NEW YORK--(BUSINESS WIRE)--Blackwells Capital LLC (“Blackwells”), an alternative investment management firm, today sent a letter to the Board of Directors (the “Board”) and management of Supervalu Inc. (NYSE:SVU) (“Supervalu” or the “Company”) outlining concerns with the Company’s share price performance and the absence of a clear strategy to unlock value and to position the Company for sustainable success. With ownership representing approximately 3.6% of Supervalu’s common stock and equivalents, Blackwells ranks among the Company’s largest shareholders.
In the letter, Blackwells identifies multiple, concrete opportunities that it believes will create substantial value for Supervalu’s shareholders, as well as significantly improve the strength of Supervalu’s business. Blackwells has requested a near-term meeting with the Board and management to constructively review its proposal and begin developing an actionable plan to strengthen the Company and its performance.
Full text of the letter follows:
October 25, 2017
The Board of Directors
c/o Corporate Secretary
Supervalu Inc.
11840
Valley View Road
Eden Prairie, MN 55344
Dear Members of the Board of Directors:
Blackwells Capital LLC, collectively with its affiliates (“Blackwells”), owns 3.6% of the common stock and equivalents of Supervalu Inc. (the “Company,” “Supervalu” or “SVU”), making us one of your most significant shareholders. While we have appreciated the ongoing dialogue with management and constructive engagement regarding the future of Supervalu, we have grown increasingly frustrated with the Company’s share price performance and the lack of clear steps Supervalu’s leadership has demonstrated a willingness to take in order to unlock value and position the Company for ongoing success. In an industry under pressure, Supervalu has tremendous structural advantages and an opportunity to define, and act upon, a corporate strategy that can create long-term shareholder value. Without active and immediate change, we believe the opportunity will be lost and shareholders will continue to pay the price.
By way of background, Blackwells is a research-intensive, multi-strategy investment manager that invests in, among others, undervalued and underperforming public companies. Our approach to such investments is to actively engage and to work constructively with management teams and boards of directors to identify and to unlock value for the benefit of all shareholders. We have substantial experience enhancing value, built on extensive due diligence, strategic refocusing, improved operational execution, balance sheet optimization and capital reallocation.
Having identified several opportunities that will create substantial value for the Company’s shareholders, as well as significantly improve the long-term quality of Supervalu’s business, the purpose of this letter is to request an opportunity to discuss these items in detail with the Board of Directors (the “Board”) and emphasize our concerns about the future of the Company should it continue to operate within its existing paradigm.
Supervalu is one of the country’s largest publicly held grocery distributors and retailers. We were initially attracted to the Company’s durable wholesale distribution cash flows, compelling acquisition strategies and real estate value of its owned distribution centers and stores. Despite these advantages, Supervalu’s stock price performance is abysmal. It has underperformed all relevant benchmarks, including its closest peers, over 1, 3 and 5-year time periods. Further, in our opinion, the recent 32.8% stock price collapse (from its highs following the latest earnings release) was in direct response to confusion created by management’s update about the sunsetting of one of the Company’s long-term contracts mentioned during last week’s earnings call.1
Approximately one decade ago, Supervalu was a $324.24 stock.2 As of today, and despite the Company’s growing addressable market, the advantageous augmentation in the US consumer population and increasing aggregate grocery expenditures, Supervalu’s stock price has collapsed 95.3% to $15.43, a near lifetime low.3
In comparison to broader indices, SVU’s total shareholder return has been (-92.5%) vs. 160.7% for the S&P Small Cap 600 Index4 and 312.5% for the S&P 600 Consumer Staples Sector GICS Level 1 Index.56 On a five-year basis, SVU has returned (-24.5%) vs. 113.7% and 114.5% for the SML Index and S6Cons Index, respectively.7 On a one-year basis, SVU has returned (-50.7%) vs. 24.7% and 11.6% for the SML Index and S6Cons Index, respectively.8
SVU’s underperformance is further reflected in the deep valuation discount to its peers9, where SVU is valued at 4.6x next fiscal year’s EBITDA vs. its peer median of 7.0x (a 35% discount) and 6.8x next fiscal year’s earnings vs. 12.2x (a 45% discount).10 For the last twelve months, an equal-weighted index of SVU’s peers has outperformed SVU by 51.9% and by 40.5% since 2014.11
As a result of continuing underperformance and repeated failures to create shareholder value, we believe the Board must urgently change direction and guide management to a plan that can improve the Company and its performance. This status quo is untenable, and shareholders cannot stand idly by and accept the ongoing value destruction.
