SUPERVALU Goes Shopping

Months after first going on the auction block, Albertsons (NYSE: ABS  ) has finally succumbed to an acquirer: SUPERVALU (NYSE: SVU  ) . This morning, the grocer teamed with druggist CVS (NYSE: CVS  ) and a group of private equity investors to buy out Albertsons for $17.4 billion in cash, stock, and debt.

Because of the parties involved, the deal isn't exactly simple, but it's probably a good outcome for Albertsons' shareholders. They'll receive $20.35 in cash and 0.182 shares of SUPERVALU stock for each share of Albertsons stock they hold. That amounts to $26.29 per stub, or a 9% premium from Friday's close.

SUPERVALU will bear the brunt of purchase and, accordingly, get most of the spoils. The Minnesota-based grocer will pony up $12.4 billion, including $6.1 billion in Albertsons' debt. In return, SUPERVALU will instantly become the country's second-largest grocery chain, trailing only Kroger (NYSE: KR  ) .

It will also have a vastly expanded operation throughout the West, including key markets in Southern California. All told, were the deal to go through, SUPERVALU would grow its base of retail outlets by approximately 1,100 stores. But it would also face significant hurdles, most of which are problems it inherits from Albertsons and which are well-documented by fellow Fools W.D. Crotty and Stephen Simpson.

So, instead, let's talk about what this means to CVS. Already the nation's largest pharmacist, CVS expects to pay $2.93 billion for 700 stand-alone Sav-On and Osco drug stores and a distribution center. It's probably a good bet that many of these are in California, where CVS has only 21 locations.

If so, that's a huge win, since CVS' primary markets are in the Northeast and Midwest. Adding a durable position out West would complement its successful acquisition of Eckerd from J.C. Penney (NYSE: JCP  ) , which added a significant presence in Florida and Texas, according to Value Line. And while we don't know all the numbers, it's clear that CVS will be assuming, at worst, a very small portion of Albertsons' debt, a gesture that should help the company return value to shareholders faster.

Investors don't seem to see it that way. They're piling into shares of SUPERVALU and dumping CVS. SUPERVALU's stock is up more than 5% as I write, while CVS' shares are down close to 1%.

Call it the myopia of the market. All investors see is the headliner, and that's SUPERVALU. But it just became No. 2 in an industry that's pinched by labor strife and cutthroat competition, including Wal-Mart (NYSE: WMT  ) and Costco (Nasdaq: COST  ) . CVS, on the other hand, was already well-positioned in a slow-growing but vital business that virtually no one wants a piece of. Well, no one except this Fool, that is.

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Fool contributorTim Beyersshops at Kroger, but only when his wife asks him to. Tim didn't own shares in any of the companies mentioned in this story at the time of publication. You can find out what is in his portfolio by checking Tim's Foolprofile. The Motley Fool has an ironcladdisclosure policy.


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