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11/01/2014

What's the Safe Way for Cerberus?

The $9.4 billion acquisition of Safeway by Cerberus Capital Management, announced in March, and its merger with Cerberus-owned Albertsons, was one of the biggest deals in U.S. grocery history and makes for the second-largest pure grocery company in America. It was a long time coming, and, as with many elaborate courtships, had its ups and downs. (At press time, the merger was awaiting approval by antitrust regulators.)

Safeway already held the No. 2 position, behind Kroger. But the deal cements that position and narrows the gap, as the new company now has more than 2,700 stores nationwide. It also is seen as a way to address some problems that had afflicted the companies in their previous incarnations.

Cerberus appears to have been the only serious contender for Safeway. Kroger reportedly made a late bid, but a deal with Kroger probably would have required massive selloffs to satisfy antitrust regulators in California and elsewhere. In any case, Kroger may have just wanted to drive up the price for its rival, as it was busy with its own deal for the Harris Teeter chain based in North Carolina.

The deal is, in a sense, a reunion for Albertsons, in a saga that began in 2006. Cerberus combined with grocer Supervalu and drugstore chain CVS Health to buy Albertsons, in a deal valued at $17.4 billion. The company then split up, with Supervalu holding on to most of the Albertsons stores, which it rebranded as New Albertsons. Its banners besides Albertsons included Acme in the mid-Atlantic, Shaw's and Star Market in New England, and Jewel-Osco in Chicago. The remaining Albertsons stores, mostly in the West, were organized as Albertson's LLC by Cerberus, which proceeded to close underperforming ones steadily through 2012.

ACT TWO REUNITES

Supervalu tried to hang onto the stores it had organized as New Albertsons, but couldn't make a go of it. That led to Act Two in 2013, when Cerberus and the other investors in Albertson's LLC bought New Albertsons, now down to 877 stores, back from Supervalu. Albertson's LLC also bought a 21 percent stake in Supervalu, which became a wholesaler. The deal revealed what a killer Supervalu's debt load was: Albertson's LLC paid $100 million in cash–and $3.2 billion in debt assumption.

For all sides in the deal, it represented a chance to reset the scoreboard after some rough going during the preceding years. Some of the New Albertsons banners, like Jewel-Osco, hadn't been doing well. But the Safeway acquisition presents questions about plans for the future company's management and overall structure.

For one thing, Cerberus is not a grocer; it's a private-equity company with a history of acquiring companies and cutting out the underperforming parts, as it did in 2006. Private equity firms often go after businesses whose parts are more attractive than the whole, and that would seem to apply in this case, with some of the banners facing less competition than others. In addition, as part of the deal, Cerberus plans to sell off Property Development Centers, Safeway's real-estate development arm, which owns several store sites and was overseeing a couple of new-store construction projects in California. This is a possible signal that it doesn't intend to build any new stores.

In general, Cerberus is seen as more interested in splitting up the company and milking its various parts than in having a coherent end game. The cash-heavy grocery industry, with its traditional structure of regional banners, has great potential in these situations for being divided into winners and losers, with the winners rewarded with a windfall IPO payday and the losers sinking out of sight after being saddled with the outstanding debt. Venture capitalists, who traditionally have spurned food retailing as having too-small profit margins, are starting to become interested. Sterling Investment Partners put Fairway Market, a New York-based chain it had owned since 2007, up for an IPO last year, raising $177.5 million (and retaining a majority share). Lone Star Holdings filed for a $500 million IPO for its Bi-Lo and Winn-Dixie banners in late 2013, although it withdrew the filing in August with no explanation.

COMBINED MANAGEMENT

The management team going forward is a combination of both companies, with Robert Edwards, CEO of Safeway, becoming CEO of the new company and Bob Miller, CEO of Albertsons, becoming executive chairman. In a talk at Boise State University in April, Miller implied that Cerberus is in the grocery game for the long haul by saying that when it bought part of Albertsons originally in 2006, experts expected them to sell off the stores immediately. But even though some stores were sold, a wholesale dismantling didn't happen, Miller said, noting that the new company bought 10 Raley's stores in New Mexico: "That...showed the grocery world that we weren't solely about selling the car for parts," he was quoted as saying in the Idaho Statesman.

For the time being, the new company has said it does not plan to close any stores. However, when Cerberus made the original purchase in 2006, it gave similar reassurances of not closing any stores, then ended up shuttering hundreds, essentially wiping out the Albertsons banner in northern California.

Another potential sticking point is unionization. Most of the existing Safeway stores are unionized, as are many Albertsons, and the United Food and Commercial Workers unions in northern California have bad memories of unionized stores getting shut down or sold. But the union president said shortly after the sale that he looks forward to working with Cerberus.

If Cerberus does end up dismantling Safeway/Albertsons or selling off one or more large chunks, it will conform to the industry trend on mergers and acquisitions, which has generally cooled off after a binge in the late 1990s (although consolidation by market share continues apace).