Don’t Fall for SuperValu’s Sudden Surge

by Marc Bastow | October 23, 2012 10:50 am

It’s hard to imagine any reason why red-ink bleeding grocer SuperValu (NYSE:SVU[1]) would have surged in Monday trading, but there it is: According to reports from a variety of sources, including Reuters[2], privately held Cerberus Capital is talking to banks about arranging up to $5 billion in debt to purchase the company in a leveraged buyout.

The pitching is aimed at any number of banks, of course, but the Reuters report acknowledges Debtwire sources saying it’s primarily focused on Bank of America (NYSE:BAC[3]) and JPMorgan (NYSE:JPM[4]).

The scent of a successful buyout is so strong that Wall Street Cheat Sheet is reporting JPM debt analyst Carla Casella upgraded SuperValu bonds from “underweight” to “neutral” on Monday due to a 50% chance of a LBO.

Of course, nobody from any of the above was available for comment. Instead, let the 33% run-up in the stock price speak for the rumor. But what gives?

Investors, investors, investors: Have we not seen this movie before? Staples (NASDAQ:SPLS[5]) and Best Buy (NYSE:BBY[6]) come to mind immediately, as both companies have seen the occasional price spike as private equity players come and go with dreams of buyouts and equity injections that will result in a privately held company or one with new management.

In all these cases, the bigger question for investors is always what do these guys see that I am missing? These companies seem to have several common threads: Their business models are outdated, their market is extremely competitive and for the most part they’re losing money.

SuperValu is no different. As my colleague Dan Burrows[7] recently pointed out, the No. 3  supermarket chain is in a struggle[8] it can’t win against either Safeway (NYSE:SWY[9]) or Kroger (NYSE:KR[10]).

Further, with discount retailers like Dollar Tree (NASDAQ:DLTR[11]) and Dollar General (NYSE:DG[12]) challenging everyone for grocery dollars, what real advantage does Supervalu bring to the table, no matter what its corporate status?

Look at the numbers: Revenue growth has followed a downward trend since 2009, and while $36 billion in revenue is nothing to sneeze at, the trend is troubling. Even worse, earnings have gone deeply red in the last two years and appear headed for more in 2013. In the last year, SuperValu has lost $2.5 billion, while its market value has tumbled to $625 million as the stock lost almost 64%.

It has already announced in its guidance that things won’t look very good for a while, and it suspended its dividend while announcing it’ll slash capital spending (read: new stores).

Its ongoing losses, $6 billion in long-term debt and a negative cash-flow are major hurdles in trying to convince nearly anyone to pony up new monies for a company whose debt load exceeds its market cap by a factor of 10.

So, what do we make of this news flash? Someone is looking to get paid out, and it’s not investors.

Marc Bastow is an Assistant Editor at As of this writing he does not hold a position in any of the aforementioned securities.

  1. SVU:
  2. Reuters:
  3. BAC:
  4. JPM:
  5. SPLS:
  6. BBY:
  7. Dan Burrows:
  8. supermarket chain is in a struggle:
  9. SWY:
  10. KR:
  11. DLTR:
  12. DG:

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