A BoiseDev Deep Dive

Analysis: A sale? A breakup? Acquisitions? Nothing? Options for Albertsons after strategic review announcement

NEWS ANALYSIS

In recent years, BoiseDev has put increasing focus on covering Boise-based Albertsons Companies, with more than 100 news stories, dozens of scoops, an interview with the company’s CEO, and more.

Despite the close focus on a significant Idaho brand and employer, the somewhat vague news release last week that it would launch a strategic review came as a surprise.

The company said it hired a pair of blue-chip investment bankers, would take “inquiries,” and work through a strategic review with an undetermined timeline. Albertsons’ board co-chair Chan Galbato was quoted in the release saying the company would take a “deep and considered review of all possible paths towards maximizing value creation.”

[Buy gas at Albertsons? Class action suit could put a small check in your pocket (and a large one in attorneys’)]

What does the news mean — and what will come next for the Boise-born and based company?

Albertsons, which went public in 2020, has seen strong results in the two years since the COVID-19 pandemic began impacting the US and increasingly focused on technology – both behind-the-scenes and on the consumer side.

It remains what’s known as a “controlled company,” which puts a few critical investors in the driver’s seat. Cerberus Capital Management is by far the largest shareholder in the sprawling grocery company, holding 31.4% of the company’s shares, followed by real estate fund Lubert-Adler Management and investment firm HPS Investment Partners.

Galbato was appointed to the board leadership position by Cerberus. An analysis last week by Reuters notes that Cerberus has owned a stake in Albertsons since 2006 (when the former Albertsons Inc. split into three pieces, with a Cerberus-led group picking up ‘underperforming’ stores). Reuters speculates the move last week may be driven by Cerberus in an attempt to keep “the pressure on in the hope of squeezing out more value.”

What are the options? A sale?

Albertsons McCall
The Albertsons store in McCall, Idaho. Photo: Don Day/BoiseDev

A news release announcing a strategic review can quickly make someone think Albertsons might consider a sale of its business. While it’s possible, the number of likely parties to pick up the company and its 2,270 stores is not large.

Albertsons ranks as the fourth-largest grocery in the country, behind just Walmart, Kroger, and Costco Wholesale. A sale to Walmart wouldn’t make sense due to antitrust and business model challenges, and the company isn’t a likely fit with Costco’s club-focused model. A matchup with Kroger is also not likely as the two companies have significant overlap in many markets, which would make it hard to get antitrust approval (for instance, in Idaho, Albertsons operates stores under its own brand and Safeway, while Kroger owns more than a dozen large Fred Meyer stores).

A once-unthinkable option, Amazon, Inc., became a lot more realistic when the company snapped up Whole Foods in 2017 (right out from Albertsons, it turns out). But Amazon, too, has seen increasing scrutiny from regulators and has been working to muscle through its purchase of Hollywood movie studio MGM in recent months.

[Albertsons sees sales increase, says inflation is a factor and omicron is hurting supply chain recovery]

Piecemeal?

Instead of unloading all 2,220-plus stores, The Philadelphia Inquirer points to another option: unloading parts of the company.

Analysts surveyed by the paper said Albertsons could sell some of its banners or markets, which would unlock capital and slim down the number of stores it owns.

Albertsons Companies owns stores under more than 20 brands – Including Acme, Amigos, Carrs, Jewel Osco, Pavilions, Shaws, United, Vons, and more. It has continued to acquire smaller brands, including a pair less than 18 months ago.

“These investors buy assets for a song, put a little money into it, make the stores better, then sell at a profit. Now they want to get some good returns on that,” John Stanton, a professor of food marketing at St. Joseph’s University in Philadelphia, told the Philadelphia Inquirer. “Their real business is selling companies, not food. That’s what you hire investment bankers for, to sell assets.”

Stanton oversimplifies a bit, as the Cerberus-led group picked up Albertsons, LLC in 2006, the rest of Albertsons from Supervalu in 2013, and Safeway in 2015. That means the three largest investments by Cerberus in grocery date back 16, nine, and seven years, respectively. In addition, the 2020 public offering gave Cerberus and some of its partners a chance to cash out some of their holdings.

[Albertsons tests app that lets customers check out without checking out]

Albertsons has been down the “sold in pieces” route before. In the 2006 deal, Albertsons Inc. split in three, with those underperforming stores going to the Cerberus group, the bulk of stores sold to Supervalu, and standalone drugstores split off to CVS. That deal lasted just a few years before Cerberus glued the two largest parts back together (leaving the drug stores with CVS).

Divest non-store pieces?

Albertons gas
An Albertsons Express gas station in Boise. Photo: Don Day/BoiseDev file

Another option is selling off non-store assets.

It’s taken this path before, selling off fuel stations across the country. It later jumped back into the gas and convenience store market and now owns 400 locations.

The company could also sell large chunks of its real estate and lease it back. Albertsons operates a separate subsidiary known as ACI Real Estate Company. It reorganized the division in 2020 and said it had about 240 store properties with a value of about $2.9 billion. For instance, the company owns the land and building for its store at 1219 S. Broadway but doesn’t in locations like the Hillcrest Shopping Center. Selling all or part of the real estate assets could provide a quick cash infusion.

Albertsons has also built an extensive portfolio of store brands, including O Organics, Signature Select and Open Nature. Other large retailers, like Sears, sold off store brands, including Craftsman, adding cash to the balance sheet.

[‘T-Rex’: Safeway made big bet on Theranos before sale to Albertsons. Now the blood test co. CEO is on trial]

On the flip: Purchase?

Albertsons hiring investment bankers and saying it would respond to inquiries could easily mean it would look to buy — or swap assets — with other retailers.

The list of purchases for Albertsons is long. The first big pickup came in 1999 when Albertsons bought American Stores, adding ACME, Osco, Sav-on, and more, continuing through the Safeway deal, and scores of smaller additions like Haggen and a more recent deal for Kings/Balduccis.

In recent years, the company has worked to pay down debt from acquisitions and decrease its debt-to-equity ratio and leverage. It could open up new opportunities to buy. In its late 2010s quest to go public, the company at one point announced a combination with Rite Aid that would have pushed the two companies together. The deal fell apart over valuation issues, and later Albertsons went public with the 2020 IPO.

Cerberus could look to swap assets with other chains or companies. It could pick up stores in areas with a more substantial regional presence in exchange for stores in places where it has less presence. For instance, Albertsons used to operate dozens of stores in Florida but eventually sold or closed all its locations in the state.

Stand still

The company could do… nothing. It even hinted at the possibility in the news release: “There can be no assurance that the review will result in any transaction or other strategic change or outcome.”

Instead, it could continue to work its playbook, invest in additional technology, upgrade and remodel stores and add small batches of locations here and there — the same strategy it has used over the past few years.

But Wall Street investors clearly expect something will happen. After last week’s news, the stock popped to a nearly all-time high, a level the stock has maintained since. No news could see the stock trend downward over time.

We’ll be watching…

Don Day - BoiseDev Editor & Founder
Don Day - BoiseDev Editor & Founder
Don is the founder and publisher of BoiseDev. He is a National Edward R. Murrow Award winner and a Stanford University John S. Knight Fellow. Contact him at [email protected].

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