Kroger to merge with Albertsons?

[storewanderer]

Before COVID, Albertsons financial condition was very poor. They barely made any money if they made money at all. The way their debt is structured from the Safeway transaction is not good and is not structured for the long term. It was structured for a 5-7 year period then like a ticking time bomb. And that is why we are seeing the company sold. That isn't to say they couldn't just continue without being sold and go restructure the debt... and be fine... but the bankers and investment groups don't make as much money that way...

[retailfanmitchell019]

Before COVID, Albertsons financial condition was very poor. They barely made any money if they made money at all. The way their debt is structured from the Safeway transaction is not good and is not structured for the long term. It was structured for a 5-7 year period then like a ticking time bomb. And that is why we are seeing the company sold. That isn't to say they couldn't just continue without being sold and go restructure the debt... and be fine... but the bankers and investment groups don't make as much money that way...

Safeway should've been casted off to Ahold in 2014. Only overlap would've been in the DC/Baltimore area.
As you've said, Albertsons would be running smoothly today with the LLC formula had the Safeway merger not happened: it would be a chain with the Old Albertsons mindset pre-Larry, with strong quality and fair prices. For store brands, Albertsons should've made a deal with SVU to get control of their old store brands back.
Albertsons would've eventually been spun off to a foreign buyer (Loblaws or someone else) in that scenario.

But no, Albertsons HAD to acquire Safeway, didn't they?

If the merger fails, it will definitely be a turning point in Albertsons' history. As I've said, Albertsons needs to sell unprofitable divisions like Safeway East, Denver, Texas, Shaw's, and those Acme stores in the NYC metro (keep the stores in Philly).
If Albertsons doesn't sell off those assets, they will die.

[kr.abs.swy]

We are forgetting how much of a basket case Albertsons was pre-Safeway. I think we like to nostalgically remember the Albertsons of the 1980s and 1990s that was growing rapidly and was generally a decent place to shop. After the SuperValu/Cerberus/CVS transaction, and more specifically during the SuperValu years and at the time of the sale of "good" Albertsons to Cerberus, we had a company that had essentially no private label, had retreated from longtime markets like most of Utah, much of Northern Nevada, and even a few Southern Idaho towns (Burley, Blackfoot), had closed a lot of stores and was building very few new ones, and basically had a business plan under SuperValu of "let's keep doing the same stuff and hope it finally starts to work." Prices were high, stores mostly didn't look great (except the small handful of high performers that got a thorough SuperValu remodel) and there really wasn't much of a reason to shop there. Current Albertsons isn't perfect, but there is absolutely no doubt that the combination of Albertsons and Safeway is a stronger company.

The stores sold by SuperValu to LLC were sold for only $100 million, plus LLC taking on $3.2 billion of debt. Enterprise value of the combined company today is somewhere in the ~$25 billion range.

Before COVID, Albertsons financial condition was very poor. They barely made any money if they made money at all. The way their debt is structured from the Safeway transaction is not good and is not structured for the long term. It was structured for a 5-7 year period then like a ticking time bomb. And that is why we are seeing the company sold. That isn't to say they couldn't just continue without being sold and go restructure the debt... and be fine... but the bankers and investment groups don't make as much money that way...

Safeway should've been casted off to Ahold in 2014. Only overlap would've been in the DC/Baltimore area.
As you've said, Albertsons would be running smoothly today with the LLC formula had the Safeway merger not happened: it would be a chain with the Old Albertsons mindset pre-Larry, with strong quality and fair prices. For store brands, Albertsons should've made a deal with SVU to get control of their old store brands back.
Albertsons would've eventually been spun off to a foreign buyer (Loblaws or someone else) in that scenario.

But no, Albertsons HAD to acquire Safeway, didn't they?

If the merger fails, it will definitely be a turning point in Albertsons' history. As I've said, Albertsons needs to sell unprofitable divisions like Safeway East, Denver, Texas, Shaw's, and those Acme stores in the NYC metro (keep the stores in Philly).
If Albertsons doesn't sell off those assets, they will die.

