We're only a few weeks into the new year, but so far one of the best-performing stocks is also one of the unlikeliest. Shares of SUPERVALU (NYSE:SVU) are up over 40% already, owing largely to a recently announced deal with Cerberus, a private equity firm. In 2006, SUPERVALU and Cerberus each took part of the Albertsons chain of grocery stores, and now Cerberus wants the rest, along with SUPERVALU's Acme, Jewel-Osco, Shaw's, and Star Market chains.
In exchange, Cerberus will pay SUPERVALU $100 million cash, take on $3.2 billion of the company's debt, and buy approximately 20% to 30% of SUPERVALU's stock at $4 per share, a premium over even today's inflated share price. This is incredibly positive news for SUPERVALU, but the company isn't out of the woods yet.
First, the good news
It's clear that this deal will help SUPERVALU in the near term. The $3.2 billion in debt Cerberus will take will essentially cut SUPERVALU's debt load in half and make payments a lot more manageable. Even better is Cerberus' commitment to buy up to a 30% stake in the company at such a high premium. That will help reassure current shareholders who've watched the stock fall nearly 50% over the last year.
But SUPERVALU will also benefit from the operational changes that will take place. With five of the traditional retail banners gone, the deep-discount Save-A-Lot brand will come into greater focus. Traditional grocers in the middle of the price spectrum, like Albertsons and Safeway (UNKNOWN:SWY.DL), have been losing sales to Whole Foods (NASDAQ:WFM) on the high end and deep discounters like Dollar Tree (NASDAQ:DLTR) on the low end for years now. While SUPERVALU's sales have fallen 23% since it acquired Albertsons in 2007, and Safeway's have barely budged, Dollar Tree and Whole Foods are both on track to double sales. Save-A-Lot only accounted for a small fraction of SUPERVALU's total revenue in the recent third quarter, but the reorganization gives the company a chance to move out from the middle and focus on where the growth is.
Now, the bad news
While SUPERVALU is managing to shed $3.2 billion of its debt in the Cerberus deal, the company also announced recently that it has secured a $900 million credit facility from Wells Fargo and a $1.5 billion loan from Goldman Sachs, essentially leading to a net reduction of only $800 million in debt. CEO Wayne Sales himself said on the conference call that the deal "is not hugely deleveraging."
What Sales did say is that the deal is "hugely derisking," in that it allows the company to focus more on Save-A-Lot's growth opportunities and less on the flagging traditional grocery market. I'm not too sure about that. After the deal is done, SUPERVALU's operations will consist of 1,300 Save-A-Lot stores, 191 traditional grocery stores, and its distribution business, which provides wholesale distribution to 1,950 grocery stores across the nation. The distribution business will keep SUPERVALU significantly exposed to the travails of traditional grocery retailing, as poor business at the store level will move its way up the food chain.
As for Save-A-Lot, it's true that the deep-discount grocery sector is growing rapidly, but Save-A-Lot is not. SUPERVALU only started reporting Save-A-Lot's sales separately in the first quarter of this year, but year-to-date sales have been almost completely flat over the same period last year. By comparison, Dollar Tree reported 10% growth.
The Foolish bottom line
The Cerberus deal goes a long way to clean up SUPERVALU's balance sheet and put some kind of floor under the stock. But the company is turning right back around and taking on more debt, so its balance sheet is not significantly better in the end.
Similarly, shedding several of its traditional grocery businesses will allow it to focus more on Save-A-Lot, but Save-A-Lot shows no sign of being a white knight riding to SUPERVALU's rescue. It may be too early to tell, but its sales growth compared to competitors looks about as mediocre as the rest of the company. To me, this is hardly the turnaround the market seems to think it is.