Saturday, December 24, 2005

SAM: Albertson's Inc - Collapse of Sale

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Who: Investors - Cerberus Capital Management LP , Kimco Realty Corp
Retailers - CVS Corp., Supervalu Inc.

Whom: Albertson's Inc., 2nd largest supermarket chain in U.S (after Kroger Co.)

Competitors: Discounters like Walmart Stores Inc. , and quality stores like Whole Foods Market, other chains like Kruger and Safeway Inc.

Deal: Proposed, $9.6 billion

Cause and Effect:
  • CEO, Larry Johntson was originally brought to Albertson's from a strong track record spanning over 3 decades at GE. He was the comapny's first outside chief executive who won the job in 2001 over former executives of the firm.
  • Mr. Johntson was a shrewd cost-cutter, cutting over 30,000 jobs to reduce the workforce to 200,000.But his efforts to boost sales floundered due to heavy competition from Walmart's dominance of the food retail business.
  • While competitors like Kruger and Safeway lowered prices and improved merchandise quality, Mr. Johntson zigzagged b/w strategies that yielded only disappointing results
  • Albertson's shares have fallen 34% since the day Mr. Johntson was named chief executive.
  • Problems have increased over the last couple of years since 2003- SGA expenses have increased by around 16% to around $10 billion in 2005.
  • As a result, over this period its EBIT has fallen drastically by more than 30% to $1.2 billion in 2005, although sales increased by around 12% to around $40 billion
  • So, Albertson was up for sale. Supervalu was going to pick up several of Albertson's better performing divisions, CVS was going to take its freestanding drugstores. Kimco and Cerberus were planning to acquire a batch of their weakest stores, most likely to unlock their real estate value
  • While the deal was almost nearing completion, it suddenly broke down Wednesday over last minute disagreement over who should shoulder the responsibility if regulators tried to block the deal because of anti-trust concerns.
  • It was said that Supervalu assumed more of the risk that the federal anti-trust regulators would object that there would be competitive overlaps b/w Supervalu-owned stores and Albertson's stores. But Albertson's board demanded more concessions, and talks were called off
  • As a result, on Friday, Albertson's shares were down 12% to $20.54 as of 4pm on NYSE



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