Albertsons IPO Could Set Cerberus Up for Big Payoff

Albertsons IPO

On Wednesday Albertson filed to go public only six months after it was combined with Safeway Inc.

By Annie Gasparro and Telis Demos.

Grocery giant Albertsons Cos. filed plans to go public, paving the way for the culmination of a decadelong investment in the supermarket business by private-equity owner Cerberus Capital Management LP that appears likely to yield a major payoff.

The planned initial public offering comes just six months after Cerberus combined Albertsons with Safeway Inc., part of a string of deals among U.S. grocery chains grappling with tepid growth and fierce competition from both discounters and upscale stores.

Under an investor consortium led by Cerberus, Albertsons, the second-largest conventional U.S. grocery chain after Kroger Co., has boosted same-store sales and slashed costs. But the company posted a loss in its latest fiscal year and carries a heavy debt load, according to IPO documents filed with securities regulators Wednesday.

It isn’t yet clear at what price banks will pitch the IPO. The company filed a placeholder saying it plans to raise up to $100 million in the IPO, but that figure, used to calculate registration fees, is expected to change.

Cerberus and its partners appear poised to make a significant return on their investment.

If investors value Albertsons similar to how Kroger is currently valued in the public markets, at about seven times its past-year earnings before interest, taxes, depreciation and amortization, the company would have a market capitalization of about $16.5 billion.

That would be a substantial return for the Cerberus-led consortium. All told, Albertsons was assembled from parts with equity value of about $9 billion at the time of the deals. That doesn’t include what the investors made on certain stock they purchased, nor does it reflect any benefits of the use of borrowed money, or leverage. The investor group doesn’t plan to sell any shares in the IPO, according to the filing.

However, it isn’t yet clear or how investors may adjust the IPO price for Albertsons’ different size, growth rate or debt load. A spokesman for Cerberus declined to comment. The filing also says the appraisal value of the land and buildings Albertsons owns is $10.5 billion.

The Boise, Idaho, company, whose store banners include Jewel-Osco, Acme and Tom Thumb, said it intends to use the proceeds from the IPO to pay down debt and for general corporate purposes.

The Albertsons conglomerate was born in 2006 when the Cerberus-led investor group acquired about 650 Albertson’s Inc. stores in a broader breakup of the then-67-year-old grocer. Cerberus closed two-thirds of those stores and sold the real estate to help pay off debt.

In that 2006 deal, Supervalu Inc. bought roughly 1,100 stores from Albertson’s. But while the Cerberus-owned stores improved, Supervalu foundered with its outlets, and in 2013 it sold back nearly 900 stores to Cerberus.

Over the past two years, Cerberus again demonstrated its ability to run Supervalu’s stores better than its rival had. Same-store sales at the legacy Supervalu stores were declining each quarter leading up the 2013 acquisition, falling 5.6% in the quarter that ended in February 2013. The following quarter, the first under Cerberus’s Albertsons, that decline moderated to 2.5%, and the stores returned to growth later that year.

Albertsons, led by CEO and industry veteran Bob Miller, has made strides by cutting prices to make its stores more competitive against rivals such as Wal-Mart Stores Inc. It also has granted local store managers more control over product purchasing and promotions to appeal to consumers in individual markets and has invested in remodeling older stores.

“Management has a good handle on what the customer wants,” said Moody’s Investors Service analyst Mickey Chadha. “Keeping the operations localized allows them to be more nimble and shift to consumer preferences in certain locations.”

In fiscal 2014, the legacy Supervalu stores posted same-store sales growth ranging from 7.5% to 8.7% each quarter, according to Wednesday’s filing.

The company’s $9.4 billion purchase of Safeway, which closed in January and reflected proceeds from divestitures given back to shareholders, will help it gain scale to negotiate better deals with food makers, save money on marketing, and merge back-office operations to cut costs, it said in the filing.

Albertsons also is inheriting Safeway’s well-regarded customer loyalty-card program and store brands, which it plans to roll out in the rest of its stores.

In the year ended Feb. 28, Albertsons posted a loss of $1.2 billion on $27.2 billion in sales, according to Wednesday’s filing. Including Safeway and stripping out certain merger-related charges and other items, the company would have lost $385 million. Sales including Safeway rose to $57.5 billion from $52.1 the prior year.

Revenues in the food-and-drug retail industry inched up an average of 1.3% annually from 2010 through 2014, according to Albertsons. From 2010 through 2012, Albertsons’s operating profit increased each year. But back then it was running about a 10th of the grocery stores it has today.

The IPO plans come as mainstream grocers are increasingly pinched from both high-end stores catering to the growing consumer preference for fresh and natural items, like Whole Foods Market Inc., and discount operations like Wal-Mart and Trader Joe’s. Albertsons said its localized structure, giving regions flexibility on what foods they stock and the deals they offer, helps it deal with the growing trend toward fresh and organic food.

Integrating Safeway’s operations while also preparing for an IPO will be a challenge, analysts said. “They don’t have a lot of room for missteps because of their highly-leveraged balance sheet,” Mr. Chadha said.

In Wednesday’s filing, the company said it had $1.1 billion in cash and more than $12 billion in debt at the end of February.

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