The RWE on New Albertson's and American Stores' ratings reflects the uncertainty regarding the acquisition entity's final capital structure and Cerberus' financial strategy. Fitch expects the transaction will likely be neutral for American Stores bonds (given strong limitation on liens) but the impact on Albertson's bonds will depend on how much secured debt AB Acquisition puts in place, against which Albertson's inventory and real estate would be pledged.
Transaction Price and Multiple Paid for New Albertson's
AB Acquisition has agreed to pay $100 million in cash plus the assumption of $3.2 billion of debt, for a total consideration of $3.3 billion for NAI. The assumed debt includes $1.95 billion of senior unsecured notes at New Albertson's, Inc., $468 million of senior unsecured notes at American Stores Company, LLC and the assumption of an estimated $780 million in capital leases.
Fitch estimates that AB Acquisition will pay around 3.8x EBITDA for the business. This is based on Fitch's estimates that revenues at these banners are $17.6 billion and EBITDA is close to $875 million. This implies that the EBITDA margin on these assets is approximately 5%, almost in line with or slightly worse than the retail businesses that will remain at SVU.
In June 2006, the Albertson's assets acquired by SVU were generating $24.5 billion in sales (there have been some asset disposals since that transaction) and about $1.8 billion in EBITDA, implying an EBITDA margin of 7.2%. At that time SVU paid $12.4 billion for the Albertson's business or a multiple of 7.0x EV/EBITDA.
Remaining SVU Business
Comparing SVU's business today (after carving out the businesses to be sold) with SVU's business in fiscal 2006 prior to its acquisition of Albertson's reveals the deterioration in the legacy SVU business over the past six years.
Sales at an estimated $17.2 billion today compare with sales of $19.9 billion in fiscal 2006 (year ending February 2006), or a 13% decline, reflecting identical store (ID) sales declines and modest asset sales. Fitch estimates LTM EBITDA of around $700 million - $730 million, compared with EBITDA of $924 million in fiscal 2006, or a decline of 20% - 24%.
The distribution business has LTM revenue of $8.2 billion with EBITDA of $265 million or an EBITDA margin of 3.2%. In fiscal 2006, this business generated revenue of $9.2 billion and EBITDA of $308 million so while the revenue base has contracted, margins have remained fairly stable. The retail business today has combined sales of $9 billion consisting of an estimated $4.2 billion in sales at its 191 price superstores and traditional supermarkets and $4.8 billion at its hard discount Save-A-Lot business. This compares with combined sales of $10.6 billion in fiscal 2006. EBITDA is estimated at $435 to $465 million (with Save-A-Lot at $240 million) versus $660 million in fiscal 2006, with margins contracting by about 100 to 120 basis points to 5.0%-5.2%.
In addition, free cash flow (FCF) was around $350 million - $400 million in the years leading up to fiscal 2006, and is now estimated by management at $175 million post-sale, which is largely explained by the $200 million drop in EBITDA over the time frame.
New SVU Debt and Leverage Profile
Following the transaction, SVU's debt structure will consist of a new $900 million asset-based revolving credit facility, a $1.5 billion term loan secured by a portion of the company's real estate and an equity pledge of the parent company of Save-A-Lot, $1 billion of senior unsecured notes maturing in May 2016 and an estimated $350 million in capital leases. The new revolver and term loan will replace and refinance SVU's existing $1.65 billion asset-based revolver, $846 million term loan, and $490 million of 7.5% bonds maturing in November 2014, which will be called. It is uncertain whether the $200 million accounts receivable securitization facility will remain in place.
This will leave SVU with debt (including capital leases) of $3.0 billion plus the amount outstanding on the new revolver, which Fitch assumes will be in the $300 million range, leaving total debt of about $3.3 billion. Fitch assumes rent expense of about $130 million to $140 million. This will result in adjusted debt/EBITDAR in the low 5x range, compared with 4.8x for the whole business as of Dec. 1, 2012. As a result, the transaction is expected to be modestly leveraging.
Outlook for Remaining Business Remains Negative
Each of SVU's remaining business is currently under considerable pressure, experiencing sales declines and margin contraction. The retail food segment's (traditional supermarkets including assets for sales) ID sales declined by 4.5% the quarter ended Dec. 1, 2012, and has experienced negative ID sales for the past four years. While the remaining banners may be better positioned than the businesses being exited, Fitch still expects future comparable store sales declines in the low single digit range.
Sales in the independent business (wholesale distribution) have been relatively flat but margins have been under pressure due to price investments. EBITDA margins have contracted by 60 basis points to 3.2% for the first three quarters of fiscal 2013 relative to the comparable year ago period.
The Save-A-Lot business saw its ID sales declines accelerate in Q3 to negative 4.1% versus negative 3.7% in Q2 and negative 3.4% in Q1. EBITDA margins have contracted by 130 basis points to 5.4% for the first three quarters of fiscal 2013 relative to the comparable period a year ago. Performance has been disappointing and worse than expected in this business given that the hard discount segment has typically done well in this environment. Planned repositioning activities are expected to further constrain Save-A-Lot's margin over the next few quarters.
Fitch believes it will be difficult for SVU to turn around these businesses, although they have held up somewhat better than the businesses that are being spun off. Fitch expects EBITDA will continue to erode from the $700 to $730 million level these businesses generate today. With FCF potentially in the range of $150 million to $175 million over the next two to three years, Fitch remains concerned about the refinancing risk related to a sizable $1 billion senior note maturity in May 2016.
Up to 30% Stake in SVU By Cerberus Consortium
In addition to the sale of New Albertson's, a Cerberus-led investor consortium (Symphony Investors) will conduct a tender offer for up to 30% of SVU's common stock at a purchase price of $4 (or a total consideration of up to $250 million), a 50% premium to SVU's 30 day average closing prices as of January 9, 2013. If Symphony does not obtain at least 19.9% of the outstanding shares through the tender, SUPERVALU will be obligated to issue new shares to bring Symphony's stake to at least 19.9% of outstanding stock (currently 214 million diluted shares outstanding) prior to the issuance.
What Could Trigger A Rating Action:
A downgrade could occur if negative ID sales persist, suggesting the company is not reversing traffic declines, or if operating margins narrow more than expected, leading to weaker free cash flow and credit metrics and an inability to refinance its 2016 maturities.
An upgrade could occur if the company is able to reverse negative operating trends, and demonstrate that it is able to address its 2016 maturities with a combination of FCF and asset sales.
The rating actions are as follows:
--IDR affirmed at 'CCC';
--$1.65 billion bank credit facilities affirmed at 'B'/'RR1';
--$850 million term loan B affirmed at 'B'/'RR1';
--Senior unsecured notes affirmed at 'CCC+'/'RR3'.
New Albertson's, Inc.
--IDR of 'CCC' placed on RWE
--Senior unsecured notes ('CCC'/'RR4') placed on RWE
American Stores Company, LLC
--IDR of 'CCC' placed on RWE
--Senior unsecured notes ('B'/'RR1') placed on RWE