How KIM (and their partner Cerberus) will make another 5x their equity in SVU
I've been reading this message board sporadically since July. There's been a lot of unreasonable price expectations by the pumpers ($25...?!?) and the usual scare tactics and silly posts by the shorts. But very little facts and analyses of why SVU is appealing to private equity.
We're all well aware of SVU's mismanagement, declining sales, weak margins, burdensome debt load...that's why the board has put the company up for sale.
The issue is not what's wrong with the Supervalu, rather....where is the value in the company.
The real value to Cerberus and its partners, including KIM, is not in the grocery store business -- though I'm sure that Cerberus will integrate a number of SVU's Albertson's under their management as well as sell some of stronger banners to competitors for a profit -- but in the underlying real estate owned by SVU.
Supervalu operates ~1,100 traditional grocery stores. According to their 2012 fact book, they own 40% of these stores that range in size from 40,000 - 60,000 square feet:
1,100 x 0.40 = 440 owned stores x 50,000 average square feet = 22 million owned square feet.
Additionally, SVU operates ~400 Save-A-Lot stores that are ~15,000 square feet in size:
400 x 0.40 = 100 owned SAL stores x 15,000 square feet = 1.5 million SAL owned square feet
Total square footage owned by SVU = 23.5 million square feet.
Land, soft and hard costs for the construction of a grocery store in an urban center is in the range of $200-250 per square foot nationally.
The replacement cost of the real estate owned by SVU is:
23.5 million square feet x $225 per square foot average = $5.3 billion.
Note, that this $5.3 billion is the replacement cost estimate. This is how much it costs to purchase the land and build the store. Secondary trades are usually at a significant premium.
So, despite the heavy competition that's seen sales plummet consistently, of the....
* 1,100 traditional grocery stores such as Jewel-Osco, Lucky and Farm Fresh
* 1,330 Sav-A-Lot discount stores
* 29 distribution centers comprising 20.5 million square feet and serving over 4,400 locations
...just 540 stores have a replacement value of $5.3 billion.
This is how Cerberus, KIM and their partners will achieve another 5x return on their investment.
I've only identified the replacement value for 40% of their (owned) stores. We can value the remaining 60% as a going concern.
Supervalu expects fiscal 2013 cash flow between $900-950 million. For simplicity, let's assume that the 60% of stores generate 60% of the cash flows.
$900 million x 60% = $540 million
The cash flow multiple for grocery store ranges between 6-8x. Assuming the low end of the range implies a value of:
$540 million x 6 = $3.2 billion
Total valuation of the stores = $5.3 billion for the owned stores + $3.2 billion for the 60% not owned = $8.5 billion
Add to that the value for the distribution business. Since I don't know how to value a distribution business, I'll refer to the SumZero article on September 26th that implies a value between $1.4-4.4 billion.
Even if we discount the low end by 50%, that's a value of $700 million.
Total value of SVU assets = $5.3B + $3.2B +$0.7B = $9.2B
Total liabilities of SVU = $6.1B debt + $1.0B pension obligations = $7.1B
Total equity = $2.1B
Equity per share = $2.1B / 212 million shares = $9.90 per share
To my original point, in my opinion, Cerberus and partners will most likely offer between $4.00-4.50 per share for SVU. That leaves $5.40-$5.90 per share ($9.90 value minus the $4.00-4.50 offer) of intrinsic value for them, up to $1.25 billion!