Grocery store dealmaking, already up one-third this year, is expected to increase as regional supermarkets seek greater size and heft to compete against non-union, lower-cost rivals.
The goal has been to help companies lower their purchasing, marketing, and distribution costs as they increase in size. Cutting costs and gaining size should improve profits in the face of competition from non-union warehouse clubs, specialty grocers and mass merchandisers such as Costco Wholesale Corp (COST.O), Whole Foods Market Inc (WFM.O) Wal-Mart Stores Inc (WMT.N) and Target Corp (TGT.N).
Dealmaking in the grocery sector has jumped 34.2 percent so far this year to $2.6 billion. That marks the busiest year-to-date since 2007, according to Thomson Reuters data.
"The next few months will be busy because things are busy now. 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," said Scott Moses, managing director and head of food, drug and specialty retail investment banking at Sagent Advisors.
Deals are unlikely to look like the mega-mergers of 1998, which saw Kroger Co (KR.N), already the largest grocery retailer in the United States, merge with Fred Meyer, and Albertsons merge with American Stores, bankers said.
Instead, deals will resemble bolt-on acquisitions and regional expansions such as Sprouts Farmers Market's merger with Henry's Farmers Market and Haggen Inc's acquisition by Comvest Group, bankers said.
SUPERVALU SEEN AS PRIMED FOR DEAL, BREAK-UP
One company that analysts and investment bankers agree is primed for a deal or break-up is Supervalu Inc (SVU.N), which owns the Jewel-Osco, Albertsons and Save-A-Lot chains.
The company has laid off workers, closed stores and sold assets in a continuing effort to lower debt from its $12.4 billion acquisition of more than 1,100 Albertsons stores in 2006.
"There are some food retailers with the competitive position, scale, capital structure and resulting liquidity to create shareholder value over time by increasing EBITDA," said an industry banker who declined to be named because he was not authorized to speak with the media.
"There are some who have not been able to do that, particularly with a challenging credit market. Supervalu clearly falls in the later camp," the banker said.
Supervalu trades at 6.4-times earnings, compared with a sector median of 14.8-times earnings. Supervalu's stock has fallen 14 percent since the start of the year, compared with a modest rise in market leader Kroger Co (KR.N). Supervalu, which is the third-largest grocery chain behind Kroger and Safeway Inc SWY.N, has a market capitalization of $1.7 billion.
Last month, Supervalu said it would build fewer Save-A-Lot discount stores than planned because licensees were having difficulty obtaining loans in the weak economy. The company also tempered its full-year earnings and sales forecasts.
Supervalu, which has been losing market share, has vowed to get its everyday pricing as low as bigger players Kroger and Safeway amid fierce competition and rising food costs.
Major supermarket chains are struggling with falling sales volumes as all but the most affluent shoppers remain very cautious about spending.
Supervalu could break apart, get money to pare its debt and money to invest in its traditional grocery store chains. Bankers expect a wide range of rivals and private equity firms would line up to buy the Save-A-Lot and distribution businesses.
Save-A-Lot is the company's "hard discount" brand aimed at low-income shoppers. The warehouse-style stores offer less variety than a traditional supermarket and focus on private label items. It competes with Kroger's Food-4-Less.
The company's wholesale distribution business serves about 2,200 independent retailers. The business accounts for about 20 percent of Supervalu revenue.
"SuperValu has struggled since it bought the Albertson's stores because it couldn't juggle the debt load and the price competition from rivals. It couldn't pay the debt and invest in the business at the same time," said a second investment banker, who declined to be named because he was not authorized to speak to the media.
"Unlocking the value of the distribution business could free up funds to revive the other half of the business," the second banker said.
(Reporting by Jessica Hall in Philadelphia; additional reporting by Lisa Baertlein in Los Angeles; editing by Gunna Dickson)