As has been privately communicated to you on several occasions, we believe the following initiatives are critical to begin a process of repositioning the Company and unlocking value:
1) Owned real estate. Unlock the value of the Company’s 17.3 million square feet of owned real estate.12 Our analysis suggests the real estate value alone is worth multiples of the current market capitalization of the Company (and nearly as much as its entire Enterprise Value).
2) Retail grocery. Reposition the Company away from some of its direct retail exposure and currently struggling 217 stores.13 Our plan consists of selling approximately 30% of the stores while using the remaining ones to roll out delivery and meal preparation services, driving awareness, interest and innovation. Shareholders deserve for SVU to be positioned as the most formidable competitor in this space, relying on its expansive supply chain, national horizontal integrations and footprint.
3) Leadership refreshment and commitment. Supplement the Board and management with the expertise necessary (including expeditiously filling the current CFO vacancy with a seasoned industry executive) to guide the Company through these transformative shareholder-focused strategic opportunities, including drastically improving investor communications and transparency.
4) Capital allocation. The Company must begin (i) paying a dividend and commit to growing that dividend over time and (ii) immediately defending shareholder value by putting in place an active and substantial share buyback plan. Looking for a means of redress to this unfortunate situation, we would suggest there is no more opportune time to do so than now.
We believe that the execution of these initiatives will produce tremendous value for shareholders, and is firmly within the control of a Board and management team that are focused and prepared to set Supervalu on a path for long-term success.
Over the course of the coming weeks, we expect to be able to engage the Board and management constructively on the details of these initiatives, as well as other strategies that will benefit SVU and its shareholders.
Sincerely,
Jason Aintabi
Managing Partner at Blackwells Capital LLC
About Blackwells Capital
Blackwells Capital is an alternative investment manager dedicated to global fundamental and special situation investing across capital structures. Founded in 2016 by Jason Aintabi, its Managing Partner, Blackwells’ investment approach is research-intensive, value-oriented and concentrated.
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| 1 | Source: Bloomberg. SVU price per share reached an intraday high of $21.66 on the October 18, 2017 before falling to $14.54 on October 20, 2017. | |
| 2 | Source: Bloomberg. Pro forma for the effect of the 1 for 7 reverse stock split undertaken August 1, 2017 and all previous split/share adjustments. June 29, 2007 was its 1 for 7 reverse stock split adjusted high. | |
| 3 | Source: Bloomberg. Closing price as of October 24, 2017. Comparison is pro forma for the effect of the 1 for 7 reverse stock split undertaken August 1, 2017 and all previous split/share adjustments. | |
| 4 | SML Index. | |
| 5 | S6Cons Index. | |
| 6 | Source: Bloomberg. As of October 24, 2017 and pro forma for the effect of the 1 for 7 reverse stock split undertaken August 1, 2017 and all previous split/share adjustments. Total returns are from January 3, 2007 to October 24, 2017. | |
| 7 | Source: Bloomberg. As of October 24, 2017 and pro forma for the effect of the 1 for 7 reverse stock split undertaken August 1, 2017 and all previous split/share adjustments. Total returns are from October 24, 2012 to October 24, 2017. | |
| 8 | Source: Bloomberg. As of October 24, 2017 and pro forma for the effect of the 1 for 7 reverse stock split undertaken August 1, 2017 and all previous split/share adjustments. Total returns are from October 24, 2016 to October 24, 2017. | |
| 9 | SpartanNash (SPTN), United Natural Foods (UNFI), Metcash (MTS AU). | |
| 10 | Source: CapitalIQ consensus estimates. Prices as of October 20, 2017. | |
| 11 | Source: Bloomberg. As of October 24, 2017 and pro forma for the effect of the 1 for 7 reverse stock split undertaken August 1, 2017 and all previous split/share adjustments. Total returns are from October 24, 2016 to October 24, 2017 and from October 24, 2014 to October 24, 2017, respectively. | |
| 12 | Source: The Company’s 2017 Annual Report, filed on Form 10-K. | |
| 13 | Source: The Company’s 2017 Annual Report, filed on Form 10-K. |