Don't expect to see a "For Sale" sign stuck next to the driveway entrance to your local Albertsons (NYSE: ABS), but the entire company is indeed on the auction block.
The company announced today that its board of directors is exploring strategic alternatives to increase shareholder value, including a possible sale of the company. The company retained Goldman Sachs (NYSE: GS) and The Blackstone Group as financial advisors.
Kroger (NYSE: KR) and Safeway (NYSE: SWY) played hardball with their Southern California store clerks -- who went on strike for five months starting in late 2003. That battle was said to be all about controlling costs and being able to compete in the future with the likes of Wal-Mart (NYSE: WMT).
But the supermarket battle gets still more complex. There is Whole Foods (Nasdaq: WFMI) growing like a weed and attracting high-income customers who are willing to pay higher prices for specialty foods. There are also the warehouse clubs like Motley Fool Stock Advisor recommendation Costco (Nasdaq: COST) that are trying to lure larger-volume customers with rock-bottom prices. So why is Albertsons looking at selling now?
Well, things are starting to look brighter, for one -- those pesky operating margins turned upward by 0.7% in the latest reporting period. That's a big percentage jump for a company with an annual trailing operating margin of 3.1%.
Another good reason is that Albertsons has invested heavily in improving its businesses. It has been remodeling stores, selling stores in markets where it wasn't a dominant player, and dual-branding its food and drug stores. At the same time, the company has been on a cost-reduction program to trim $1.25 billion by fiscal 2006. Add it up. The company is doing its best to compete in a relatively difficult sphere.
You'll find the value in if you divide the trailing annual earnings before interest, taxes, depreciation, and amortizations (EBITDA) into the enterprise value (EV). Based on yesterday's closing price, Albertsons traded for 5.7 times EBITDA-to-EV. Kroger, Safeway, and Wal-Mart traded for 7.1, 7.6, and 9.8 times EBITDA-to-EV, respectively.
Investors certainly thought a buyer might see this value and bid the stock up 27.4% in early-morning trading. Since then, the stock has drifted down to an 11.5% gain around 4 p.m. EDT. The thinking, in my opinion, probably goes a bit like this: A combined Albertsons-Kroger might find itself better positioned in a cutthroat marketplace, since the combined entity might find itself endowed with marginally higher supplier bargaining power. The logical result? The ability to offer lower prices to customers and/or higher margins.
The bottom line, however, remains: Will a merged Albertsons be able to compete with the likes of Wal-Mart? Probably not. Wal-Mart would likely find itself better able to squeeze suppliers and offer accordingly lower prices while maintaining a viable level of margins. But given a choice of two evils -- going it alone or combined -- the latter seems more attractive.
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