January 15, 2020

Breakingviews: Albertsons IPO would call on Cerberus’ tamer side

by Breakingviews.

Cerberus Capital Management has twice tried to unload Albertsons, the U.S. grocery chain, without success. Now it is trying its hand yet again. The grocery chain is polishing its initial public offering prospectus, according to the Wall Street Journal. The biggest obstacle to Cerberus getting it done this time is the beast within: namely, its own record of aggressive dealmaking.

The private equity firm run by Stephen Feinberg first bought into Albertsons in 2006. It toughed out the financial crisis, slowly acquiring stores from other retailers, and then filed for an IPO in 2015 – only to shelve that plan. In 2018 came an attempt to reverse into publicly-traded Rite Aid. But the target’s shareholders rebuffed the offer, presumably because of the difficulty in knowing what Albertsons was actually worth. Hence 14 years of ownership – a lifetime in buyout world.

Now isn’t a bad time to try again. The valuation of grocery store chains has been relatively stable after a difficult few years in which Amazon.com branched into physical stores and retailers expanded too aggressively. Consumers are in good shape. But prices are no better than they were when Cerberus last tried its luck. Shares of competitor Kroger are a third below where they were in 2015 and shares remain near the level where Albertsons first launched its deal with Rite Aid.

Had Cerberus been slightly less demanding, it might have sold Albertsons already. Then again, the private equity firm named after the dog that guards the entrance to the Underworld isn’t known for being cuddly. It made its name for distressed debt restructurings, which tend to require sharp elbows. It was one of the few private equity firms to ditch an agreed deal during the financial crisis – its purchase of United Rentals. It also owned gunsmith Remington until it lost control in a restructuring in 2018.

Albertsons calls for a softer touch. The company’s mooted value of $19 billion, according to the Wall Street Journal, would be almost a fifth higher than the implied price when its owner tried to merge it with Rite Aid. That would look aggressive – especially when prospective investors know they’re dealing with a shrewd dealmaker. After several years of a bull market and two failed tries, Cerberus’ best bet is to proceed with claws retracted.

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