IMO, this is the first of a number of closings by the new owner. They are not interested in wholesale's profits, so unlikely to keep unprofitable stores open. Plus they will look at each location to see where and how they can make the most money (profit) from each. Bad for my retail friends but good for Cerberus.
They seem to be edging up a bit now. Personally, I think that once things settle down and the deal is finalized, we will see a nice gain in these bonds. The one I own is already up 20% in value from its low a few months ago.
As a former wholesaler, my experience is that company owned stores generated a higher gross margin for the wholesale operations than did independently owned stores. Corporate stores are generally expected to purchase everything they can from the wholesale division, while Independents can and often do "shop around" for the best deal. This is especially true in the higher margin portions of the business, such as perishables.
So, I would expect margins to drop, not increase.
A definitive agreement with Cerberus Capital Management LLP was announced on January 11, 2013 (see transaction summary below). As part of the Cerberus transaction, the 2014 bonds are expected to be called and refinanced with a new SVU bank facility. This is expected to occur upon closing, 1Q 2013. The bonds are callable at par and are currently trading to the call. For this reason we remain NEUTRAL.
The 2016 notes have traded up approximately 2 points on news of a definitive agreement. The bonds have a 8% yield for what appears to be two year risk. This is a $1.0bn issue. It trades with this yield due to refinancing risk. We expect the bonds to remain at this level until the "new SVU" shows a turnaround and access to the capital markets. For this reason we remain NEUTRAL.
The American Stores bonds will be cash collateralized and are trading accordingly.
The Albertson bonds lack a change of control and therefore will travel to the "New Albertson's" entity. Given the lack of protection proved by the Albertson indentures, we expect Cerberus to keep the bonds outstanding and layer senior secured debt on top of the bonds resulting in structural subordination. With long maturity dates and a lack of covenant protection, the bonds are a "cheap" form of equity for Cerberus. As a result we expect the bonds to continue to trade wide, reflecting structural subordination. This transaction does remove the overhang of a potential "strategic filing" of Albertson's by Supervalu, and allows holder to "kick the can". At this time we do not have financials on the New Albertson's entity so we are unable to provide relative value commentary.
S&P has placed Supervalu Inc. ratings on CreditWatch positive while Fitch reaffirmed at CCC. In their announcement, S&P commented "the CreditWatch listing reflects our opinion that the sale transaction, if completed as proposed, will result in modest decline in leverage for SUPERVALU, with total debt to EBITDA possibly below 5.0x on a proforma basis from our expectations of 5.3x in fiscal 2013 (please note S&P includes pension and other liabilities in their calculation of total debt).
Likely what happened is the Cerberus had trouble financing the purchase of all of SVU due to the large debt load, so this new approach is their way of getting what they really wanted (the old Albertsons group) plus likely a controlling interest in SVU for a low price.
I do not own any SVU stock, but do have some Albertson bonds, so I am mostly unbiased in this - I feel that long term the SVU stock will be worth alot more than $4. Thats likely why Cerberus is buying so much stock. I am not buying here though since I only invest in blue chip stocks and bonds, but in my speculative days I would have jumped on SVU last week.
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).
Thanks for the advice. I was thinking the same hing - hat they might do a tender offer on the bonds. I am in a $82 on mine with an effective yield of about 8%, so if the tender is high enough I might just bail out.
Thanks to both of you for the information. It clears it up for me. Now I hope my bonds go up from here! Luckily I sold all my SVU stock 3 years ago as well as the SVU bonds (I kept the Albertsons one).
Its really simple. When you short a stock, you SELL shares you do not own. At some point in the future, you have to BUY the same stock to COVER you position. Its just like the normal process of buying and selling, but in reverse.
You have to have a stock account that allows you to do this (mostly you have to have a certain amount of assets backing you up). Your broker borrows the stock from someone else to be able to do the SELL for you. There may be a fee for this, so check with your broker,
Also, if the stock pays a dividend, you have to pay that amount when it occurs. Again, just a reverse of the normal stock process.
Hope this helps.
We know that Cerberus is taking $3.2 billion in debt from SVU on this deal. But doesn't SVU owe alot more than that on the Albertsons group stores? Assuming this is correct, how does the remaining debt stay with SVU? Do all the Albertson and Acme bonds go with the stores, and is this covered by the $3.2 billion?
Someone asked me this question and I really did not know how to answer them.
Supervalu has long been a strong wholesaler and tough competitor. Glad to see that they are going back to their roots.
One thing to keep in mind when looking at that $17 billion in sales number - that includes sales to he Albertsons group which was just sold. While they will keep this business in the short term, long term it is very likely to be reduced. Cerberus will likely sell a number of the stores to other chains and/or convert the facilities to non-shupermarkets. Either way, business will be lost.
Bond guy - what do you see ahead for the Albertsons (Med term) bonds? The one I have is up today a bit, about 10%, but still at only $61. Should I hold?
I agree 100% with you about the tender - as another bond person, I have gone through this before and when you tender you may or may got get all of your shares/bonds sold.
Since this is being touted as a TENDER offer of up to 30% of the stock, it does not mean that you will get $4 per share for your stock. What I have seen in similiar situations is that more shares are offered up to the company than they want (30% of outstanding), so the people offering the shares are pro-rated downward.
For example, if 60% of the shares were tendered in the offer, and Cerberus only takes a 30% stake, you would only get to sell half of the shares you tendered to Cerberus for $4. The rest you would keep.
So, if I had a nice profit in my shares now (I do not own any), I would sell them, rather than wait for a potential $4 on some of my shares.
With Cerberus buying the stores with a group of REAL ESTATE companies, I can see them selling a number of them to other than supermarket use - and SVU would lose the wholesale transfers.
I do not see it that way. Since Cerberus is only taking a UP TO 30% position, you may not get $4 for all of your shares. In fact, SVU could just issue more shares and sell them directly to Cerberus for the $4/share - that would mean more shares outstanding and could lower the value of the existing shares.
Need to be careful here. I am not sure how this will play out.
It will be interesting to see how Cerberus carves SVU up. One big thing of course is the real estate owned by SVU. I really wonder how much of what Cerberus made on the first go round was due to very favorable leases and owned Albertsons property.
What I am saying is that I know that many of the old Albertsons locations had great leases, ones that had VERY low rents in the option periods and/or VERY low priced purchase options attached to them. This came about in the 70s (that I know about) and perhaps later on, when Albertsons leases were basically financial instruments that institutions such as pension funds were buying solely for the 20 year (or whatever the primary term) return.
So, what I would like to know is do the Albertsons bonds have a tie to these leases? If so, there may be some hidden value here.
I read somewhere that SVU has a number of different bonds and that some are superior in credit to others, thus the large difference in yields. I would not read too much into any one bond's price at this point, unless you know ALL the details about the bond.
If WMT wanted to takeover SVU, it would be cheaper to just buy them up at this low price, instead of wasting gross profits in an attempt to drive them under.