UPDATE 3-Supervalu selling five grocery chains to investor group

Thu Jan 10, 2013 12:34pm EST

* Selling Albertsons, Acme, Jewel-Osco, Shaw's, Star Market

* Cerberus leads investor group in deal

* $3.3 bln deal includes assumption of $3.2 bln in debt

* Group to take up to 30 percent of remaining Supervalu

* Supervalu shares up almost 8 percent

By Olivia Oran and Lisa Baertlein

Jan 10 (Reuters) - Supervalu Inc struck a $3.3 billion deal to reduce its burdensome debt by selling five retail grocery chains to an investor group led by Cerberus Capital Management LP, the No. 3 U.S. grocery store operator announced on Thursday.

Shares in Supervalu jumped 7.9 percent to $3.29 on the New York Stock Exchange. The company has been losing shoppers to rivals like Kroger Co and Wal-Mart Stores Inc.

Supervalu, which also reported a quarterly profit, said it would sell the Albertsons, Acme, Jewel-Osco, Shaw's and Star Market chains and in-store pharmacy under the Osco and Sav-on names. The transaction will be valued at $3.3 billion, in which the buyer will take on $3.2 billion of Supervalu's debt.

After the deal, slated to close by the end of March, Supervalu's business will include a food wholesaler serving 1,950 U.S. stores; the discount grocery chain Save-A-Lot, which offers a smaller assortment of low-priced merchandise than a typical supermarkets; and the regional grocery chains Cub, Farm Fresh, Shoppers, Shop 'n Save and Hornbacher's.

As part of the deal, a Cerberus-led group will launch a tender offer for up to 30 percent of Supervalu's common stock at $4 per share, which represents a 50 percent premium to the 30-day average closing share price.

The Cerberus investor group includes real estate firms Kimco Realty Corp, Klaff Realty LP, Lubert-Adler Partners and Schottenstein Real Estate Group.

Supervalu Chief Executive Wayne Sales said the company's remaining supermarket chains hold strong competitive positions and are not in need of significant investment.

The transaction will also leave the company with a "much more manageable" debt load, Sales said on a conference call with analysts. The CEO joined the company over the summer to put together a deal and will leave when it is completed.

Supervalu said its remaining businesses should generate annual revenue in excess of $17 billion. In the fiscal year ended in February 2012, the company's total revenue was $36.1 billion.

The grocery distribution business will represent about 47 percent of the remaining company's revenue, Sales said. Save-A-Lot will contribute one-quarter of revenue and the remaining grocery chains will kick in 28 percent. Executives declined to give additional financial information.

"It's back to square one," Cantor Fitzgerald analyst Ajay Jain said of post-deal Supervalu, which will have a footprint similar to what it was before the Albertsons acquisition that left Supervalu with burdensome debt.

Cerberus' Supervalu strategy is widely expected to mirror its play-book at Albertsons - which was purchased by the private equity firm, Supervalu and CVS Caremark Corp for $10 billion in 2006.

Under that deal, Cerberus acquired 655 Albertsons locations and Supervalu bought the remaining 564.

Cerberus will reunite its newly purchased Albertsons stores with those it already owns.

"Cerberus will most likely do what they did six years ago with Albertsons - sell, close, sell, close," supermarket consultant David Livingston said.

"They are not in this because they have a passion for running grocery stores. You don't buy failing grocery stores because you want to be in the grocery business," Livingston said.

Supervalu has no plans to sell additional assets. Pension liabilities for the chains it sold will transfer to the new owners, executives said on a conference call with analysts.

Goldman Sachs Group Inc and Greenhill & Co Inc advised Supervalu on the transaction. Lazard and Barclays PLC advised Cerberus.

SALES STILL UNDER PRESSURE

Minneapolis, Minnesota-based Supervalu separately reported a quarterly profit of $16 million, or 8 cents per share, for the third quarter ended Dec. 1, compared with a year-earlier loss of $750 million, or $3.54 per share.

Excluding an after-tax gain related to a cash settlement from credit card companies and after-tax charges primarily related to store closures, it earned $5 million, or 3 cents per share, in the latest quarter.

Sales fell 5 percent to $7.91 billion.

Supervalu's grocery stores reported a 4.5 percent decline in sales at identical stores in the latest quarter. The company defines that measure as sales at supermarkets operating for four full quarters, including store expansions, and excluding fuel sales.

Identical store sales at Save-A-Lot declined 4.1 percent.

Supervalu expects to trim about $400 million of its remaining debt this fiscal year, and sees capital spending of about $500 million, including plans for new Save-A-Lot stores and about 40 store remodels.

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