SUPERVALU (SVU) has been one of the more tumultuous stocks in the retail sector over the last ten years, climbing as high as $46 in 2007, before unraveling in 2008 and falling below $3 by 2012. Today, the stock trades near $8 a share after a major asset sale thanks to the influence of activist investor Cerberus Capital Management.
At a P/S ratio of just 0.13, SUPERVALU is still cheap using that revenue-based valuation, though the figure was as low as 0.02 before the supermarket chain sold Albertson's, Acme, Jewel-Osco and other chains to Cerberus for $100 million in cash and the assumption of $3.2 billion in debt. With a rock-bottom valuation, underperforming assets and a beaten-down share price, SUPERVALU was a classic target for activist investors looking to unlock value. Let's take a closer at how Cerberus got involved, and where the company stands today.
A brief history of Supervalu activism
In January 2013, facing a mountain of debt, steep operating losses and a stock price near $2.50, Supervalu entered into an agreement to sell five grocery banners -- Albertson's, Acme, Jewel-Osco, Shaw's, and Star Market -- or 877 stores to a Cerberus-led consortium for $3.3 billion. The real estate alone was estimated to be worth more than the $3.3 price tag the group of buyers known as Symphony Investors paid. Cerberus had a history with Supervalu, acquiring 635 Albertson's locations in 2006, making it a natural fit for the more recent purchase. When the sale closed in March of 2013, Symphony Investors became Supervalu's largest shareholder, holding 21.2% of shares outstanding.
That deal helped lift Supervalu's stock price, and paved the way for future maneuvers from Cerberus. In April of that year, Cerberus's Chief Operating Officer, Mark Neporent gained a seat on the board of directors as a designee of Symphony Investors. In July of 2013, two more board members were appointed, fulfilling the agreement made with Cerberus when the sale was initiated.
Fellow activist hedge fund Jana Partners also stepped up its stake in Supervalu this April to 11.6%, though it lacks the arrangement providing it influence on the board that Cerberus has.
Where Supervalu stands today
Supervalu's stock price isn't the only thing that's looking up since Cerberus' investment last year. After putting up nearly $1.5 billion loss in fiscal 2013, the company reversed that last year, turning a modest profit of $182 million. Much of the credit belongs to CEO Sam Duncan, who took the reins in February 2013 and led the supermarket chain to its first year of positive comps since 2008. In its most recent quarter, the company delivered $48 million, or $0.18 per share, in profits from continuing operations, and comps at its Save-A-Lot stores, its biggest remaining banner, were up 5.6%.
Supervalu isn't without its problems of course. A recent data breach could have negative consequences as the company reported in August that a criminal intrusion earlier in the summer may have resulted in stolen customer card data, and earlier this week it reported discovering malware on point-of-sale systems at some of its stores.
Not all activist investors are created alike
With Supervalu back in the black and seemingly getting better, at least some of the credit must go to Cerberus Capital Management. Helping Supervalu slim down by taking 877 stores off its hands was necessary for the company to return to profitability, and Supervalu's steps to full health since then have come with Cerberus appointees on the board, helping to steer the ship. Perhaps, this shouldn't come as a surprise since Cerberus is no stranger to the grocery business. The private equity company recently acquired Safeway (NYSE: SWY) for $9 billion with plans to merge it with Albertson's stores, creating the nation's #2 grocery chain.
Activist investors aren't always good for their fellow shareholders -- see Bill Ackman and J.C. Penney -- but Supervalu, with its beaten-down stock price and underutilized assets, was ripe for a deep-pocketed, knowledgeable investment firm like Cerberus. Though much of the transition has already been completed, there is still room for improvement and meaningful revenue growth still has yet to come. I'd interpret Cerberus' continuing investment as a positive sign, and investors may want to consider following its lead as the private equity firm made the right call last year. If Cerberus sells though, that may be a sign for retail investors that Supervalu's recovery has ended, and your money may be better put to use other places.
