(Bloomberg)—For the biggest Albertsons Cos. investor, spending 16 years in the checkout line looks like it was worth the wait.
Cerberus Capital Management paid $350 million in 2006 for struggling Albertsons stores as a real estate play. In the years since -- spanning one financial crisis, four US presidencies and a pandemic -- the private equity firm has added to its stake, bulked up through acquisitions and (repeatedly) tried to part with the US grocer.
Last week, Kroger Co. agreed to buy Albertsons for $24.6 billion, valuing Cerberus’s remaining stake at about $5.2 billion.
Though the tie-up isn’t a done deal with antitrust fervor brewing in Washington, it could finally draw a line under a complicated but profitable investment for Cerberus, the New York investment firm led by co-founder Stephen Feinberg.
Cerberus’ rate of return is about 200% over the life of the investment, according to a person familiar with the situation, asking not to be identified discussing private matters. A representative for Cerberus declined to comment.
The benchmark annual rate of return for a private equity asset held for 15 years was 13.3%, according to a Cambridge Associates report. Since Cerberus first invested in Albertsons, Kroger’s share price has climbed 324%, while the S&P 500 Consumer Staples Index is up 192%.
Three-Way Split
When Cerberus bought its first batch of Albertsons stores as part of a three-way split of the company, it didn’t get the trophy assets. Those went to SuperValu and CVS, with Cerberus picking up underperforming locations across Florida and Arizona. No one at the firm, which began in 1992 as a distressed debt investor, planned to mount a serious challenge to the largest grocery chains.
But under the leadership of Robert “Bob” Miller, the then-chief executive officer who was once a teenage clerk in a California Albertsons, the stores flourished.
By 2012, the business was valued at $3.5 billion, including debt. The quick option -- and the usual route for a private equity firm, which typically hold investments for about five to seven years -- would have been to cash out, selling its regional portfolio of stores at a decent return. Instead, Cerberus returned some capital to limited partners and rolled the dice again.
In 2013, it bought back all the stores SuperValu had acquired in the 2006 split. The following year, it agreed to buy Safeway for $9.2 billion. While the deal took almost a year to win regulatory approval, it saved the combined company about $800 million over multiple years.
Within months of the deal closing, and with more than 2,000 Albertsons stores now under its belt, Cerberus was ready for an exit. An initial public offering was filed in 2015 and Wall Street’s biggest banks hit the road, seeking to raise $1.7 billion from investors eager to buy into its promise to sell more fresh and organic produce.
But a few days before the IPO, Walmart Inc. turned in a rough quarterly showing, spooking investors. Albertsons pulled its offering just before pricing.
Pursuing Deals
Cerberus and Albertsons kept an eye on the public market while relentlessly pursuing deals; Bloomberg News reported in 2017 that it held preliminary talks to merge with Sprouts Farmers Market. Also that year, the Financial Times wrote that the chain was considering a takeover of Whole Foods Market, which was instead bought by Amazon.com Inc.
In February 2018, Albertsons announced a merger with Rite Aid. But shareholders of Rite Aid were planning to vote down the deal and wanted Cerberus and Albertsons to sweeten their offer, which came to no avail.
With Rite Aid off the table, Albertsons pushed to transform its business through technology. It transitioned to warehouse automation, boosted its distribution capabilities, improved its merchandise and introduced a customer loyalty program.
In 2020, Cerberus finally took the company public at a valuation of $7.66 billion, raising $800 million in an IPO after having sought as much as $1.32 billion.
Twists and Turns
Cerberus’s long road with Albertsons might still have some twists and turns. Two members of the US Senate panel that oversees antitrust concerns said Tuesday that they would hold a hearing on the transaction. And the Federal Trade Commission is also expected to review the Kroger-Albertsons agreement.
Ultimately the deal is a score for Cerberus, the press-shy buyout firm known for making turnaround bets on companies including auto-lender GMAC. It also owned gunmaker Remington from 2007 and exited it in 2018 after firearm investments became more controversial following the Sandy Hook school shooting.
All the while Albertsons had been quietly growing on the roster of Cerberus, which is slated to receive a significant stake in a spinoff made up of grocery stores to potentially be divested should the companies win regulatory approval.
That could put the firm in a position akin to 2006, when it became the owner of the stores spun off from its initial Albertsons deal.
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