How Will SUPERVALU (SVU) Gain from Selling Save-A-Lot?

On Oct 17, SUPERVALU Inc.’s SVU stock moved up almost 6% after its announcement  that it has found a bidder for selling its Save-A-Lot business. SUPERVALU entered into an agreement with private equity firm Onex Corporation under which it will spin off its Save-A-Lot business for $1.365 billion in cash, subject to customary closing adjustments. The deal is expected to be closed by Jan 31, 2017, subject to regulatory requirements.

Further, SUPERVALU and Save-A-Lot will enter into a five-year professional services agreement under which SUPERVALU will provide Save-A-Lot with certain services and assistance for its day-to-day operations.

SUPERVALU had announced its intention to spin off Save-a-Lot stores a year ago during its first-quarter fiscal 2016 earnings conference call. Although the discount retail chain had been one of the best performing units of the company in the past, its recent performance has not been noteworthy. Moreover, a spin-off will allow the company to concentrate on its more profitable core businesses.

SUPERVALU intends to use at least $750 million from the net proceeds to prepay its outstanding debt. The remaining net sale proceeds are to be used to further reduce debt and improve its capital structure, as well as to fund corporate and growth initiatives.

SUPERVALU INC Price

 

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The grocery retailer has been recently suffering from lower-than-expected sales in the Retail and Save-A-Lot segments. Higher competition in the grocery business as well as a challenging sales and retail environment can be attributed for the decline in sales in the retail business of the company.

Additionally a deflationary environment as well as unfavorable year-over-year comparisons is also hurting the Save-A-Lot segment. The cumulative effect of these factors is anticipated to affect the top line negatively in second-half fiscal 2017. Additionally, the company expects the comparable sales in the second quarter to be lower than the first quarter.

Zacks Rank & Key Picks

SUPERVALU currently carries a Zacks Rank #4 (Sell). Nonetheless, one can count on better-ranked stocks like The Chefs' Warehouse, Inc. CHEF, The Kraft Heinz Co. KHC and Con Agra Foods Inc. CAG.

The Kraft Heinz Co has a long-term growth rate of 19.5% and carries a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The Chef’s Warehouse has a long-term earnings growth rate of 12.5%, while Con Agra Foods has a long-term growth rate of 8.8%. Both these stocks carry a Zacks Rank #2 (Buy).

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