[storewanderer]

We are forgetting how much of a basket case Albertsons was pre-Safeway. I think we like to nostalgically remember the Albertsons of the 1980s and 1990s that was growing rapidly and was generally a decent place to shop. After the SuperValu/Cerberus/CVS transaction, and more specifically during the SuperValu years and at the time of the sale of "good" Albertsons to Cerberus, we had a company that had essentially no private label, had retreated from longtime markets like most of Utah, much of Northern Nevada, and even a few Southern Idaho towns (Burley, Blackfoot), had closed a lot of stores and was building very few new ones, and basically had a business plan under SuperValu of "let's keep doing the same stuff and hope it finally starts to work." Prices were high, stores mostly didn't look great (except the small handful of high performers that got a thorough SuperValu remodel) and there really wasn't much of a reason to shop there. Current Albertsons isn't perfect, but there is absolutely no doubt that the combination of Albertsons and Safeway is a stronger company.

The stores sold by SuperValu to LLC were sold for only $100 million, plus LLC taking on $3.2 billion of debt. Enterprise value of the combined company today is somewhere in the ~$25 billion range.

The absolute worst period of Albertsons was that 2009-2012 period under Supervalu (for the ones owned by Supervalu). The store operations in WA (Seattle suburbs) were by far the worst (OR was also pretty bad but not as bad...). SoCal looked a bit better for some reason and was priced better. ID looked better but had terrible pricing. Conversely for the LLC Stores once they got done closing stores and exiting regions those were the best times for those Albertsons Stores in a long time.

If Safeway-izing the Albertsons Stores made them stronger, which maybe it did, then the merger is good. I guess. But now we are going to be losing both Safeway and Albertsons with this Kroger transaction.

Ironically had either Albertsons or Safeway stayed separate, a Kroger acquisition of just one of the two would have probably gone a lot more smoothly. Then again Safeway was in the process of imploding.. had it not been bought by Albertsons, the Texas Stores would have been shuttered like Dominicks/Genuardis and who knows what Safeway would have done to the rest of its company after that.

[kr.abs.swy]

I don't agree that the pre-covid financial condition was "very poor." It looks like their corporate rating was B+ going into covid. That's not great, but certainly isn't poor. But yes, I agree, they were struggling to turn a profit and there's no question that covid was the gift that keeps on giving for their stores.

Back to current Albertsons -- as of their most recent 10-K, they had $8.0bn of debt, primarily bonds (and not including the leases). Of that $8.0bn, $750mn was to mature in 2022 (presumably has been paid off or refinanced; I didn't look) and there weren't any other major maturities until 2026 ($2.8bn). The balance of $3.9bn matures in 2027 or later (and it looks like most or all was to mature by 2031).

So basically, they have two full years to deal with the $2.8bn in 2026 maturities before they even hit CPLTD. If for some reason they don't get it dealt with by 2024, they still have 2025 to refi, just with more pressure because it would go current.

With a BB credit rating, banks would fall over themselves to underwrite a new bond issue and/or to put together a new syndicated loan. Even in a modestly recessionary economy, Albertsons would be able to refinance the 2026 maturities without too much stress. Investors know that these stores are sources of consistent cash flow and this business isn't that at risk from inflation (unless their customers literally don't want to eat).

I also noticed that the majority of Albertsons' debt is unsecured. They have a long list of options -- each of which is viable in today's economy:
* refinance into the bond market
* refinance into the bank loan market
* offer PP&E and stores as collateral to make the bonds or loans more attractive
* if necessary, use an ABL line that is secured by margined inventory and receivables
* more equity from Cerberus, secondary stock sales, etc.
* sell off a division or two

So yes, they do have some intermediate-term maturities that they'll need to deal with. But they have a long list of levers they can pull. They could refinance $1bn of the 2026 maturities into a 2032 10-year bond and another $1bn into a 2037 15-year bond by the end of the year if they wanted to. Literally -- they could have that done by the end of 2022. No problem. There is just no sense in paying the underwriting fees right now because they hope this all becomes a moot point after Kroger takes over.

Assume a very worst case scenario and no banker on Wall Street is returning their calls: with $4bn in annual EBITDA and somewhere north of $1bn in interest expense, they could scrape together enough out of cash flow to retire the 2026 maturities over the next three years. They'd just need to pay down ~$1bn per year. They'd have to manage capex extremely aggressively, wouldn't be able to pay dividends, etc., but they could do it. But that's a worst case scenario -- economic conditions would have to be extremely dire for them not to be able to refinance.

