Supervalu To Acquire Unified Grocers For $375M, Shares Up

Grocery retailer Supervalu Inc. (NYSE:SVU) has recently inked a deal to acquire grocery distributor Unified Grocers Inc. for $375 million. Per the agreement, Supervalu will pay $114 million in cash and will also assume and pay off $261 million in United Grocer debt as of April 1.

The deal is likely to close in mid-to-late summer, subject to approval by Unified’s shareholders and other customary closing conditions. Shares rose 1.88% after the market closed on Apr 10.

Unified Grocers is a West Coast wholesale grocery distributor that supplies independent retailers in Oregon, Washington, and Northern California, while Supervalu is one of the largest grocery wholesalers and retailers in the U.S. Thus, the acquisition will boost Supervalu’s wholesale business and will also complement its customer base.

Also, it will help the company to serve customers better amid evolving grocery industry. The acquisition is also expected to offer new growth opportunities across multiple geographies for Unified Grocers, including the expansion of Unified’s Market Centre division as well as providing specialty and ethnic products to independent customers.

The deal will bring together two large grocery wholesale organizations with combined sales of $16 billion in 2016. Both Supervalu and Unified will have 24 distribution centers and serve a customer base of over 3,000 stores.

Following the completion of the merger, Unified Grocers will be a wholly-owned subsidiary of Supervalu. By the end of the third year after the transaction, the combined business will save at least $60 million in operating costs. The transaction is expected to be accretive to earnings per share, excluding the transition and integration costs as well as potential purchase accounting adjustments, in fiscal year 2018.

We believe the acquisition is a strategic fit for Supervalu, which has been focusing more on its wholesale business than retail as its retail businesses have been witnessing a slowdown due to tough competitive pressure, deflationary environment in the food industry and soft sales in the retail segment.

The company’s shares declined 28.6% in the past year underperforming the Zacks categorized Food-Miscellaneous Diversified industry’s gain of 0.4% in the same time frame.

Deflation in the grocery industry has also hit the company’s profits. An oversupply in some types of food – particularly meat, poultry and dairy – has lowered prices and forced grocery stores into more aggressive promotions. Moreover, customers are becoming more receptive to purchasing private label products as a low cost alternative to national brands. However, the company has undertaken several initiatives to post a turnaround.

In order to combat declining sales at the retail segment, the company is working on new pricing strategies and has plans to expand retail banners. Supervalu is geared to rebrand most of its retail banners in order to create a unique clearly-defined identity for each of the brands, communicated through in-store signage, weekly ads, customer emails, mobile devices and banner web pages. Further, the company has developed the store-within-a-store concept to expand offerings and started offering home delivery through the Instacart app.

Supervalu has also spun off its underperforming business Save-A-Lot to private equity firm Onex Corporation in Jan 2017 in order to concentrate on more profitable core businesses and fund several other turnaround initiatives.

It is better to wait and see if these initiatives help the Zacks Rank #3 (Hold) stock to post a turnaround in the near future.

Stocks to Consider

Some better-ranked stocks in the broader consumer staples sector include Lamb Weston Holdings, Inc. (NYSE:LW) , ConAgra Foods, Inc. (NYSE:CAG) and Pinnacle Foods, Inc. (NYSE:PF) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

While Lamb Weston has a long-term earnings growth of 3.24%, ConAgra Foods and Pinnacle have growth rates of 8.00% and 8.33%, respectively.

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