Group gobbles up grocery chain

0 Comments | Oakland Tribune, Jan 24, 2006 | by Matthew Bunk, BUSINESS WRITER

ALBERTSON'S INC. will be split up in a $9.7 billion buyout announced Monday, which will put ownership of the company's Northern California stores into the hands of an investment firm that may try to sell them again.

While Supervalu Inc. will take over most of Albertson's grocery operations -- making it the nation's second-largest grocery chain -- Cerberus Capital Management L.P. will lead a team of investors to oversee groups of stores in Northern California, Dallas, Florida, the Rocky Mountains and the Southwest.

Now Cerberus' team needs to avoid a bellyache from swallowing a much larger beast -- and contend with Safeway Inc. in a competitive Bay Area market.

"Nobody has done well in Northern California except Safeway," said Mark Husson, an analyst at HSBC Securities.

It's not clear what the investment consortium will do with the grocery operations, but financial experts said a second sale is likely.

Husson said Cerberus "is already beating the bushes for buyers."

He said the investment firm doesn't have a background in running grocery stores and would be hard pressed to compete in a market increasingly dominated by Pleasanton-based Safeway Inc.'s remodeled "lifestylecenters."

Boise, Idaho-based Albertson's has at least 114 retail stores in the Bay Area, as well as distribution centers in Vacaville and San Leandro.

Minneapolis-based Supervalu, the Cerberus group and drugstore chain CVS Corp. made up an investment group that offered to buy Albertson's for $9.7 billion in cash and stock. The group made a similar attempt to buy Albertson's about a month ago, but the deal collapsed. The sale will net Albertson's stockholders about $26.29 in cash and Supervalu stock for each Albertson's share. The buyers are also assuming about $7.7 billion in debt.

Richard Benson, president of UFCW Local 870, which represents hundreds of Albertson's workers in the Bay Area, said union leadership is watching the transaction with "both eyes open."

"It puts a question mark on the deal because the new owner doesn't run grocery stores," he said. "And if they're not going to operate them, what will they do?"

Albertson's shares rose $1.31, or 5.4 percent, Monday to $25.42 on the New York Stock Exchange, while Supervalu shares rose $2.13, or 6.7 percent, to $33.98 and CVS shares fell 11 cents to $26.96.

Only Kroger Co. will be larger once Supervalu takes over 1,124 stores under the Albertson's, Acme Markets, Bristol Farms, Jewel- Osco and Shaw's Supermarkets banners. The expanded Supervalu will have

2,656 stores.

Kroger, which operates on the West Coast as Ralphs, might be a potential buyer for the Albertson's stores in Northern California, Husson said. "Kroger has been looking at divesting its Northern California business," Husson said, "but they might be thinking they can make a go of it if they take over the Albertson's stores."

Supervalu also will face challenges as it absorbs its larger rival, analysts said.

"This is a huge step for Supervalu and we would not rule out some upfront indigestion," Goldman Sachs & Co. analyst John Heinbockel wrote in a research note.

Supervalu will pay about $6.3 billion in stock and cash and assume about $6.1 billion in Albertson's debt for the 1,124 stores and in-store pharmacies under the Osco and Sav-on brands.

CVS of Woonsocket, R.I., is purchasing about 700 stand-alone Sav- on and Osco Drugstores and a distribution center in La Habra for $2.93 billion in cash. It will also acquire real estate interests in the drug stores for $1 billion.

The Associated Press contributed to this report.