Capital, New York, “Management seemed to say clearly it can create more shareholder value by rolling the Just for U program out to Canada in the second half of 2013 than by selling it.”
Safeway’s Canadian assets encompass 222 stores, mostly in Western Canada, generating sales of approximately $6.6 billion (U.S.).
The prospect for Safeway to sell the Canadian business was raised in January after Loblaw Cos., Toronto, announced plans to put its stores in a real estate investment trust to gain greater financial flexibility, which stimulated immediate speculation it was considering an attempt to purchase the Safeway business.
Speculation was piqued again early last month when Montreal-based Metro announced the sale of half its stake in Alimentation Couche-Tard for $500 million — money that could potentially be used to pursue an acquisition, observers said.
A few days later West Face Capital, a Toronto-based investment firm, purchased an undisclosed stake in Safeway, and speculation over what Safeway might do escalated further.
Perry Caicco, managing director for CIBC World Markets, Toronto, told SN he expects Safeway to do an asset sale within 18 months.
A&P, Montvale, N.J., announced in January it is looking for a buyer for the Food Emporium stores — 16 locations in Manhattan, N.Y., and one in New Canaan, Conn.
A&P is reportedly determined to sell the stores — something it was unable to do when it put them up for sale in 2009.
Interest in the stores has reportedly come from Kings Food Markets, Parsippany, N.J., which was said to be interested in operating five of the locations and finding other lessees for the remaining locations.
Another potential buyer could be Fairway Markets, backed by Sterling Investment Partners, Westport, Conn.
Looking beyond the sale of Food Emporium, Stern raised the question of what Yucaipa Cos., A&P’s majority investor, might want to do with the entire chain. “It could be looking at opportunities to make acquisitions in the Northeast, or it could be thinking about selling what it has,” he said.
Gorland said he doesn’t see A&P as an acquirer. “I don’t see it buying anything at this time,” he noted. “It’s still in the mode of fine-tuning what it has, and it will probably close and sell a few more units.”
Another industry observer said A&P could consider acquiring the Acme stores in Philadelphia to strengthen its store base. “There’s already some overlap between unions, and A&P could be more effective if it could rationalize the two chains.”
Salisbury, N.C.-based Delhaize, closed 33 underperforming Sweetbay Supermarkets last month along Florida’s Gulf Coast — a move some observers said could lead to the sale of the entire 105-unit Florida division.
“Delhaize is going through some troubled times and gradually dealing with reality,” one observer told SN.
Pierre Bouchut, chief financial officer of Delhaize Group, the U.S. company’s Brussels-based parent, said the Sweetbay closures were “a first step to stop the bleeding at loss-making operations. Over time, a more structural solution for the rest of Sweetbay would be a logical step.
“But Sweetbay is already cash positive, excluding the losses from those stores, and all things being equal, Sweetbay should be profitable in 2013,” he added. “But it needs to close a significant gap to get to the level of [Delhaize’s] other operations in America.”
With competitive activity increasing as Aldi, Whole Foods Market and The Fresh Market enter the region, “Delhaize could decide to get rid of the Sweetbay stores it has closed, or it could decide to sell the entire chain,” Gorland said.
One industry observer said Delhaize is likely to continue to operate the rest of the Sweetbay stores indefinitely “unless someone — like a private equity investor — comes along looking to benefit from that cash flow.”
Stern said he expects most of the closed stores to end up with non-grocery operators. “Publix doesn’t need them, and Wal-Mart is so methodical that it will take a very long time for it to make a decision on whether or not to acquire them.
“Sweetbay never fit neatly into [Delhaize’s] banner strategy,” Stern added. “But at this point it’s not clear if a buyer would be available.
“Publix is in a strong position on the west coast of Florida, but some other competitors could seek to strengthen their position by acquiring some Sweetbay stores if they are available. Winn-Dixie, as part of Lone Star, would probably be in the best position to buy some of them.
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