Albertson’s sells stores to investor consortium

MINNEAPOLIS – Supervalu Inc. will more than double in size and become the nation’s second-largest traditional grocery store chain after claiming the lion’s share of Albertson’s Inc. as part of a $9.7 billion buyout. Now it needs to avoid a bellyache from swallowing its larger rival.

“This is a huge step for Supervalu and we would not rule out some upfront indigestion, especially if the macro environment is not accommodating,” Goldman Sachs & Co. analyst John Heinbockel wrote in a research note.

Minneapolis-based Supervalu and the drugstore chain CVS Corp. led an investment group that said Monday it will buy Albertson’s for $9.7 billion in cash and stock. The group made a similar attempt to buy Albertson’s about a month ago, but the deal collapsed.

Albertson’s stockholders will get about $26.29 in cash and Supervalu stock for each Albertson’s share. The buyers are also assuming about $7.7 billion in debt.

Only Kroger Co. will be larger once Supervalu takes over 1,124 stores under the Albertson’s, Acme Markets, Bristol Farms, Jewel-Osco, and Shaw’s Supermarkets banners. The expanded Supervalu will have 2,656 stores nationwide.

Albertson’s shares rose $1.31, or 5.4 percent, to close at $25.42 on the New York Stock Exchange, while Supervalu shares rose $2.13, or 6.7 percent, to finish at $33.98 and CVS shares fell 11 cents to $26.96.

Supervalu will pay about $6.3 billion in stock and cash and assume about $6.1 billion in Albertson’s debt for the 1,124 stores and in-store pharmacies under the Osco and Sav-on brands.

CVS of Woonsocket, R.I., is purchasing about 700 stand-alone Sav-on and Osco Drugstores and a distribution center in La Habra, Calif., for $2.93 billion in cash. It will also acquire real estate interests in the drugstores for $1 billion.

The other purchasers, led by Cerberus Capital Management, will acquire 655 stores in Dallas/Fort Worth, California, Florida, the Rocky Mountains and the Southwest. The group plans to operate the stores under the Albertson’s name.

Larry Johnston, chairman, CEO and president of Albertson’s, said the sale “increases shareholder value by capturing strong value for the ongoing business enterprise, monetizing valuable real estate assets, and affording shareowners the opportunity to benefit from a substantial continuing ownership interest in a powerful, growing, and vibrant new company.”

Following the transaction, approximately 65 percent of the new Supervalu will be held by existing Supervalu stockholders, and approximately 35 percent will be held by Albertson’s stockholders.

The purchase has been approved by the boards of all the companies involved. If shareholders and regulators also approve, Supervalu sales will expand from $19.5 billion in 2005 to a projected $44 billion for fiscal 2006.

That growth will be manageable because Supervalu only bought into markets where Albertson’s was number one or two in market share, said Jeff Noddle, Supervalu chairman and CEO. “That growth infrastructure is in place,” he said.

Supervalu’s new stores will retain their old brand names and will be managed regionally. “We believe that local people know their local customers,” Noddle said. “People in Chicago are going to make the decisions for the people in Chicago.”

He said the company’s predictions indicate the combined operations will generate enough cash flow to steadily pay down the new debt, although he expected Supervalu’s credit rating to be downgraded in the short term.

“We are going to do the same things going forward that we did in the last five years to de-leverage the company,” he said. “We enter this very confident, and I think we have a fairly good reputation for managing these things.”

Supervalu spokeswoman Yolanda Scharton said the purchase will expand the company beyond its current base in the East, Southeast and Midwest. “With all this, it’s all states, coast-to-coast and border-to-border,” she said.

The company currently employs about 57,000 people. The Albertson’s properties in the deal have about 144,000 workers. She said it was too soon to say how many of them would remain with the combined companies, but added, “we believe the vast majority of these employees will remain with us.”

Already the largest drug store chain in the nation, CVS said it will operate 6,100 stores across 42 states and the District of Columbia after the deal closes, which is expected this summer.

Dave Rickard, chief financial officer of CVS, said about 350 of those stores were in prime locations in California, which would have taken decades to acquire piecemeal. As it stands, the company will have access to an area that is growing fast, aging and relatively wealthy and at what it considered a good price. “It’s just a terrific demographic for us,” he said.

Rickard said the company will gain about 27,000 employees on top of its existing 180,000. Rickard said he expected CVS would retain most of them.