Last summer, Supervalu (SVU), announced plans to spin-off its wholly owned subsidiary Save-A-Lot, a discount grocery retailer. SVU, which was trading in mid-July at $5.35 for a market cap of $1.4 billion, will spin-off 60% of its ownership interest in Save-A-Lot and retain the remaining 40%. SVU expects to dispose of a portion of the retained stake within the next two years reducing it down to 20% or less.
SVU offers wholesale grocery distribution and logistics services to more than 2,000 independent retailers and about 185 military commissaries in the United States and overseas. It supplies brand-name and private-label goods in every price range. It also has more than 1,330 owned and licensed Save-A-Lot grocery stores, which hold the #1 spot by revenue in the extreme-value grocery category. SVU’s retail operations include nearly 200 regional grocery stores under the Cub Foods, Shoppers Food & Pharmacy, Shop ‘n Save, Farm Fresh, Hornbachers and Rainbow banners. All told, the company covers about 40 states through nearly 20 distribution centers.
The spin-off is expected to be completed in September. Post spin-off, Save-A-Lot Inc. will trade on the NYSE and operate under two business segments: Corporate Stores, a retail format comprising 463 stores and Licensee Distribution, a wholesale format comprising 897 stores. SUPERVALU will retain the wholesale segment and Retail Foods segment and will operate 2,227 stores across the United States.
We value SVU using the sum-of-the-parts valuation methodology (see “Value shopping” below). We value SVU (consolidated) at $6.50 per share, implying a better than 20% upside from the
current market price of $5.35. Our fair value estimate for Save-A-Lot is $4.50 per SVU share. This suggests shareholders are getting SVU’s core business for less than a dollar.
We value Save-A-Lot (the spin) using a blended valuation approach that employs enterprise value (EV)/sales and EV/EBITDA techniques. We value the spin at 0.35X fiscal year 2017 sales and 7.0X fiscal year 2017 EBITDA representing a significant discount to discount retailers like Dollar General (DG), Dollar Tree (DLTR) and Dollarama (DOL). Save-A-Lot has a high-risk profile given its lower than peer sales growth and EBITDA margins exacerbated by its relatively small size. Similarly, we value SUPERVALU’s core business at a significant discount to the peer group.