US Retailer SuperValu Has A Value Disconnect a Buyer Can Exploit: Gadfly
You've heard it before: Mergers often trigger a domino effect. And with U.S. grocery chains poised for further consolidation, their suppliers should consider following suit.
One likely participant in any potential deal is US retailer SuperValu Inc., which my colleague Tara Lachapelle has pointed out may warrant a look from suitors including buyout firms or closely held rival C&S Wholesale Grocers. Its sale of the Save-A-Lot grocery chain to Canadian private equity firm Onex Corp. in December freed up the company to both pay down debt and focus on its wholesale-distribution business.
SuperValu's fiscal 2018 revenue from that business is set to grow by as much as $1 billion, or more than 10 percent, according to some analysts' estimates, thanks to new contracts to supply produce to Fresh Market Inc., America's Food Basket and others.
Its shares, however, are moving in another direction -- they've been pummeled more than 30 percent in the past 12 months as stiff competition and food deflation have eaten into profits.
One potential merger partner that could take advantage of the valuation mismatch is SpartanNash Co. The Grand Rapids, Michigan-based company could strike an all-stock transaction at a generous 50 percent premium and have a deal be immediately accretive even without accounting for cost savings, according to data complied by Bloomberg.
While SpartanNash just snapped up smaller rival Caito Foods Service Inc. for $218 million in January, it seems receptive to another deal. On an earnings call in February, President and soon-to-be CEO Dave Staples said the company's M&A focus was on distribution, an area where it would be "proactive." Outgoing CEO Dennis Eidson added that its transaction pipeline was "pretty robust," and that "for the right kind of transaction, we will be at the table."
If the two were to merge, the combined company would have a debt-to-Ebitda ratio of about 2.5. That'd basically allow SpartanNash to keep its promise to shareholders regarding leverage, where it has left itself some wiggle room. (The company pledged to maintain a leverage ratio of under 2.5 by year-end, excluding any new M&A activity).
Another Potential Suitor
Another would-be suitor is United Natural Foods Inc., whose CEO Steven Spinner said this month that M&A would continue to play a "major role" in its long-term growth. (One caveat here: It's inclined to take a breather while it completes the integration of Haddon House Food Products, a smaller rival it bought last year.) An all-stock merger at a generous premium would also boost its earnings, even without accounting for synergies.
Neither of these deals would likely raise antitrust concerns:
Whether these suitors, or others, decide to make a move, they'd be wise to do so sooner rather than later. SuperValu should bounce if and when food deflation pressures abate, scuttling some -- but not all -- of a merger's value.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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