SpinCo

This is the place for general and miscellaneous posts on topics which might extend past the boundaries of any specific region. No non-grocery posts.
VibeGuy
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Re: SpinCo

Post by VibeGuy »

The challenge for PE is that they need double-digit share price appreciation as well as either cash flow or strippable assets to make an investment attractive relative to other uses of their capital.

Safeway NW (and let’s face it, that’s the Crown Jewels of SpinCo) has no path to 15% year-over-year growth - they’re as big and as well-run as they can get already. Sure, they can drive incremental share price growth, but the value ascribed to them by Kroger and Albertsons in setting the SpinCo pricing is a known quantity - there isn’t some magic mechanism to unlock additional value just waiting for the expert management of PE teams to wave a magic wand. Yes, they have cash flow. The real estate has largely already been stripped. PE ownership isn’t for the long term - Cerberus‘s play notwithstanding, the average exit is targeted at three to five years.

SaveMart had/has fixable operational problems that can make the stores more valuable to an acquirer and they generate enough free cash flow to give PE time to see if they have the secret sauce recipe. Same at World Market. Fix them up, sell them off or take them public at a huge price pop while not losing much money to get them to that exit event. That’s a winning formula for PE.

I just don’t see PNW Safeway as having much(if any) fixer-upper potential. They’re good enough to be a solid #1 or #2 in every neighborhood they operate in, there isn’t much they could become. My personal dislike of Safeway isn’t loathing so much as boredom - they’re quietly competent midmarket grocers with clean stores, solid mix, some ability to read neighborhoods and completely adequate perimeter departments. They’ve dumbed down their flagship stores, they’ve pulled back from prepared foods, they have like five good bakery SKUs, and all of that hasn’t made them bad, just crushingly perfectly adequate. They’re never going to have breathtaking perimeter quality like Metropolitan or Town & Country. They don’t have to.

The other pieces of SpinCo are a different story. Maybe SoCal is (rightfully) seen as the Fixer region that needs capital investment and management discipline to unlock market value, and maybe the PNW assets just provide the cash flow to accomplish that. Maybe Cerberus can push SpinCo management to get laser-focused on getting SoCal into another owner’s hands through strategic investments that provide outsized returns to market value and incidentally increase net results. Maybe some other PE firm thinks they can be that Svengali to the SoCal region.

I don’t know if a buffed and polished SoCal is that much of a gem. Apollo spent 1.1B to get Smart and Final back, and sold off Smart Foodservice for 970m, so that 650m they got out of Chedraui for the Smart & Final legacy was impressive.

So yeah, if you think three to five years of focused improvement can turn SoCal into something attractive to a purchaser, it’s possible that some PE group takes SpinCo private and uses the PNW assets to provide the runway, but I think the deal is more PE-friendly if they spin out the PNW to an operator first.
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Re: SpinCo

Post by storewanderer »

Another thing to remember is in this recessionary period we are moving into, the grocery business should be a strong business as everyone needs to eat. There is also opportunity for further consolidation among ethnic chains and conventional chains which to this point we have not seen much of (not going to count El Super and Smart & Final since Smart & FInal is a complete joke and not a conventional chain).

Here is another one though, which builds into your proposed idea of having the owner of Smart & Final get divests (and a banner to use)- those Smart & Final units that used to be Haggen appear to me to be poorly performing across the board. Perimeter departments are closed but not demolished. Smart & Final slapped up some cheap looking fixtures on the wall and didn't do anything else to "convert" those stores (didn't even paint the walls in most of them) beyond covering (poorly) the various perimeter departments. Someone who, say, got the divests, along with the Vons banner, could take that block of Smart & Final Stores that were divests, convert them to Vons banner, and they would be far more productive than they are today as Smart & Final. However there are overlap issues if this happens... but if SpinCo goes into fire sale mode this buyer should express interest as it would address a major problem in the Smart & Final store base (the Haggen units).

US Foods overpaid significantly for Smart Foodservice in my opinion, isn't running the unit very well and I am there multiple times every week (Smart & Final ran it better... which is very disappointing as I find Smart & Final banner to be a terrible operator but did feel they did a good job operationally with Smart Foodservice over the years), but that is their problem to deal with. US Foods is still stuck ordering everything from UNFI for those stores, maybe that is part of the problem (even US Foods private label goods have to come through UNFI).

