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Why Cerberus Won’t Cash Out Yet Despite Albertson’s IPO

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July 10, 2015

 

America’s second largest grocery store chain has announced its plans for initial public offering (IPO). According to the reports, its private equity owner might be on the verge of a huge pay-out, but the firm might not cash out of the venture just yet.

 

The IPO Plans

 

The company filed for the IPO after it merged with Safeway Inc. earlier this year. It is part of the string of deals in the US. Struggling grocery chains have had to look for new strategies by merging with other companies as the competition in the sector heats up.

 

The price banks will set for the IPO is still unknown. According to the Wall Street Journal, the company’s placeholder says it hopes to raise around $100 million with the IPO, but the newspaper believes this won’t be the final figure. Whatever the figure, many analyst believe the private equity firm is set for a hefty profit. The filing also didn’t specify the number of shares it plans to sell.

 

The underwriters of the IPO include Citigroup, Morgan Stanley and Merrill Lynch.

 

The Road to IPO

 

The private equity firm, Cerberus, led a consortium that bought the grocery chain in 2006, after Albertson struggled to survive as a public company. When the private equity firm got involved with the company, Albertson had a market share of 0.4%. The deal valued the company at $17.4 billion.

 

The PE firm took an aggressive approach to managing the company and the chain managed to expand its national reach. The firm closed nearly two-thirds of Albertson’s stores and sold off much of its real estate to pay off the company’s debt. Later on, the firm also focused on expanding the company through a number of mergers.

 

In 2013, it bought NAI from SuperValu and further acquired United, a Texas-based grocery chain. As mentioned above, the company finalised its deal to buy Safeway earlier this year in a deal worth $9.4 billion.

 

Overall, the private equity firm together with the management team at Albertson have managed to turn around the chain. Moody’s Investors Service Analyst, Mickey Chadha, was quoted in the Wall Street Journal stating, “Management has a good handle on what the customer wants. Keeping the operations localized allows them to be more nimble and shift to consumer preferences in certain locations.”

 

Not A Full Exit

 

According to Fortune, the IPO isn’t yet the final exit for the private equity group. The firm is not planning to sell any of its current shares, but will focus on attracting new investors to invest and cut down the company’s relatively large debt load.

 

Albertson currently has net debt of nearly $11 billion. Last year the company made sales of around $57 billion. The estimates by the Wall Street Journal suggested the company could list for $16 billion, if the market value follows the market leader’s current valuation.

 

Traditional grocery chains are under fire both in the US and elsewhere. E-commerce companies such as Amazon have been successful in attracting customers and competition in the sector has forced many traditional chains to re-think their strategies.

 

It remains to be seen how successful the private equity firm’s exit from the company turns out to be.

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