Supervalu to sell Jewel-Osco, other chains to Cerberus group

Published: Thursday, Jan. 10, 2013 10:44 a.m. CDT

(MCT) — Jewel-Osco stores will be sold to a consortium of investors led by Cerberus Capital Management, Jewel's parent Supervalu said Thursday. 

The deal, valued at $3.3 billion, also includes the Albertsons, Acme, and Shaw stores.

The announcement ends months of speculation that all or parts of the troubled grocery chain would be sold to New York-based Cerberus, an investment firm. Supervalu acquired Jewel in 2006 as part of a larger, complex acquisition of the Albertsons company.

Supervalu also reported a profit of $16 million, or 8 cents per share, in the third quarter ended on Dec. 1, compared with a year-earlier loss of $750 million, or $3.54 per share, Reuter reported.

Excluding an after-tax gain related to a cash settlement from credit card companies and after-tax charges primarily related to store closures, it earned $5 million, or 3 cents per share.

Traditional supermarkets, large stores built for one-stop-shopping, have suffered as Walmart and Target have added grocery departments, and discount chains like Aldi and Save-A-Lot have proliferated. Dollar stores have also expanded food offerings. And none of these competitors are tied to union contracts, making it easier to keep labor costs, and consequently prices, low.

But Supervalu sales and earnings have also lagged traditional supermarket competitors, like Cincinnati-based Kroger, and Dominick’s parent, Pleasanton, Calif-based Safeway. Returns for investors have also lagged. According to Bloomberg, Supervalu’s stock price fell 81 percent from 2010 through 2012, while Safeway stock fell 15 percent and Kroger’s grew 27 percent.

Last April, Supervalu reported a loss of $1.04 billion for fiscal 2012, which included a $519 million operating loss and $509 million in interest expense. Sales also declined 3 percent, to $27.9 billion.

In July, the company said it was exploring strategic alternatives, including a sale. Soon after, the company dismissed CEO Craig Herkert, with Chairman Wayne Sales stepping in to helm the troubled grocer.

In September, Supervalu said it would 60 underperforming stores, primarily from the Save-A-Lot and Albertsons chains. No Jewel locations were identified at the time. The announcement was particularly troubling to investment community because Save-A-Lot, a hard discount chain, has been Supervalu's primary growth vehicle.

Supervalu has long acknowledged that many of its stores are not price competitive. In 2012, it homed in on Jewel-Osco and the Chicago market. Supervalu surveyed customers and lowered prices throughout the store. When the company reported results for its second fiscal quarter in September, (Supervalu CEO Wayne) Sales said that Jewel had been "competitively priced throughout the store" for about six weeks.

Sales said that the initiative had resulted in "dramatic improvement" in how consumers "think about the quality of products we sell, how they feel about the service they get in various departments" and that the company was pleased with increased unit sales.

Supervalu acquired Jewel-Osco stores in 2006, as part of a complex acquisition of the Albertsons company. The deal, led by Cerberus Capital Management, divided the Albertsons grocery chain, with part going to Cerberus, and part going to Supervalu.

Until the 2006 deal, Supervalu had been primarily a wholesale company, although it had slowly been adding retail assets. But the Albertsons deal vastly increased Supervalu's retail business, and saddled the company with an onerous debt.

That debt obligation has made it difficult for the company to fend off low-priced competitors like Walmart, which sacrifices gross margin for sales volume, or make capital investments to improve the look and experience of its stores, and better compete with upscale chains like Whole Foods.

Cerberus Capital Management had been widely been viewed as the most likely candidate to acquire all or part of Supervalu.

The New York-based investment firm has experience in the food retail sector and was an investor in the 2006 Albertsons deal. Cerberus still holds a stake in Albertsons and Strategic Restaurants, a Burger King franchisee with more than 250 restaurants.

Separately, experts have suggested that Jewel may be particularly attractive to a large chain without a major Chicago presence, such as Kroger.

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