You're also right that PNW Safeway generally performs solidly (there are some issues in OR though), and the market in OR/WA outside the larger metros is pretty stagnant. Sure there is a new Grocery Outlet here and there out in the smaller markets, the base of independents is fairly stable and growing a little bit here and there but nothing huge going on, Wal Mart isn't opening significant new stores, new WinCo here and there who picks a little off everyone, but the PNW Safeway group isn't facing any major threats (unlike SoCal which has a lot more growing competition plus more significant demographic shifts that are driving customers away from these boring conventionals).

I do think a banner change will hurt PNW Safeway though... all of Safeway's faults will suddenly be in the spotlight if someone does a banner change on it.
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Re: SpinCo

Post by VibeGuy »

I would absolutely not be surprised to see Chedraui turn some of the Smart and Finalized conventional stores away from the Smart and Final format and into something else at some point, and I wouldn’t necessarily assume El Super. In their home market, Chedraui runs surprisingly good perimeters and some that rise to truly exceptional (those in their Super Selecto banner, specifically - the single best Tarta de Santiago you will ever find comes out of their in-store bakeries). I think Chedraui is patient enough to wait for some labor availability improvement (both to staff those departments and the skilled trades to freshen them) some supply chain certainty (restaurant/grocery capital goods like ovens and stuff have been spotty/long lead times) and now to see how SpinCo tilts the field.

The beauty of PE is that there’s almost always a greater fool who thinks they can get rich quick, no matter how distressed their target acquisition happens to be at the moment. The SoCal market has been the victim of raiders’ delusions of competence for so long now that there’s almost certainly another pile of dumb money burning a hole in someone’s pocket as we speak.
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Re: SpinCo

Post by Bagels »

As I've repeatedly mentioned, this forum is really overthinking SpinCo.

https://www.axios.com/pro/retail-deals/ ... tsons-sale
(paywall)
While the Spinco was formulated as a kind of backstop to give Kroger and Albertsons shareholders some assurance the deal could get approval, the preference, of course, is to sell the stores to competitors and not have to proceed with the Spinco at all, the second source says. ... While the Spinco is capped at 375 stores, according to the merger agreement, Kroger and Albertsons have said they are willing to divest up to 650 stores.

xxx

The transaction will take into account the economic viability of stores to be spun off, to ensure they are at a high enough concentration to support, for example, a warehouse. It won't be a matter of Kroger spinning off two stores in Texas that then go out of business in two years, a second source familiar with the situation says.
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Re: SpinCo

Post by storewanderer »

Bagels wrote: October 31st, 2022, 6:38 pm As I've repeatedly mentioned, this forum is really overthinking SpinCo.

https://www.axios.com/pro/retail-deals/ ... tsons-sale
(paywall)
While the Spinco was formulated as a kind of backstop to give Kroger and Albertsons shareholders some assurance the deal could get approval, the preference, of course, is to sell the stores to competitors and not have to proceed with the Spinco at all, the second source says. ... While the Spinco is capped at 375 stores, according to the merger agreement, Kroger and Albertsons have said they are willing to divest up to 650 stores.

xxx

The transaction will take into account the economic viability of stores to be spun off, to ensure they are at a high enough concentration to support, for example, a warehouse. It won't be a matter of Kroger spinning off two stores in Texas that then go out of business in two years, a second source familiar with the situation says.
We will see what happens. At the end of the day it is going to be somewhat of a challenge to get financing at these high rates. Something may change as we get into 2023 on that front... I suppose they'd love to sell them off to weaker competitors who will screw up and drive customers off. Many of the potential buyers will do just that and they know it. Hopefully the FTC knows it too, and blocks the merger.

I'd rather see the SpinCo with an experienced management team and nimble structure... feels like it would be a more formidable competitor. Do we really want to see Raleys flop in Las Vegas again, for example?
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Re: SpinCo

Post by VibeGuy »

I don’t want to see the PNW Safeway assets end up in PE control, and the non-PE shareholders have almost as little say in the matter as they did about the merger in general. The PNW Safeway assets are USDA Prime and represent 40+ share points *in the most competitive markets*. Screwing this up isn’t like any screwup made before in grocery retail.

I don’t think, given the rate environment that we’re in, that it’s necessarily realistic to see Albertsons close the two big chunky tranches (PNW Safeway - 200+ stores, and SoCal Vons, let’s call it 100) prior to the Krogersons closing date. The rest of the overlap markets where there is actual selectivity about which assets go in to SpinCo and which get merged up are much more likely to be handled as asset sales by SpinCo and there’s less real-world impact to any operational chaos induced by the process.