The fact that most all of their debt is unsecured tells you that investors have faith in this company.

This is why I say that there is absolutely no reason to be thinking about bankruptcy.

Before COVID, Albertsons financial condition was very poor. They barely made any money if they made money at all. The way their debt is structured from the Safeway transaction is not good and is not structured for the long term. It was structured for a 5-7 year period then like a ticking time bomb. And that is why we are seeing the company sold. That isn't to say they couldn't just continue without being sold and go restructure the debt... and be fine... but the bankers and investment groups don't make as much money that way...

[pseudo3d]

Interesting article: https://www.supermarketnews.com/retail- ... 13c01ae908

Looks like 500 - 550 stores might be a more realistic divestiture number.

Also this was the most interesting part of the article:

"For example, the report showed that in seven markets, the percentage of Albertsons stores in Chicago with at least one Kroger location increases from 2.79% within 1 mile to 14.53% within 3 miles. The trend is similar in other markets: Denver (30.95% 1 mile, 90.48% 3 miles), Las Vegas (28.57% 1 mile, 95.24% 3 miles), Phoenix (22.08% 1 mile, 89.61% 3 miles), Portland (29.69% 1 mile, 81.25% 3 miles), San Diego (19.72% 1 mile, 76.06% 3 miles) and Seattle (40.78% 1 mile, 87.38% 3 miles)."

What's also interesting is they didn't do the study for the biggest overlapping market: Los Angeles.

One question is, what is the standard for each area?

For instance, when Ahold and Delhaize were doing their working together deal, they had to sell off one store of two in a particular area. They were in separate towns, probably closer to that 3-4 mile range from each other, but in both cases the only store in the given town. You then had to travel probably 10+ miles to the next town that would have a store outside that company.

If you applied that same standard to some of the listed areas, it wouldn't work, simply because they are far larger areas with more stores to begin with, and in some places people may not even travel now to that store 3 miles away no matter what brand it is. Once you get into major cities, some people won't even go more than a few blocks to shop.

That makes it harder for someone not familiar with a particular location to pick what is or is not really changing competition in that area.

A key difference between Kroger/Albertsons (or even Albertsons/Safeway) and Royal Ahold/Delhaize was that most of the overlapping stores were smaller markets. There were assorted suburban areas in and around Northern Virginia and Baltimore (none in the Baltimore/Washington cities directly, or their larger closer suburbs), there was Richmond, and most of the divested stores (about 60 out of 86 stores) were Food Lion...a Food Lion's share, if you will.

The big problem right now is that with Albertsons/Safeway, it was still barely permissable because most of the affected markets (Arizona, SoCal, Oregon, Washington, Dallas) still had Kroger. It knocked out a competitor but there were still two very viable competitors left in the area. With Kroger/Albertsons it eliminates that last real competitor in those same markets plus some. The only market where that isn't really the case is Houston, but again, there Randalls is basically dead weight and isn't going to give Kroger a huge edge over H-E-B.

Back in 2002 when they bought the Albertsons stores when the chain left Houston, it created some overlap--but the new Albertsons stores were modern 55k+ square feet stores compared to the old early 1980s Greenhouse stores that Kroger still had.

As a modern example, Randalls may have a 55k square feet store but Kroger has a wildly popular 85k square feet store that's newer, more accessible, and all that just about a mile away. If the situations were reversed, then it makes sense why Kroger would want the bigger store, but they aren't.

[storewanderer]

I don't agree that the pre-covid financial condition was "very poor." It looks like their corporate rating was B+ going into covid. That's not great, but certainly isn't poor. But yes, I agree, they were struggling to turn a profit and there's no question that covid was the gift that keeps on giving for their stores.

Back to current Albertsons -- as of their most recent 10-K, they had $8.0bn of debt, primarily bonds (and not including the leases). Of that $8.0bn, $750mn was to mature in 2022 (presumably has been paid off or refinanced; I didn't look) and there weren't any other major maturities until 2026 ($2.8bn). The balance of $3.9bn matures in 2027 or later (and it looks like most or all was to mature by 2031).

