Save-A-Lot Sale Generates-A-Lot Of Cash For SuperValu

It’s no surprise that many recently announced spinoffs have been abandoned in favor of outright sales. Possible reasons include the fact that numerous industries are suffering from a lack of organic growth or the fact that these bite size carve out pieces are more easily acquired. Oh yeah, it also helps when acquirers toss around rich valuations.

The latest example is SuperValu’s (SVU) estimated $1.37b sale of discount grocer Save-A-Lot to Onex Partners, a Canadian private equity firm. The price is actually more than SuperValu’s current equity market cap and as a result, it’s no surprise that the stock popped a bit on the announcement. Of course, the name crashed a day or so later after another poor quarter of declining sales due to deflation and intense competition. Fickle markets.

The company plans on using the proceeds to pay down its onerous and enormous debt load (at least on an absolute level) and for corporate growth purposes. Although there will be some tax leakage, the company will be able to utilize its NOL’s to retain most of the proceeds. Save-A-Lot was the lone bright spot in terms of growth within SVU’s portfolio and the overall market trends seem to favor being at the extreme bottom of the market like Save-A-Lot or at the very high end. SuperValu will continue operating its remaining 200 stores and running its wholesale distribution business, but given the share price, it seems no one is particularly excited about either of those businesses or confident in their future.

Despite the trend of potential spinoffs being bought, Save-A-Lot’s situation was a bit different. Although initially planned as a tax free spinoff of 80% of the company, Supervalu was forced to change its plans several months ago to a taxable split of just 60% of the company. Losing the tax advantage eliminates many of the benefits to shareholders while also making a sale a more attractive and competitive option. That is especially true given the existence of the NOLs. Many speculated that the company’s creditors actually forced it to alter its spinoff plans into a taxable structure so perhaps by using the proceeds to slash its indebtedness, the company can also eliminate further meddling in its operational plans by its creditors. Given the smaller size of the company and the operating trends, I think it will need more work in that arena to get to that point.

The sale is expected to close this January and is expected to be dilutive. Obviously, there will be no spinoff here so we will remove it from the table.

Disclosure: Author holds no position in any stock mentioned.