SoCal could honestly go either way - asset sales or spinout/merger. Getting into the tax consequences is beyond my attention level tonight, but the community impact of running 100 stores in SoCal into the ground while they figure it out is. . . well, discussion here aside, the deaths of Haggen SoCal, Mayfair-Arden, Alpha-Beta, Lucky and whoever else haven’t left communities in the deep lurch. The competitive landscape in the Southland has just been more tolerant of players disappearing. Lawsuits will come from shareholders if they screw up the goodwill of Vons, garments will be rent, teeth will be gnashed.

But screwing up Safeway PNW? It’s a BFD.

The playbook for preserving assets during transition periods is almost so old as to be delivered on stone tablets, but it doesn’t always feel like soon-to-be cashed-up sellers know how to read. I don’t think being (very) concerned for the future of the biggest competitor to Krogersons between now and their permanent situation is glorifying the temporary holding company so much as being deeply concerned about what happens to surviving operations in a divestiture environment.
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Re: SpinCo

Post by storewanderer »

One thing I wonder though is how valuable is a "butchered" PNW Safeway. Those stores that are in 10k size towns and Fred Meyer doesn't operate in, are the really profitable stores in the division. Those stores I expect Kroger to keep.

What is going to be divested is the stuff that competes with Kroger (likely already not performing as well as what Kroger will keep) already which as you note is a massive number of stores and many are also pretty good stores especially considering they go against Kroger already.

I also wonder about some very small town stores (under 5k population) that do not do very well, are smaller, and while Kroger pricing should improve performance, I am not sure it will be enough. There are also getting to be some odd competition situations in these small towns with Grocery Outlet's expansion, adding in a Dollar General, etc.
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Re: SpinCo

Post by VibeGuy »

The key thing to remember is that Safeway isn’t a 20% first or second place in visit or dollar share - first or second place each means north of 35% - there’s some neighborhoods where it’s Safeway 1 and Kroger 2, and a few where it’s the opposite, but the combined share is almost always over 70%. So I don’t think there’s a bunch of weak Safeways that are both incapable of being absorbed into Krogersons due to share issues *and* undesirable to whoever follows SpinCo. I also don’t think there’s much in Washington that can be carved out to Kroger that significantly affects the overall value by causing big geographic gaps or islands. The only glaring example that comes to my mind is Anacortes, which I do think Kroger can take and that’s the economical access path to Oak Harbor where SpinCo absolutely keeps one store and it’s Haggen.

Oregon, it may be a little different because of the coastal overlap and the physical gap between the Willamette Valley and the coast. To reduce transaction costs and complexity, I think SpinCo would prefer to avoid one-off divests and will incent any purchaser to take the region as a bloc, but that doesn’t stop the purchaser from doing some divests of their own, either as a prepackaged thing at the time of the transaction, or after they see how things go. It’s a natural fit for Roth’s to take on some of the central coast overlaps that are more isolated from the existing Safeway DC, for example, if Pattison doesn’t take the whole region, but these are corner cases. Most of the SpinCo assets will still be urban and suburban near freeways and there’s not going to be a case where SpinCo is driving past a wall of Krogersons to get to their stores.

Alaska is a somewhat different story. Anchorage, Fairbanks, Juneau, Palmer, Soldotna and Wasilla can’t go to Kroger, but ten stores with a complex distribution chain may be seen as less than sufficient scale and depress sale price despite what I suspect are pretty decent four-wall earnings.

So I think that when SpinCo divests PNW Safeway, it’s not going to be a fire sale situation where they’re maki deals on distressed merchandise - Cerberus and Pals will wait until the asset’s value is maximally realized in the sale and they have *some* patience and runway, even with the debt loads.

Do you have specific mainland chunks I’ve missed where you’re concerned about this Balkanization?
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Re: SpinCo

Post by storewanderer »

I don't know about Roth's, I think the results with them would be similar to Haggen's expansion attempt. Same old story. UNFI supplied. In way above their abilities; too large of stores for them. I suppose Pattison could try to bring that Save On Foods banner down and put it onto these stores and see what would happen. I definitely would not use the Roth's banner under any circumstances outside Roth's existing cities given Roth's reputation for pricing and these stores not being the right fit for them. Other problem is Roth's does not operate pharmacies from the best I can tell.

I am also not sure they will have to divest as much as we think in some of these places around the coast/let's call it west of 5. There are a surprising number of independents hanging on over there.