So basically, they have two full years to deal with the $2.8bn in 2026 maturities before they even hit CPLTD. If for some reason they don't get it dealt with by 2024, they still have 2025 to refi, just with more pressure because it would go current.

With a BB credit rating, banks would fall over themselves to underwrite a new bond issue and/or to put together a new syndicated loan. Even in a modestly recessionary economy, Albertsons would be able to refinance the 2026 maturities without too much stress. Investors know that these stores are sources of consistent cash flow and this business isn't that at risk from inflation (unless their customers literally don't want to eat).

I also noticed that the majority of Albertsons' debt is unsecured. They have a long list of options -- each of which is viable in today's economy:
* refinance into the bond market
* refinance into the bank loan market
* offer PP&E and stores as collateral to make the bonds or loans more attractive
* if necessary, use an ABL line that is secured by margined inventory and receivables
* more equity from Cerberus, secondary stock sales, etc.
* sell off a division or two

So yes, they do have some intermediate-term maturities that they'll need to deal with. But they have a long list of levers they can pull. They could refinance $1bn of the 2026 maturities into a 2032 10-year bond and another $1bn into a 2037 15-year bond by the end of the year if they wanted to. Literally -- they could have that done by the end of 2022. No problem. There is just no sense in paying the underwriting fees right now because they hope this all becomes a moot point after Kroger takes over.

Assume a very worst case scenario and no banker on Wall Street is returning their calls: with $4bn in annual EBITDA and somewhere north of $1bn in interest expense, they could scrape together enough out of cash flow to retire the 2026 maturities over the next three years. They'd just need to pay down ~$1bn per year. They'd have to manage capex extremely aggressively, wouldn't be able to pay dividends, etc., but they could do it. But that's a worst case scenario -- economic conditions would have to be extremely dire for them not to be able to refinance.

The fact that most all of their debt is unsecured tells you that investors have faith in this company.

This is why I say that there is absolutely no reason to be thinking about bankruptcy.

The problem with trying to retire the 2026 maturities is like you point out, that would cripple their ability to pay dividends to Cerberus and friends (that is a high priority). There is a reason they are pushing to sell the company now. It has a tract record the past couple years of doing well for the past couple of years. One or two bad quarters and everything derails for this chain.

There is a reason why Cerberus wants OUT. And wants out NOW.

The other side of this is if they thought the company was going to build upon the past couple years and continue to produce strong results another couple years forward (which would be possible if they ran it properly; and they really aren't too far off from doing that if they could just fix pricing and private label), then it would be worth even more in another couple of years and they could pay down some debt from strong results (maybe not the whole 2026 maturity amount but at least a chunk of it). But this scenario is speculative. Again Cerberus seems to want out NOW and the numbers were such that Kroger agreed to this deal that carries a satisfactory premium for them.

I have always been concerned with Albertsons debt load in a high interest rate environment. The rates will become too high to service the debt and completely cripple them from paying dividends to Cerberus and friends and from doing proper capex. But let's go forward and look at what Kroger's debt load is going to be after this- yikes. Even less room for error for the merged company with the debt it appears to be taking on. Of course you throw Kroger's superior financial performance and better asset structure (more owned stores/facilities, etc.) into the mix so they are in a better position to handle higher debt service costs, I guess, than Albertsons is.

I think they'd be better off splitting the thing up in pieces again. If Kroger is the buyer for the so called "good" assets, so be it. And hope Kroger doesn't become the next Supervalu. Find another investment group (multiple have been in/out of grocery over the years) that will take the "poorly performing" assets and let them improve them, sell them to other parties, or butcher them up for real estate value.

However I am not sure a division by division "butchering" is the best approach. I think they need to do it store by store. Certainly in some cases entire divisions just need to go. With all of the real estate Cerberus has sold off, I am not clear what the terms of the leasebacks are. It is very possible that some old stores on high cost real estate, especially in NorCal, that Safeway had owned for 60+ years, which were basically cash printing machines due to having no rent cost, suddenly are facing challenges due to having to pay rent, plus the property tax basis being "reset" when the sale-leaseback occurred, which cost is obviously being rolled into the rent, then when you add in issues like increasing theft, other increased operating costs, etc. that these stores seem to be facing, all may not quite be as it seems in terms of what assets are poorly performing.

