SuperValu’s Save-A-Lot Spinoff To Cost-Shareholders-A-Lot

Supermarket operator SuperValu (SVU) revealed some new details this week about the potential spinoff of its discount operator Save-A-Lot in an amendment to its initial Form 10 filing. The big news is that instead of a tax free spinoff of ~80% of the company, shareholders will only receive 60% of the company and as a result, the spinoff will be treated as a taxable dividend. That’s a bitter pill for shareholders who will now end up with less of the company and a tax bill to boot.

Initially, the plan was for the company to retain only the typical ~20% in the spinoff, but it seems something has changed. The St. Louis Dispatch’s David Nicklaus speculates that it’s a bullish move by SuperValu’s new CEO who wants to retain more of the upside in Save-A-Lot. Another idea posited in his piece by Ajay Jain is that ‘SuperValu might keep a bigger stake so it would have “flexibility to further de-lever the balance sheet in the future.”

Perhaps, but another reason for the change in structure could be that the company’s creditors demanded it. When looking at spinoffs, the interplay with creditors (whose approval isn’t always required) is often ignored, but many lenders do not appreciate an important cash flow source vanishing from the fold (although I am sure they appreciate those times when a cash drain gets sent away). Just look at the drama surrounding Ceasar’s. In May, SuperValu, which carries an immense amount of debt, proudly announced that it had amended its term loan agreement in order to allow a series of transaction permitting the possible Save-A-Lot spinoff. It seems that part of the pound of flesh extracted by its creditors was for SuperValu to retain a more significant equity stake in Save-A-Lot, up to 40%. Additionally, the amendment requires the company to pay down a certain amount of its debt from the proceeds of the new debt issued by the spinoff company.

The Save-A-Lot spinoff idea first floated last year and although the stock initially popped, some were concerned about the company’s competitive position post-spin. The rest of SVU’s portfolio is comprised of so called ‘middle’ grocers, which have been squeezed hard by discount stores on the low end and by premium stores on the high end. The spinoff picked up steam earlier this year with the first Form 10 filing and again with this amendment. Although shareholder approval isn’t required for the transaction to go through, it will be interesting to see if there is any pushback regarding the new plan. The company recently named grocery veteran Mark Gross as CEO and gave him a very generous pay package to revive SuperValu’s stalled turnaround. It remains to be seen if hitting shareholders with a taxable spinoff of one of the lone bright spots in its portfolio is part of the plan. 

Disclosure: Author holds no position in any stock mentioned.