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Fitch: Unified Grocers Purchase Neutral to SUPERVALU'S Ratings
April 13, 2017 / 7:37 PM / 5 months ago

Fitch: Unified Grocers Purchase Neutral to SUPERVALU'S Ratings

(The following statement was released by the rating agency) CHICAGO, April 13 (Fitch) SUPERVALU Inc.'s (SVU) definitive agreement to acquire Unified Grocers, Inc. (Unified), a regional grocery wholesale cooperative with $3.8 billion of annualized sales, for $375 million is neutral to the company's 'B' Long-Term Issuer Default Rating (IDR), according to Fitch Ratings. Supervalu's sales and EBITDA (pro forma for the sale of Save-A-Lot) will increase by 30% to over $16 billion and 8% to $567 million, respectively, as a result of the acquisition. The transaction value represents roughly 9.5x Unified's nearly $40 million Dec. 31, 2016 latest-12-month (LTM) EBITDA. SVU expects to realize $60 million of annualized synergies associated with operating efficiencies and the elimination of administrative overhead by year three after closing the deal. Fitch views the $60 million target, which represents nearly 20% of the wholesale businesses' roughly $300 million of pro forma EBITDA as aggressive but believes savings will be meaningful given SVU's national footprint and the opportunity to consolidate distribution centers. SVU intends to finance the transaction with approximately $175 million of surplus cash and $200 million of incremental debt. The acquisition is expected to be completed by mid-to-late summer of 2017 (mid fiscal 2018), subject to approval by Unified's shareholders and other customary closing conditions. Fitch does not expect any antitrust issues given the still fragmented nature of the industry. Fitch views the transaction as in line with SVU's strategy of growing its wholesale distribution business and neutral to the company's credit profile given only moderately higher leverage. With the acquisition of Unified and about $1 billion of annualized revenue from fiscal 2017 new business wins, SVU's wholesale business will generate over $12.5 billion of annual sales further solidifying its top 2 position in the U.S. grocery distribution industry. SVU will also inherit Unified's Market Centre division which specializes in faster growing Hispanic, organic and other specialty foods. Sales for this division were not disclosed. Fitch estimates pro forma total adjusted debt/EBITDAR of approximately 4.0x. This estimate is based on SVU's Dec. 5, 2016 LTM EBITDA of $529 million excluding Save-A-Lot, roughly $40 million of EBITDA from Unified, and $1.8 billion of total debt. However, Fitch anticipates that leverage will approximate 4.5x for fiscal 2018 and remain in the low-to-mid 4.0x range thereafter as synergies are realized but sales and operating earnings pressure for SVU's retail business remain under pressure. Key Rating Drivers Wholesale Distribution Focus: SVU's sales and EBITDA pro forma for the sale of Save-A-Lot and acquisition of Unified are approximately $16 billion and $567 million, respectively. Wholesale distribution will represent about 70% of SVU's sales and retail grocery the remaining 30%. Despite the focus on wholesale distribution, both businesses continue to face long-term revenue and margin challenges due to heighted competition, consolidation and restructuring in the supermarket industry. Wholesale Revenue, Margin Pressure: Wholesale revenue declined in fiscal 2015 and 2016 due to customer losses but SVU is focused on retaining existing customers and winning new business. In fact, new business wins in fiscal 2017 are expected to contribute about $1 billion of annualized revenue (13% on $7.7 billion LTM annual sales) in fiscal 2018. Fitch anticipates that SVU will have to offset 2% to 3% wholesale customer attrition caused by challenging industry conditions with both organic growth and acquisitions. Moreover, margins are expected to remain pressured due to large contracts coming at a lower margin and recent challenges resulting in higher labor and third-party freight expenses from transitioning new customers onto SVU's distribution network. Fitch believes wholesale segment EBITDA can approximate the mid $300 million range, up from $267 million for the LTM, with EBITDA and synergies associated with Unified. Declining Retail Share, Profitability: Identical store (ID) sales for SVU's retail banners (217 stores at fiscal third quarter) were mostly negative for the past few years, falling 5.3% through the first three quarters of fiscal 2017. Fitch expects mid-single-digit declines will continue in fiscal 2018 despite moderating deflation due to weak share positions and heightened competition. SVU's retail banners continue to be share donors over the intermediate term. Fitch projects segment EBITDA will fall below $100 million by fiscal 2019 from $181 million for the LTM. Leverage in 4x Range: Despite modestly lower leverage following the divestiture of Save-A-Lot and subsequent debt reduction, Fitch expects SVU's leverage to be approximate 4.5x in fiscal 2018. The approximate 0.5x increase in leverage is due to the acquisition of Unified and lower retail EBITDA. Fitch anticipates leverage will remain in the low-to-mid 4.0x range in fiscal 2019 absent additional acquisitions as synergies are realized but retail remains under pressure. RATING SENSITIVITIES Future developments that may, individually or collectively, lead to an upgrade include stable market share trends; total adjusted debt/EBITDA sustained below 4.0x; relatively stable margins; and positive FCF. Future developments that may, individually or collectively, lead to a downgrade include consistently weak top line performance across each of the company's businesses and margin contraction that lead to negligible or negative FCF. Fitch currently rates SVU as follows: SUPERVALU INC. --Long-Term Issuer Default Rating 'B'; --$1 billion secured revolving credit facility 'BB/RR1'; --$524 billion secured term loan 'BB/RR1'; --$750 million senior unsecured notes 'B/RR5'. The Rating Outlook is Stable. Contact: Primary Analyst Carla Norfleet Taylor, CFA Senior Director +1-312-368-3195 Fitch Ratings, Inc. 70 W. Madison Street Chicago, IL 60602 Secondary Analyst Monica Aggarwal, CFA Managing Director +1-212-908-0282 Committee Chairperson Steven Marks Managing Director +1-212-908-9161 Media Relations: Alyssa Castelli, New York, Tel: +1 (212) 908 0540, Email: alyssa.castelli@fitchratings.com. 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