[kr.abs.swy]

Unfortunately none of us really know what Cerberus is thinking. In my mind, there are probably two factors at work:
1. Cerberus is long past the typical holding period for investments. Usually when PE gets involved, you expect to see them try to monetize after something like seven years. They just aren't built to be long-term investors. They very well could have their investment in funds that are in the resolution phase. It's just time for Cerberus to close the book on this investment. Even if you reset the clock at the time of the Safeway merger, it's just time for Cerberus to call it a day.
2. Cerberus probably sees that Albertsons isn't going to perform any better in the coming years than they did in the covid years, so they aren't going to have many better opportunities to get out.

So from that standpoint, this makes sense. Cerberus turned around what is left of the bad markets they bought in 2006, bought SuperValu Albertsons on the cheap, has integrated Safeway, and has created a company worth $25 billion. Their work is done. The fact that something remains of the LLC stores (that we all mostly expected to be sold for RE value), the fact that SuperValu Albertsons avoided bankruptcy, and the fact that the Safeway merger was successful-ish all mean that Cerberus did OK here.

I understand that on the surface, the debt sounds scary. And they probably will have to pay higher rates when the debt comes due. And their leverage is a turn or two higher than some of their competitors. But it is perfectly normal for a company like this to have debt (but yes, I agree, Albertsons is on the high side, especially if they yank out the proposed dividend). Having debt helps them keep their cost of capital lower, which helps increase the return to the equity holders, which more or less is just how a capitalist economy works. I'm not as worried about high rates killing them as you are, because if rates go up, their competitors are going to have to pay more in interest expense too. We all have to eat, so higher rates will get passed along throughout the industry. (And we would be paying even more if Albertsons was funded 100% with equity, because the expected return on equity is higher). That isn't to say it might not get bumpy, and that isn't to say that Albertsons wouldn't be at a disadvantage if competitors have longer term fixed rate debt at the time that Albertsons has to refinance. But we're not talking about crippling amounts of leverage (compare Albertsons leverage to where leverage is for retailers who go bankrupt -- it's not even close).

Just my two cents ... thanks for the discussion.

I don't agree that the pre-covid financial condition was "very poor." It looks like their corporate rating was B+ going into covid. That's not great, but certainly isn't poor. But yes, I agree, they were struggling to turn a profit and there's no question that covid was the gift that keeps on giving for their stores.

Back to current Albertsons -- as of their most recent 10-K, they had $8.0bn of debt, primarily bonds (and not including the leases). Of that $8.0bn, $750mn was to mature in 2022 (presumably has been paid off or refinanced; I didn't look) and there weren't any other major maturities until 2026 ($2.8bn). The balance of $3.9bn matures in 2027 or later (and it looks like most or all was to mature by 2031).

So basically, they have two full years to deal with the $2.8bn in 2026 maturities before they even hit CPLTD. If for some reason they don't get it dealt with by 2024, they still have 2025 to refi, just with more pressure because it would go current.

With a BB credit rating, banks would fall over themselves to underwrite a new bond issue and/or to put together a new syndicated loan. Even in a modestly recessionary economy, Albertsons would be able to refinance the 2026 maturities without too much stress. Investors know that these stores are sources of consistent cash flow and this business isn't that at risk from inflation (unless their customers literally don't want to eat).

I also noticed that the majority of Albertsons' debt is unsecured. They have a long list of options -- each of which is viable in today's economy:
* refinance into the bond market
* refinance into the bank loan market
* offer PP&E and stores as collateral to make the bonds or loans more attractive
* if necessary, use an ABL line that is secured by margined inventory and receivables
* more equity from Cerberus, secondary stock sales, etc.
* sell off a division or two

So yes, they do have some intermediate-term maturities that they'll need to deal with. But they have a long list of levers they can pull. They could refinance $1bn of the 2026 maturities into a 2032 10-year bond and another $1bn into a 2037 15-year bond by the end of the year if they wanted to. Literally -- they could have that done by the end of 2022. No problem. There is just no sense in paying the underwriting fees right now because they hope this all becomes a moot point after Kroger takes over.

