Spillage in the aisle
Supermarket chain Albertsons has secured an initial public offering after several attempts – and stumbled right at the checkout. The private equity-backed group priced its shares at $16 on Thursday, below the $18-to-$20 range it had put out a week earlier. Its owners, who include Cerberus Capital Management, are also selling fewer shares than hoped, so the sale will raise 40% less than it could have. It’s a sign that the market is working as it should, even if the IPO process itself didn’t.
Albertsons’ listing, after 14 years of private equity ownership, values its equity at $9.3 billion, roughly equivalent to 15 times last year’s earnings. That looks fair. It is around one-quarter less than the multiple for the industry overall, according to Eikon, and below rival Kroger’s 16 times. It’s also below the price at which buyout firm Apollo Global Management can turn convertible stock it bought a couple of weeks ago into shares. At any price within the original range, Apollo would have been in the money from the get-go.
The discount is justified on some levels. The company has an overhang of not one but two private equity firms – with Cerberus owning it for 14 years and trying but failing more than once to unload it. Cerberus itself is hardly a financial novice, and understands the push-and-pull with underwriters who like to win business. And the Covid-19 pandemic is worsening in some states where Albertsons has many stores, like Texas, California and Arizona. Albertsons also has pension liabilities its owners may have hoped investors wouldn’t treat as debt.
The misfire, though, is unfortunate for Albertsons’ backers and advisers. The market hasn’t much budged since Albertsons set its price range. Most big retailers’ shares are up 1%, including Kroger, Target and Walmart. And no fewer than eight of the top 10 underwriters of U.S. IPOs, based on Refinitiv data, have their names on the company’s filings. They were led by Bank of America, the market’s No. 2 for 2020 so far. The first rule of retail is to understand the customer. For those who are packing, stacking, selling and shipping Albertsons’ stock, that appears to have been overlooked.