Analyst cuts target for SuperValu sale price

SuperValu Inc., the third-largest grocer in the U.S. by revenue, has put itself on display for buyers after the company reported less-than-expected revenue for the first quarter of fiscal 2013, and one analyst on Thursday, July 12, slashed his target for what he thinks the retailer would fetch in a sale by 40%.

The Eden Prairie, Minn.-based operator of Save-a-Lot and Albertson's supermarkets said Wednesday that it had enlisted the help of Goldman, Sachs & Co. and Greenhill & Co. to act as its financial advisers in a strategic review that could include a sale of the company or select assets.

While a sale of the company as whole is not likely, the supermarket operator could look to divest or spin off select operations in markets where it doesn't already have a strong foothold, according Antony Karabus, a retail business consultant and former head of Karabus Management, an investment advisory firm for the retail industry.

"I believe very fervently that there are only two options in the grocery store business," Karabus said. "You either have to have a flawless regional business or you have to be a national chain who has an exceptional national strategy and executes that strategy extremely well."

Because expanding nationally would be an arduous and expensive process, the more likely outcome for SuperValu would be to rid itself of stores in less desirable markets and focus on those where its footing is already strong, he explained.

According to a Cantor Fitzgerald LP report, SuperValu and Albertson's have strongholds in the West, with a 30% market share in the Boise, Idaho, area; 16.9% in the Las Vegas market; and a 20% share of the Santa Barbara-Santa Marta, Calif., market.

Conversely, the company is weakest in the Orlando, Fla.; Cleveland; and New Orleans markets, where SuperValu and affiliates have less than 5% of the market.

"The right answer, in my opinion, is finding the gems and diamonds in the chain and really trying to realize value in selling the pieces that are holding them back," Karabus said. "They need to focus on where they think they can be the No. 1 or No. 2 grocery chain. Where they cannot create that market share -- where they can't be higher than 3 -- the gap of investment in too high."

Cantor Fitzgerald analysts agreed.

"The sharp deterioration evident in SuperValu's latest results is likely to result in renewed speculation regarding its ability to remain intact and solvent under its current structure," Cantor Fitzgerald analyst Ajay Jain wrote in a Wednesday research note.

Jain on Thursday reduced his price target on the company to $6 per share from $10 per share, given uncertainty about a suitor emerging. On Thursday, SuperValu, which trades on theNew York Stock Exchange under the symbol SVU, closed at $2.69, down 49% from Wednesday's $5.29.

"While we view the Board action as a matter of strategic necessity for SuperValu, there is no guarantee that SuperValu can find appropriate buyers for any major pieces of its retail or distribution assets," Jain wrote.

The move to explore a sale comes on the heels of a disappointing earnings release for the company. In the first quarter of fiscal 2013, SuperValu reported net sales of $10.6 billion and net earnings of $41 million, compared to net sales of $11.1 billion and net earnings of $74 million in the first quarter of fiscal 2012.

The only segment to report positive growth was the company's Save-a-Lot stores, which reported sales of $1.29 billion for the quarter ended June 16, compared to $1.28 billion in the same quarter of 2012.

"SuperValu's latest results offer further confirmation that the operating environment across the sector has gotten increasingly difficult during the latest quarter," Jain wrote. "We note that while SuperValu and the acquired Albertson's store fleet have a long history of underinvestment, the relative price positioning of SuperValu remains weak as more price-focused competitors have taken more credible steps in recent years to drive customer traffic while SuperValu has largely chosen to protect margins."

To help offset the ill effects of more cost-sensitive retailers, the company has declared numerous steps to cut expenses and increase profitability.

For example, in its first-quarter financial results, the company declared it had canceled its annual dividend, saving roughly $70 million, according to Cantor Fitzgerald.

The company also said it intends to achieve an additional $250 million in administrative and operational expense reductions over the next two years by adopting an "intense focus on efficiency and productivity across all functions and every part of its businesses," SuperValu CEO Craig Herkert said in a statement.

To help bolster its balance sheet in the past, the company had looked to single-store divestitures. In January 2007, for example, the company said it would seek strategic alternatives for 15 Jewel-Osco stores in Milwaukee and would look to divest at least 10 grocery store locations. That September the company completed the sale of the stores to numerous buyers, including Roundy's Supermarkets Inc. and Lena's Food Markets. Although terms of the transactions weren't disclosed, an industry source said the combined proceeds from the sales was likely between $90 million and $165 million, which was used to pay down debt.

The stakes are higher now, however.

The company said Wednesday it is looking to pay down $450 million to $500 million in debt during the 2013 fiscal year.

"This is not a small process," Karabus, the industry consultant, said. "It is not just about just selling off a few stores, but exiting an entire market or switching your focus completely. You don't call in Goldman and Greenhill for a small transaction like that."