Jewel-Osco purchase could bring lower prices, another sale
BY DAVID ROEDER AND FRANCINE KNOWLES Business Reporters January 10, 2013 8:19AM
The Jewel-Osco Store at State and Roosevelt after SuperValu announced that it’s selling Jewel-Osco and four other grocery stores to AB Acquisition in a transaction valued at $3.3 billion, Thursday, Jan. 10, 2013. | John H. White~Sun-Times
Updated: February 12, 2013 2:29PM
Will the Jewel-Osco stores survive intact?
With more than 170 stores and market leadership in Chicago, Jewel-Osco may be the strongest of the five grocery chains whose owner, Supervalu Inc., sold them for $3.3 billion. The sale, announced Thursday, also involves Albertsons, Acme, Shaw’s and Star Market stores and connected pharmacies that use the names Osco and Sav-on.
The group taking them over is led by Cerberus Capital Management LP, a buyout firm that formerly owned the automaker Chrysler. Their partners in the deal are steeped in real estate knowledge, leading to speculation that the stores will be closed or sold to maximize profits.
“Because of the real estate angle here, they could be looking at this as an asset play” and not a commitment to operate the stores, said Bob Goldin, executive vice president at Technomic, a Chicago-based food industry consultancy. He said the Jewel stores “need tender loving care and I hope that’s what they’ll do, but that’s not often in the playbook of private equity.”
However, a source close to the acquisition said Jewel will become a stronger competitor once freed from the Supervalu connection. Jewel has to buy its wholesale goods from Supervalu and now can shop for better deals that will reduce prices at the checkout counter, the source said.
“Jewel’s problems are not the competition. In Chicago, you’ll always have competition. Their problem is pricing,” he said.
Though not the dominator it once was, Jewel still has the leading market share in Chicago at about 30 percent. Longtime rival Dominick’s used to be a close second, but now has only about 9 percent of the market, said retail consultant John Melaniphy, president of Melaniphy & Associates Inc.
“Jewel has been under pressure but it’s still in the catbird seat. With the economy getting better, its sales should rise,” Melaniphy said.
Joining Cerberus were Kimco Realty Corp., Chicago-based Klaff Realty LP, Lubert-Adler Partners and Schottenstein Real Estate Group. It was essentially the same group that in 2006 acquired Albertsons stores in cooperation with Supervalu, which took over other Albertsons locations.
The Cerberus partnership worked selectively in that deal, selling out of markets such as northern California where Albertsons was weak while remaining strong in others, such as Arizona and Texas. The 2006 sale could be a template for how the operators approach Jewel.
The latest sale involves 877 stores across the country. The Cerberus group paid just $100 million in cash. The rest of the valuation comes from its assumption of $3.2 billion in debt.
“They’re buying it real cheap,” Melaniphy said. But he added that increasing sales will be tough.
Jewel occupies a tenuous middle ground between high-end stores such as Trader Joe’s that stress quality, service and appearance and warehouse-style discounters such as Aldi. Many independent chains with ethnic appeal or an emphasis on quality produce also have sprouted.
Supervalu is publicly traded and based in Eden Prairie, Minn. After the sale of Jewel and the others in this deal, Supervalu will consist of a food wholesaler, regional chains Cub, Farm Fresh, Shoppers, Shop ’n Save and Hornbacher’s and discount chain Save-A-Lot. Also, the Cerberus group has the right to acquire up to 19.9 percent of Supervalu stock at $4 per share.
The shares closed Thursday at $3.47, up 43 cents or 14 percent on the day. They have steadily lost value in recent years and have spent most of the last six months at less than $3 each.
For investors who bought Supervalu at the recent low prices, getting out at $4 a share is advisable, said Morningstar Inc. analyst Michael Keara. Almost overlooked because of the sale was Supervalu’s release of its fiscal third-quarter earnings, which featured declines in sales “across the board,” Keara said.
It reported a profit of $16 million, or 8 cents per share, including a $26 million after-tax gain related to a cash settlement received from credit card companies.
That compared with a net loss of $750 million, $3.54 a share, for the same period in fiscal 2012.
But the key figure was its net sales, down 4.8 percent to $7.9 billion. Retail food net sales were $4.96 billion, down 7.4 percent.
Supervalu said grocery retail veteran Sam Duncan will replace CEO and Chairman Wayne Sales after the sale.
In a conference call with analysts, Sales said the deal positions Jewel-Osco and the other store brands “with the best opportunity for future success,” enabling the new owners to quickly implement turnaround programs.
He said the deal will leave what’s left of Supervalu with a strong balance sheet enabling it to immediately invest in price, freshness and the customer experience, while bringing “to the party a very strong and experienced retail food leadership team. They have a very clear strategic plan to begin to implement changes immediately in the organization.”