Buyer of Albertsons stores could make Supervalu acquisition ...

As rumors of a reunited grocery chain swirl, the potential purchaser?s plans are unknown.

A company you?ve probably never heard of is rounding up money to take control of all the Albertsons supermarkets in Idaho and elsewhere that Supervalu bought six years ago. One analyst says that could put some Albertsons employees? jobs at risk.

The company is Cerberus Capital Management, a New York private equity firm. According to The Wall Street Journal and Debtwire, a daily trade newspaper, Cerberus is preparing to borrow $4 billion to $5 billion to acquire Supervalu, the struggling Minnesota company that bought most of Albertsons Inc. in 2006, ending Albertsons as an independent, Boise-based company.

Cerberus is intimately familiar with Albertsons. When Supervalu bought more than 1,100 Albertsons supermarkets six years ago, it cast aside about 650 stores that it didn?t want. Cerberus led a team of investors that bought them. Cerberus and its partners created a new business to run them ? or dispose of them, in hundreds of cases ? and named it Albertson?s LLC.

You probably haven?t heard of Albertson?s LLC either. But it?s based in East Boise, where it shares a building at 500 E. Baybrook Court with Supervalu. Supervalu still maintains its regional offices for its Albertsons stores here.

Albertson?s LLC shies away from publicity and maintains a low local profile. You won?t find it sponsoring prominent local fundraisers for charity ? as Supervalu does with the annual Albertsons Open golf tournament, which it inherited from Albertsons Inc. ? or buying tables at local chamber of commerce lunches. It contributes to communities where its stores are located.

Its total of 600-plus stores in numerous states has shrunk to about 200 from Arizona to Florida as it has closed some stores and sold others. They still carry the Albertsons name and logo, though recently the chain has started calling them Albertsons Markets. They still operate in cooperation with Supervalu under terms set in the 2006 purchase.

Supervalu, too, has closed hundreds of stores, but it has failed to boost sales and profits despite repeated efforts to turn itself around.

If Cerberus buys Supervalu, the two Albertsons chains would be reunited.

A spokesman for Cerberus directed all questions to Albertson?s LLC. A spokeswoman for that company said that it did not want to comment.

TWO ROADS TRAVELED

Albertson?s LLC takes a different hue based on the angle you?re seeing it from. It?s one of the Top 100 retailers in the country based on sales. Or, as some analysts say, it?s a real estate investor that also runs grocery stores.

Joe Albertson built Albertsons starting in 1939 from a single store at 16th and State streets. It grew into the second-largest grocery chain in the country. Albertsons bought other companies as it grew. By 2005, it was in three dozen states under a dozen banners and employed 240,000 people.

But it struggled even then. Analysts say Albertsons Inc. stumbled in its later years because it overextended itself in acquisitions, the management in Boise didn?t fully understand the East Coast market, and it faced tough competitors like Walmart and Boise?s WinCo Foods. That?s what led to the sale in 2006.

?The very worst stores went to Albertson?s LLC, and Supervalu took the very best ones,? said David J. Livingston, a Milwaukee-based supermarket analyst.

Cerberus, which specializes in distressed businesses, wasted no time paring its portfolio. By the end of the year, Albertson?s LLC had shuttered or announced plans to close about 250 of those stores.

What happened from 2006 to 2012 has been a lesson in expectations. The worst stores turned out to be the best investments, analysts said.

Here?s why: Supervalu bought the best-performing Albertsons stores, but they were still ?below average? for the grocery store universe, Livingston said. ?And not only that, they borrowed money to do it, which makes the story turn out worse,? he said.

Supervalu borrowed $6.5 billion to finance the purchase.

Meanwhile, Albertson?s LLC sold many of its stores piecemeal, said Burt Flickinger a supermarket and retail analyst and the managing director of Strategic Resource Group in New York. For example, it bought a slew of Florida stores and sold dozens of them to a competing supermarket chain, Publix, before the Florida commercial and residential real estate collapse, Flickinger said. Those sales were ?extremely profitable,? he said.

They ?made money both operating stores and selling stores ? probably made more money selling stores,? Flickinger said.

A case study on the Cerberus website shows how it handled an unnamed grocery chain acquisition whose details match the Albertsons purchase.

?When a Cerberus-led consortium of investors and two retailers acquired the company, it was suffering from years of mismanaged stores and substantial real estate debt,? Cerberus said.

Cerberus said it cut debt from $1 billion to $120 million by refinancing or paying creditors; sold and leased back properties to cut more than $300 million in real estate debt; cut product costs by switching its supply to a retailer-owned cooperative; and launched new store-branded products.

Albertson?s LLC now has about 20,000 employees, according to its website. A report by the National Retail Federation says it had $4.1 billion in U.S. sales last year, about 5 percent less than in 2010.

