United Natural Foods announced this morning it will acquire Supervalu for $2.9 billion, including debt and liabilities. UNFI’s CEO, Steve Spinner, will lead the combined companies while Sean Griffin, UNFI’s COO, will lead integration efforts. The companies expect to generate more than $175 million in synergies through the deal.
The move will expand UNFI’s perishables business and give it access to important new markets, executives said during a conference call this morning. The acquisition follows mounting calls for Supervalu to explore a sale and improve its performance. UNFI said it plans to divest Supervalu’s retail assets “in a thoughtful and economic manner” over time.
"This transaction accelerates UNFI's ‘Build out the Store’ growth strategy by immediately enhancing our product range, equipping us to bring an attractive, comprehensive product portfolio to an expanded universe of customers," Steve Spinner, UNFI's chairman and chief executive officer, said in a release. "Combining our leading position in natural and organic foods with Supervalu’s presence in fast-turning products makes us the partner of choice for a broader range of customers.”
Wholesale consolidation has heated up in recent years, but this acquisition comes as a surprise and promises to create a one-of-a-kind distributor to service both conventional goods and those in the fast-growing natural and organic channel.
The deal is a win for Supervalu investors, who have watched the company’s value plummet as it’s shifted focus from its retail division to its wholesale business. In recent months, the company endured a bitter back-and-forth with activist investor Blackwells Capital, which has pushed for the company to explore a sale and forwarded a slate of nominees for board elections.
While Supervalu’s transition has been a painful one, it recently picked up assets that likely made it attractive to UNFI. This includes Unified Grocers, the West Coast wholesaler Supervalu picked up last year for $375 million. With that deal came access to high-growth markets as well as Market Centre, the specialty distributor that Supervalu has planned to expand nationwide, with facilities set to open in Illinois, Pennsylvania and Florida in the coming months.
Supervalu also purchased Associated Grocers of Florida last year for $180 million, giving it access to a fast-growing southeastern region that’s seeing a rush of new retailers.
UNFI is a strong player in the natural and organic industry, though its fortunes are tied closely to Whole Foods, its largest customer. That relationship is on solid footing, thanks to a long-term purchase agreement the Amazon-owned grocer has entered into with UNFI. But the wholesaler clearly wants to reach new markets and customers.
“In the near term, it gives us a pretty significant presence in the markets where we needed help,” said Steve Spinner, UNFI’s chairman and chief executive officer, in a conference call Thursday morning.
Long-term, UNFI looks to leverage Supervalu’s capabilities in perishable foods, which has grown significantly of late. Between the 2017 and 2018 fiscal years, sales to upscale and fresh formats have increased from 9% of the business to 20%, according to figures presented at the company’s annual expo this week in St. Paul, Minnesota. Last year, Supervalu launched a fresh meal line called Quick & Easy that encompasses heat-and-eat, meal kit and prepared food offerings.
“The Supervalu fresh business – produce, protein and all the fast-growing categories our customers need at an efficient price, we are now able to grow nationally, which is a great opportunity for the combined company,” Spinner said.
UNFI will take on considerable debt to fund the deal, and some question the move in light of this and other issues.
“UNFI has had persistent operational issues in recent years and the scale of integration work required for Supervalu will be a massive undertaking,” wrote Ajay Jain, senior research analyst with Pivotal Research Group, in a note to investors.
Others say the deal is a win considering the heightened competition and shrinking margins across the industry. Mickey Chadha, vice president with investment firm Moody’s, pointed out that Supervalu’s reliance on independent operators has made it difficult for the company to grow on its own.
The acquisition, he wrote in a note emailed to Food Dive, “gives more credence to our assessment that the wholesale food distribution business needs scale now more than ever to counter the pricing and competitive pressure permeating throughout the food retailing business."