ebook essays pieces of the puzzle
Monday, February 11th, 2013
super values

13 0211 zSVU

The last of the nine stops on the Upper Midwest tour is back in the Twin Cities, with the #2 local corporate soap opera, Supervalu (SVU).  #1 is Best Buy.

SVU has never been the same since it stepped up to the plate in 2006 to buy most of Albertsons, in what it felt was a super value of its own.  The panels in the chart from top to bottom:

*The stock did well early in this period and spiked hard in the wake of the deal.  It was up almost 200% before reality set in.  It has fallen 90% since then, wiping out all of that gain and much, much more.

*The firm’s debt-to-assets ratio had been steadily declining before the acquisition and has moved higher ever since.

*These Albertsons bonds were assumed by SVU.  They were downgraded on the acquisition, widening the spread, and then gapped out for a time during the financial crisis.  They really deteriorated after that, as ratings continued to be dropped (now Caa1 at Moody’s, B- at S&P, and CCC at Fitch).  The recent improvement in the spread comes from the proposed deal to sell many of the SVU operations to Cerberus and others.

*Same store sales have been persistently negative for five years.  Not only has there been brutal price competition with well-capitalized firms like Wal-Mart and Target, but the debt load has restricted SVU’s ability to invest in the stores.

For the period shown, compensation for the CEOs of the firm was close to $100 million total, earning it boos from shareholders, governance watchers, and the media.

This company is another reminder of what all the studies of acquisitions show:  Many deals that are pronounced as transformative by corporate managers (and their investment bankers) are not super values but value traps.  (Chart:  Bloomberg terminal.)