The issue with these weaker Safeways (weaker relative to a Fred Meyer... every Safeway is weak compared to a Fred Meyer... and I'm talking just in grocery sales alone) is once they get detached from the real Safeway and divested, it is likely sales will drop by some amount; if they continue after divest as close to Safeway as possible maybe a 10-15% sales drop will occur; if they go to someone like Roth's who has terrible pricing, questionable center store mix, fully UNFI supplied but not well merchandised, I would expect a 25%+ sales drop overnight.

I'm over at Roth's ad looking at pricing and their front page is decent but then you get into the rest of it and this is a very weak ad. Looking at their online store, Miracle Whip 30oz sale price 6.99 regular price 11.99? What? In central OR? This is a good example of how Roth's pricing is. There is no expansion potential for this format with this pricing especially taking over previously promotional Safeways.

But is there as much overlap on the coast and out that way as we think? I think over in Astoria/Warrenton the Safeway and Fred Meyer are far enough apart for both to remain Kroger.
1. Newport there is a Safeway but it is not a great performer; one of the last to get a Lifestyle but that was a very radical improvement for that store, I will give them that, extreme makeover there. I don't see this surviving under another conventional operator but I wonder if a natural operator like Market of Choice would be a good fit for the area.
2. Coos Bay and Tillamook the situation is different with a well positioned nice Safeway in both cases solid volume
3. St. Helens again that is not a great Safeway, the Fred Meyer significantly outperforms it and is run much better as well. It may limp by under another operator but I'm not sure it can afford more than a 10% sales loss and definitely needs some new employees and higher standards in the operation to have a chance. There is an independent there who does as much business as the Safeway does with a smaller store, plus Grocery Outlet and Wal Mart (div 1 but plenty of grocery items). I think they may be able to get out of divesting this one but not sure they'd keep it open.
4. Florence I am not really sure about, can't say I've been to that store, but looks like it would go in the bucket with Coos Bay and Tillamook.

So I think only 4 divests possible over that way: Newport, Coos Bay, Tillamook, and Florence.

I am wondering if Kroger will get a favor on Alaska due to a potential lack of interested buyers and the complex logistics of expanding to that market and not have to divest much (or anything). I think Alaska may be a case where divesting is NOT in anyone's best interest. Safeway also has a small wholesale operation in Alaska and supplies various small village stores. It is unclear how many.
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Re: SpinCo

Post by VibeGuy »

I only think Roth’s should take like Newport and Florence. This is to solve for the very specific problem of islanding a divestiture.

Clatsop County is a *really* interesting problem from
an antitrust perspective.

Yes, the two Safeway stores and one Fred Meyer are spread over fifteen miles. But Safeway is the only conventional in Astoria. The co-op is lovely but pocket lint for share.

Warrenton? Well, that’s Natural Grocers and Select Market, which combined aspire to pocket lint, and Walmart which is admittedly doing quite a lot of volume. In grocery share, I’d say they’re doing somewhat less than Fred Meyer, though.

Seaside is exclusively Safeway as conventional and adds GrocOut, Cannon Beach adds Fresh Foods (all 10k ft^2).

A GIS-based solution says it’s fine to roll both Safeway properties into Kroger. They’re more than five miles apart.

But if you look at dollar and visit share points, you’re once again in a duopoly situation where FM+Safeway are 75-80% for the county as a whole, and that isn’t going to pass regulatory muster. Kroger will scream and cry bloody murder (and they continue to rue not buying the adjacent parcel that was formerly Costco where they could have expanded their footprint that was too small the day it opened), but 75-80 share points in a local trading area? It doesn’t pass the sniff test.

You *might* be able to convince the regulators that Seaside could move to Kroger, but a little analysis of existing spend will tell you that most *residents* of Seaside go to FM in Warrenton regularly, that Walmart is nearly as far as FM and still competes with Safeway Seaside and that GrocOut is comparable in neither volume nor services, so shouldn’t “count” as a competitor.

I maintain Oregon will hold their feet to the fire and not allow much over 50% control of any political or geographic subdivision bigger than the census tract the store is in and the tracts surrounding it. Obviously you can’t block purchases of a store for going a little over a target level, but 75% starts looking like a company town. I’m pretty sure that any combination of either Safeway + FM is > 50 for the county, and 70% for either + Warrenton.

More a Groceteria topic, but Astoria is one of the few places in Oregon where Fred Meyer had a presence before the hypermarket era of FM (downtown, on Commercial), then left and came back 40+ years later. Safeway only became dominant by buying out a retiring independent after the return of FM.
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