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United Natural (UNFI) Snaps Up SUPERVALU, Stock Loses 8.5%

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United Natural (UNFI) Snaps Up SUPERVALU, Stock Loses 8.5%

United Natural (UNFI) concludes the acquisition of SUPERVALU for nearly $2.9 billion. The deal is likely to provide better competing grounds to United Natural in the grocery space.

United Natural Foods, Inc. UNFI concluded the pending buyout of SUPERVALU INC. SVU for nearly $2.9 billion, considering all outstanding debt and liabilities. Consequently, SUPERVALU will be delisted and stop trading under New York Stock Exchange.

The deal is likely to benefit United Natural, which can leverage the best of both the businesses, thanks to this union. The deal will help the company create a leading food wholesaler with massive reach, scale and assortments. Clearly, the merger is expected to provide better competing grounds to United Natural in the grocery space. Incidentally, United Natural’s deal with Whole Foods, which was scooped up by Amazon AMZN, is set to expire in 2025. This deal radically reduces United Natural’s reliance on Whole Foods that currently accounts for almost a third of its business.

Additionally, through this deal, United Natural will be able to add categories like meat to its portfolio of organic offerings. Markedly, the company expects to realize cost synergies worth more than $175 million by the third year of the buyout, and more than $185 million by the fourth year. With improved scale, more streamlined processes and reduced capital expenditures in future, United Natural is on track to enhance its profitability in the long run.

SUPERVALU has long been struggling with dismal retail operations and trying to remain stable through store closures, streamlining operations and focusing more on strengthening its wholesale business. From this merger, SUPERVALU is expected to gain the necessary support to stay afloat. The enhanced scale of the combined entities is expected to radically boost efficiency in operations. Apart from forming a strong comprehensive portfolio, the merger is expected to provide wider geographic reach to both companies.

United Natural will sponsor the deal with mainly debt and as part of this the company also entered into new credit facility transactions. However, it looks like industry experts are still skeptical regarding the integration process as well as United Natural’s likelihood of attaining the targeted synergies and being more profitable after SUPERVALU’s takeover.

Unfortunately, shares of United Natural lost more than 8% yesterday, reflecting investors’ concerns surrounding the deal. In fact, the company has been in the red zone ever since the acquisition plans were first announced in July. Evidently, United Natural has plummeted 41.1% in the past three months, against the industry’s upside of 0.9%.

Nevertheless, we expect the acquisition to be fruitful by giving United Natural solid cross-selling opportunities and strengthening its customer base. Management stated that it will throw more light on the details related to its integration initiatives on its investor day scheduled on Jan 16, 2019. That said, let’s wait and see how this merger places United Natural, which currently carries a Zacks Rank #3 (Hold).

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