Assume a very worst case scenario and no banker on Wall Street is returning their calls: with $4bn in annual EBITDA and somewhere north of $1bn in interest expense, they could scrape together enough out of cash flow to retire the 2026 maturities over the next three years. They'd just need to pay down ~$1bn per year. They'd have to manage capex extremely aggressively, wouldn't be able to pay dividends, etc., but they could do it. But that's a worst case scenario -- economic conditions would have to be extremely dire for them not to be able to refinance.

The fact that most all of their debt is unsecured tells you that investors have faith in this company.

This is why I say that there is absolutely no reason to be thinking about bankruptcy.

The problem with trying to retire the 2026 maturities is like you point out, that would cripple their ability to pay dividends to Cerberus and friends (that is a high priority). There is a reason they are pushing to sell the company now. It has a tract record the past couple years of doing well for the past couple of years. One or two bad quarters and everything derails for this chain.

There is a reason why Cerberus wants OUT. And wants out NOW.

The other side of this is if they thought the company was going to build upon the past couple years and continue to produce strong results another couple years forward (which would be possible if they ran it properly; and they really aren't too far off from doing that if they could just fix pricing and private label), then it would be worth even more in another couple of years and they could pay down some debt from strong results (maybe not the whole 2026 maturity amount but at least a chunk of it). But this scenario is speculative. Again Cerberus seems to want out NOW and the numbers were such that Kroger agreed to this deal that carries a satisfactory premium for them.

I have always been concerned with Albertsons debt load in a high interest rate environment. The rates will become too high to service the debt and completely cripple them from paying dividends to Cerberus and friends and from doing proper capex. But let's go forward and look at what Kroger's debt load is going to be after this- yikes. Even less room for error for the merged company with the debt it appears to be taking on. Of course you throw Kroger's superior financial performance and better asset structure (more owned stores/facilities, etc.) into the mix so they are in a better position to handle higher debt service costs, I guess, than Albertsons is.

I think they'd be better off splitting the thing up in pieces again. If Kroger is the buyer for the so called "good" assets, so be it. And hope Kroger doesn't become the next Supervalu. Find another investment group (multiple have been in/out of grocery over the years) that will take the "poorly performing" assets and let them improve them, sell them to other parties, or butcher them up for real estate value.

[HCal]

Then again Safeway was in the process of imploding.. had it not been bought by Albertsons, the Texas Stores would have been shuttered like Dominicks/Genuardis and who knows what Safeway would have done to the rest of its company after that.

If Safeway was in the process of imploding, Wall Street definitely didn't get the memo. Their stock price wasn't showing any signs of upcoming problems.

If they hadn't been acquired, they might have shut down a couple of divisions (Texas and Eastern), but overall they were a solid company.

[storewanderer]

Then again Safeway was in the process of imploding.. had it not been bought by Albertsons, the Texas Stores would have been shuttered like Dominicks/Genuardis and who knows what Safeway would have done to the rest of its company after that.

If Safeway was in the process of imploding, Wall Street definitely didn't get the memo. Their stock price wasn't showing any signs of upcoming problems.

If they hadn't been acquired, they might have shut down a couple of divisions (Texas and Eastern), but overall they were a solid company.

Safeway stock was stuck in a rut between $15-$20 for a very long time like 2008-2013. Recall in the late 90's it was like 60+. Safeway stock in 2012 fell below $15 per share. That was right around when they closed Genuardi's. Then in 2013 the stock went up a bit and they sold Canada and closed Dominick's. After the cash from Canada and some better results in 2014, plus acquisition rumors, plus the spinoff of Blackhawk (gift card), the stock went up. This is true. Also in 2013 Jana Partners (activist investors) got involved in Safeway and that caused the stock price to rise. By early 2015 Albertsons agreed to pay $34 per share for Safeway. So yes, the stock did better leading up to the Albertsons deal, but it was not in good shape coming out of the last recession. It is interesting, in some regards, Cerberus did not go after Safeway at some point between 2008-2012 when the stock was stuck in that rut... (vs. buying the Supervalu assets). They probably could have gotten it cheaper than $34 per share...