The Fitch analysis that someone keeps reposting on the board tells shareholders what we already know...SVU's purchase of Albertson's in 2006 was a horrible, value-eroding transaction.
Nothing new here, people...let's move on...
Here's what we know of the new SVU:
1) According to Citigroup, the sale of the 5 banners to Cerberus allows SVU to "get rid of some of its weakest chains, such as Albertson's, Shaw's and Star Market."
So of the 5 chains sold, 3 were the worst of the lot. The other two, Jewel and Acme, are also traditional grocers facing stiff competition from non-traditional players such as Wal-Mart and Whole Foods.
For Cerberus and its partners, these purchases will largely be real estate plays.
2) The transaction with Cerberus removes $3.2B in debt and capital leases and $1.2B in pension obligations and other LT liabilities from SVU's balance sheet.
Old SVU liabilities = $8.6B
New SVU liabilities = $4.2B
Reduction in liabilities = $4.4B
3) Most importantly - with respect to valuation - SVU has diversified its revenue stream AWAY from the traditional grocer store business which is most susceptible to competition.
The old SVU:
Traditional grocers = 63% of revenues
Save-A-Lot = 12% of revenues
Food distribution = 25% of revenues
Traditional grocers = 28% of revenues
Save-A-Lot = 25% of revenues
Food distribution = 47% of revenues
Having the bulk of your revenues from food distribution and discount grocery (that can compete more effectively in this low-cost operating environment) is the greatest benefit of this transaction that will warrant an expansion to the their cash flow multiple!
Good writeup. However, be sure to factor in the potential loss of food distribution business as Cerberus sells or closes a number of the stores they purchased (as you mentioned, it is a real estate deal for them, they do not care about wholesale transfers).
There's no loss to the food distribution business. All revenue and profit from sales from the wholesale operations to the divested banners is already reported as part of the banner P&Ls. So actually, revenue for the wholesale business will INCREASE, as the banners serviced out of Lancaster will now be treated as independent customers instead of banner stores.
Nice post! i'd go one step further however. I'd divide the company into three groups of stores: traditional union stores (good freakin' riddance), discount non-union stores (the ones SVU ended up with), and hard-discount (Sav-a-lot).
I like the new SVU, in it at about $4.80 a share, for awhile I was thinking if it ever gets close to that again I would dump. This is an IRA account and now going to just forget about it and I think in 10 years when I can take money from IRA I will see a very nice gain. Before this deal BK was a real possibility but no way now