Supervalu Inc (NYSE:SVU) jumped nearly six percent before the market close higher yesterday, on news that the company is selling its Save-A-Lot brand to a Canadian private equity firm for $1.37 billion. Shares of Supervalu continued to rally in after-hours trading, rising an additional 1.51 percent to $5.38. The food retailer and wholesaler will unload Save-A-Lot, a discount grocery store chain, to Onex Corp – rather than following through with its previous plan of spinning off the subsidiary.
Under the terms of the agreement, Supervalu will continue to provide Save-A-Lot with specific professional services – like payroll and merchandising technology – for a period of five years. According to the Minneapolis-based parent company, the deal is expected to close before January 31. Onex will soon own and operate all 1,370 Save-A-Lot locations.
“Today’s announcement is the result of a thorough process to maximize the value of the Save-A-Lot business and best position SUPERVALU for future success,” said Jerry Storch, Supervalu’s Non-Executive Chairman of the Board. “SUPERVALU is successfully executing on its long term strategic vision and positioning the Company for continued growth and value creation. We are confident that this transaction will create exciting opportunities for both SUPERVALU and Save-A-Lot.”
Supervalu plans on using the net proceeds from the all-cash payment to prepay a minimum of $750 million towards its outstanding term loan balance. The rest of the Onex payment will be used to cut down on the company’s debt, enhance its capital structure, as well as bankroll corporate programs and growth initiatives.
The acquisition of Save-A-Lot means that Supervalu can focus more on its food distribution unit, which supplies to hundreds of supermarkets across the country. Despite the fact that Save-A-Lot was one of the company’s best-performing divisions, getting rid of it would provide Supervalu with a stronger balance sheet that will allow us to further build on our core strengths and growth opportunities.”
The sale of Save-A-Lot comes during a time marked by particularly fierce competition in the supermarket world. Some of the industry’s biggest companies are shuffling around, restructuring and consolidating – in a time of falling food prices. The current food deflation has sparked a vicious price war among supermarket competitors, and grocery store chains are heavily discounting to lure in customers.
“It starts to border on irrational pricing,” said Jennifer Bartashus, an analyst at Bloomberg Intelligence. “People are lowering prices just to draw traffic, without thinking about their margins.”
Supervalu’s stock price has plummeted by more than 25 percent this year-to-date, as price wars put pressure on the company’s bottom line.
DISCLAIMER: The author does not hold any positions in any of the above companies.