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Fitch: Activist Could Accelerate Change at SUPERVALU, but Pay-outs May Be Limited
November 7, 2017 / 8:08 PM / 14 days ago

Fitch: Activist Could Accelerate Change at SUPERVALU, but Pay-outs May Be Limited

(The following statement was released by the rating agency) CHICAGO, November 07 (Fitch) According to Fitch Ratings, recent activist demands could further accelerate SUPERVALU Inc.'s (SVU; B/Stable) transformation to a mainly wholesale distribution business and fast track the company's recently announced plans to evaluate its owned real estate, underperforming retail stores, and distribution network. However, cash distributed to shareholders may be limited by restrictions in SVU's $840 million term loan facility, which is secured by a perfected first priority interest in SVU's real estate and other assets that had a book value of $707 million at Sept. 9, 2017. Blackwells Capital LLC, which owns an approximate 3.6% stake in SVU, has proposed that SVU sell 30% of its 217 retail stores, monetize owned real estate, and return cash to shareholders via dividends and share repurchases. The activist has also suggested that SVU make changes to its management team and board structure, which portends a potential push for board representation. SVU owned 51% or 12.8 million square feet of its real estate consisting of which 85% relates to 19 distribution centers and 15% relates to its 217 retail stores as of fiscal 2017 (February). The company does not pay a common dividend and is operating under an interim CFO. SVU's term loan agreement allows for the payment of dividends subject to a fairly liberal restricted payments basket provided that certain conditions are met but contains limitations on the use of proceeds from asset sales including the sale of its retail stores and real estate. Additionally according to covenants, 100% of net cash proceeds from the sale of any term loan priority collateral, inclusive of retail stores and real estate, must be used to prepay the term loans or reinvested within a specified time period if certain conditions are not met. In terms of sale and lease back transactions involving term loan priority collateral, the first $100 million of aggregate net cash proceeds and thereafter 50% of the remainder must be used for debt reduction in order for total secured leverage to be no greater than 2x. Fitch estimates total secured leverage as defined by SVU's credit agreement was less than 1.5x at the quarter ended Sept. 9, 2017. The bond indenture governing SVU's $400 million 6.75% and $350 million 7.75% senior unsecured notes also requires sale and leaseback proceeds be reinvested or used to pay down debt. SVU's 'B' Issuer Default Rating (IDR) and Stable Outlook reflect revenue and margin headwinds facing both its core wholesale distribution and retail business due to heightened competition, consolidation, and restructuring in the U.S. supermarket industry. The ratings incorporate Fitch's expectation of total adjusted debt/EBITDAR in the 4.0x range and positive FCF. However, should a change in financial strategy occur, SVU's ratings would be evaluated. Inclusive of Unified Grocers, Inc. (Unified) and Associated Grocers of Florida (AG of Florida), Fitch estimates SVU's wholesale distribution segment will approximate roughly 75% of its $16.7 billion of pro forma sales, up from under 50% total sales in fiscal 2017. The remaining 25% consist of sales generated by five retail grocery banners: Cub Foods, Farm Fresh, Shop 'n Save, Shoppers Food & Pharmacy and Hornbachers. . Fitch views the closing or divesting retail stores as logical given SVU's wholesale distribution focused strategy and that retail segment EBITDA has declined 45% from $247 million in fiscal 2016 (February) to $135 million for the LTM. However, transactions involving these stores would likely consider depressed industry multiples, pension liabilities, and foregoing revenue or EBITDA SVU earns from distributing to these stores. Fitch estimates SVU's retail segment represents about 25% of the company's approximate $540 million of pro forma EBITDA inclusive of Unified and the pending AG of Florida acquisition which generated an estimated $20 million of EBITDA. Fitch currently rates SVU as follows: SUPERVALU INC. --Long-Term IDR 'B'; --$1 billion secured revolving credit facility 'BB/RR1'; --$840 billion secured term loan 'BB/RR1'; --$750 million senior unsecured notes 'B-/RR5'. The Rating Outlook is Stable. Contact: Primary Analyst Carla Norfleet Taylor, CFA Senior Director +1-312-368-3195 Fitch Ratings, Inc. 70 W. Madison Street Chicago, IL 60602 Secondary Analyst Monica Aggarwal, CFA Managing Director +1-212-908-0282 Media Relations: Alyssa Castelli, New York, Tel: +1 (212) 908 0540, Email: alyssa.castelli@fitchratings.com. Additional information is available on www.fitchratings.com ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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