SHREWD INVESTORS

Livingston describes Albertson?s LLC as ?grocery store morticians? who take dead stores and embalm them, making them presentable for viewings, and then bury them when they?re ready to be sold off.

?They?re salvage operators,? he said.

Supervalu won?t talk about a possible Cerberus purchase. Spokesman Mike Siemienas said the company is in ?active dialogues with several parties? about a possible deal, and there is no guarantee that talks will end in a sale or any other transaction.

One of the wild cards in Albertson?s LLC?s future as a grocery store operator, especially after a Supervalu takeover, is the growth of competitors, led by WinCo, Flickinger said. He called WinCo ?the worst nightmare for Albertson?s LLC in Arizona and all the Intermountain region.?

WinCo is trouncing even low-price competitors, he said. One key product supplier, whom Flickinger declined to name, told him that WinCo sold twice as much of that product than a competing Walmart less than two miles away. When WinCo arrives in a city, Albertsons stores lose about one-third of that product?s sales, he said.

Albertson?s LLC?s stores in Arizona tend to price key goods about 27 percent higher than Walmart and Target and about 29 percent higher than WinCo, he said. But the stores excel in food freshness, cleanliness, food safety and customer service, he said.

Cerberus?s partners in the 2006 purchase were Kimco Realty Corp. of New Hyde Park, N.Y.; Schottenstein Stores Corp. of Columbus, Ohio; Lubert-Adler Partners of Philadelphia; and Klaff Realty LP of Chicago.

In an August conference call with investors, Kimco Chief Financial Officer Glenn Cohen called Albertson?s LLC ?an investment that keeps on giving,? The Wall Street Journal reported. Kimco?s $51 million for a 15 percent stake has been repaid nearly five times over, Cohen said.

THE LEADERSHIP

Executives at Albertson?s LLC are predominantly veterans of the pre-Cerberus company. Several of them graduated from Idaho colleges.

Flickinger called Chief Executive Officer Robert Miller ?one of the seminal geniuses in the history of retailing? and Chief Strategy Officer Justin Dye ?one of the smartest financial and strategic people in the business.?

Before leading Albertson?s LLC, Miller was executive vice president of retail operations for Albertsons Inc. He also spent several years leading Fred Meyer Inc. through its sale to the Kroger Co. and became vice chairman and chief operating officer of Kroger. Nordstrom Inc. lists Miller on its board of directors.

Miller received the 2012 Horatio Alger Award from the Horatio Alger Association of Distinguished Americans. It is given to people who overcame challenges early in their lives and succeed in their fields. In 1999, he established the Robert G. Miller Endowed Scholarship Fund for students in the food industry at Portland State University. He has donated $250,000 to Boise State University to fund 50 scholarships over 10 years.

Dye was part of the Cerberus operations team during the 2006 purchase. His job includes strategy, overseeing real estate management and buying and selling properties.

WILL IDAHO STORES CLOSE?

Livingston predicts that a Cerberus acquisition would lead to stores being sold to competitors such as WinCo, Whole Foods and Walmart, which is rolling out its small Walmart Neighborhood Markets to more areas. The properties also could be subdivided for dollar-store retailers or ?recycled into the next Big Lots and Hobby Lobby and whatever else low-rent operations you have out there,? he said.

?The workers are going to be walking around with that thousand-yard stare on their faces,? he said. ?This company didn?t buy (the stores) wanting to ... turn the company around and try to find a new way to compete with Walmart and WinCo. ... This isn?t going to be a growth story at all. It?s going to be just the opposite.?

The website for Albertsons Market (Albertson?s LLC) says the chain?s goal is not to be the biggest grocery retailer but to be the best. Analysts say its remaining stores are profitable.

?Albertsons is still a very viable competitor in New Mexico and Arizona, where Albertson?s LLC has over 70 stores,? Flickinger said.

He?s also optimistic that an acquisition won?t spell the end of Albertsons stores in their home state. Supervalu has not closed any Idaho stores in its six years of ownership.

Owning Supervalu?s Albertsons stores would give Albertson?s LLC more buying power, and Cerberus? money would give the stores a better shot at competing with other regional chains, he said.

Cerberus could easily obtain financing to buy all of Supervalu, Flickinger said. If nothing else, that would give Albertson?s LLC an additional 453 stores under the name Joe Albertson made famous. The question is whether Cerberus wants to do that.

?Albertsons is a good, solid supermarket chain focusing on fresh foods, with an as strong or stronger focus on running its retail and wholesale real estate portfolio,? Flickinger said.

Audrey Dutton: 377-6448, Twitter: @IDS_Audrey

Source: http://www.idahostatesman.com/2012/11/03/2333837/buyer-of-albertsons-stores-nearly.html

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