Supervalu seen by many as prime takeover target

In the last week I've seen the following headlines and stories:

• Supervalu rumored as takeover target as groceries consolidate (Minneapolis / St. Paul Business Journal)
• Grocery M&A to rise; Supervalu seen as target (Reuters)
• Albertsons on its last legs? (LAobserved.com)

According to Thomson Reuters data, dealmaking in the grocery sector is up 34% this year to $2.6 billion, making it the busiest year since 2007.

According to Scott Moses, managing director and head of food, drug and specialty retail investment banking at Sagent Advisors, "Consolidation of grocers of various forms and sizes is almost certain to continue because it's a microeconomic imperative, given the growth of supercenters, club stores and various non-union specialty formats."

As for Supervalu (Acme, Save-A-Lot in the Philly market), the third-largest grocery chain in the country behind Kroger and Safeway, the company is desperately trying to lower its debt that resulted from its $12.4 billion purchase of Albertsons in 2006. Since that time, Supervalu has struggled to both pay down the debt and invest in its own business (not to mention its challenge to compete on price with an ever-increasing list of rivals). Instead, they have turned to layoffs and store closings.

Many industry analysts think Supervalu could sell off assets like the Save-A-Lot chain in order to lower its debt and invest in its traditional grocery stores. Most agree that rivals and equity firms would line up to buy Save-A-Lot, or perhaps even Supervalu's distribution business.

Rumors have also been swirling in the Greater Philadelphia market about a Giant (Ahold) takeover of many of Genuardi's (Safeway) PA and NJ stores.

Retail sales and vacancy rates at odds in recent reports, but wait...

Sales: According to Thomson Reuters data on 25 major chains, retail sales in the U.S. increased 1.7% in March, despite a late Easter, high unemployment and rising gasoline prices. Analysts had expected that sales would fall 0.7%. And according to a story in The Wall Street Journal, U.S. retailers expect solid spring sales, despite gas prices, inflation and lackluster consumer confidence. Global consumer strategist Don Palmer says many retailers are actually raising prices more than they have to in order to test their pricing power with customers.

But wait... Mr. Palmer points out there is risk in this pricing strategy, as resistance to rising prices will be delayed and hit later, possibly during the critical back-to-school or holiday sales season.

Vacancy rates: According to Reis, vacancies at neighborhood and community shopping centers, which are usually anchored by discount and grocery stores, rose to 10.9% in the first quarter from 10.7% a year earlier. The rate was unchanged from the three previous quarters and the highest since it reached 11% in 1991. The vacancy rate for regional malls hit 9.1%, also the highest rate since 1991.


But wait... CoStar Group said the vacancy rate for all types of U.S. retail properties (including freestanding stores, malls, strip malls and community shopping centers) fell to 7.1% in the first quarter from 7.4% a year earlier. Furthermore, retail properties overall have had net occupancy gains for seven quarters. More consumer spending and corporate hiring has helped, according to one of CoStar's senior real estate strategists.

There you have it.