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Grocery carted off in pieces

The supermarket giant that was Albertson's will shrink into a chain the size of the recently downsized Winn-Dixie..

By MARK ALBRIGHT
Published January 24, 2006

Giving up plans to become one of the nation's top two grocery chains, a humbled Albertson's Inc. on Monday was sold in pieces for $9.7-billion and its Florida unit dealt off to a private equity group.

Led by Cerberus Capital Management LP, the new owners of the 103 Florida stores said they are long-term investors who will continue to operate under the Albertsons name. But some analysts wondered how long the venture will last.

"The plan is to operate as an ongoing concern and grow both market share and the business," said R.C. Auletta, spokesman for Cerberus, which expects to close on its roughly $1.1-billion deal for 655 stores in six markets around the country by June.

Including the assumption of $7.7-billion in debt, the overall $17.4-billion cash and stock deal carves what was once marketed as Joe Albertson's supermarket into three chunks. Where each piece falls will have a major impact in the consolidating supermarket and drugstore industries, and continues the trend of investment trusts buying into troubled retailers for the value of their underlying real estate . According to Monday's deal:

Seven hundred Sav-On and Osco drugstores, located mostly in Western states, were bought by CVS Corp. for about $3.9-billion. CVS leap-frogged Walgreen Co. as the nation's biggest drugstore with the purchase of 1,200 former Eckerd drugstores in 2004. The added stores will push CVS to 6,200 stores and even further ahead of Walgreen's 5,400.

Supervalu Inc., a Minneapolis chain that operates the Save-A-Lot discount grocery chain in Florida but conventional supermarkets elsewhere, will pay $12.4-billion for 1,124 Albertsons supermarkets. That includes all of Albertson's Inc.'s best-performing divisions: Acme, Jewel Osco, Bristol Farms, Star Markets and Shaw's. Supervalu will emerge as the nation's third-largest grocer behind Wal-Mart and Kroger Co. with 2,600 stores. The chain would more than double in size to $44-billion in annual revenues.

Albertson's, which had been the nation's fourth-largest grocer with more than 2,600 stores, will be compressed into a privately held chain the size of the recently shrunken Winn-Dixie Stores Inc. with revenues of about $10-billion.

Albertson's shareholders stand to get $26.29 a share in cash and Supervalu stock for each of their Albertson's shares. That's less than the $28 Albertson's hoped to get. But Albertson's shareholders will end up owning 35 percent of Supervalu.

Albertson's shares closed Monday at $25.42, up $1.31. Supervalu shares closed at $33.98, up $2.13. CVS shares closed at $26.99, down 17 cents.

The remaining 655 Albertsons stores, including 103 in Florida, are being sold to the investment group led by Cerberus. The group said it will keep Albertson's headquarters in Boise, Idaho.

Named for a mythical three-headed hound that guards the gates of hell, Cerberus is a $15-billion fund that owns several companies, including apparel maker Esprit and Alamo/National Car Rentals, and invested $100-million in Tampa's Anchor Glass. Its other partners in Albertson's include shopping center landlords Kimco Realty Corp., Klaff Realty, Lubert-Adler Partners and Schottenstein Stores Corp., a Columbus, Ohio, retailer that owns Value City discount stores and has talked of expanding to other states.

The deals for Albertson's came as no surprise. A strikingly similar transaction collapsed two weeks ago amid concerns it would fail antitrust muster. Such concerns were set aside once Cerberus agreed to acquire 26 Cub Foods stores in Chicago from Supervalu. That freed Supervalu to acquire more than 200 Jewel Osco stores in the same metro area from Albertson's.

Such wheeling and dealing is the latest example of how traditional supermarkets are scrambling to survive the onslaught of Wal-Mart Supercenters, which sold more groceries than any other U.S. retailer in 2005.

Winn-Dixie is downsizing and refining its merchandising while in bankruptcy. Some followed Publix to a more upscale offering. Kash n' Karry Food Stores hopes to capitalize on the internal distraction caused by Albertson's changing ownership. It is morphing faster into Sweetbay Supermarket by accelerating the remodeling of 50 Kash n' Karry stores in the Tampa Bay into flashier Sweetbays this year.

Albertson's answer to Wal-Mart was an acquisition spree to compete as a bigger volume operator. The chain brought in former top GE executive Larry Johnston, who used the tactics of his GE boss, Jack Welch, to rationalize Albertson's bloated girth.

Johnston hoped to position Albertson's as one of the top two-performing supermarket chains. His board gave up after three years by agreeing to sell the company. Shareholders of each company also must approve the deal.

"This is not what Larry Johnston envisioned when he took on the job," said David Dietze, president of Point View Financial Services, a fund with Supervalu shares. "But amid relentless competition, there was just a very long path to profitability."

Cast off by a gobbled-up parent, Albertson's in Florida now finds itself about where Tampa-based Kash n' Karry was in 1987. Labeled an undesirable asset when its parent was snapped up by a bigger chain, Kash n' Karry survived on its own, then endured a series of ownership groups. The remains of its old parent now are Albertsons stores being sold to Supervalu.

Analysts, who refer to the 655 stores Cerberus acquired as "the leftovers," are not sure how long they will remain intact.

"I think they just put a big "for sale' sign on the stores in Florida," said Mark Husson, a securities analyst who covers the supermarket industry for HSBC. "I can see Publix and Sweetbay interested in buying some of the better locations, but I don't see anybody bigger coming in there."

--Mark Albright can be reached at albright@sptimes.com or 727 893-8252.

WHAT CVS IS BUYING: 700 Sav-On and Osco drugstores mostly in Western states for $3.9-billion.

WHAT SUPERVALU IS BUYING: 1,124 supermarkets operating as Albertsons, Acme, Jewel Osco, Shaw's and Bristol Farms for $12.4-billion in cash and assumed debt.

WHAT CERBERUS CAPITAL AND ITS REAL ESTATE INVESTMENT TRUST PARTNERS ARE BUYING: The remaining 655 Albertsons stores in Florida, Texas, Arizona, New Mexico, northern California and Chicago for an estimated $1.1-billion.

ALBERTSON'S IN FLORIDA

STORES: 103 from Key West north and west to Pensacola, with 22 in the Tampa Bay area and 21 around Orlando. Pulled out of Jacksonville last year and Dade County a decade ago.

EMPLOYEES: 11,000.

LOGISTICAL HUB: 1-million-square-foot distribution center in Orlando.

MARKET SHARE: Fifth place in the Tampa Bay area with 7 percent of the market behind Publix, Kash n' Karry/Sweetbay, Wal-Mart and Winn-Dixie.

SOURCES: Companies, Trade Dimensions Marketscope

[Last modified January 24, 2006, 04:34:37]