Letter outlines Company’s “disastrous”
performance and current Board’s inability to represent
shareholders’ interest or provide meaningful oversight
Detailed analysis of Supervalu’s operations,
strategy and finances available at www.savesupervalu.com
Blackwells believes there are opportunities to
unlock significant value for all shareholders
Blackwells Capital LLC (“Blackwells”), an alternative investment
management firm, today sent a letter to the Board of Directors (the
“Board”) of Supervalu Inc. (NYSE: SVU) (“Supervalu” or the
“Company”) announcing its intention to submit director nominations
to the Board in connection with the Company’s 2018 annual meeting
of shareholders. Blackwells also released a presentation detailing
its analysis of Supervalu’s operations, strategy and finances and a
plan to unlock significant value, available at
www.savesupervalu.com. With ownership representing approximately
4.35% of Supervalu’s common stock and equivalents, Blackwells ranks
among the Company’s largest shareholders.
After meeting multiple times with management, Blackwells met
with non-executive Chairman Donald Chappel and President and CEO
Mark Gross on January 17, 2017. In that meeting, Jason Aintabi,
Managing Partner at Blackwells, communicated shareholders’
frustration with Supervalu’s performance and the need for real
change in the Company’s approach to operations, strategy and
governance. In addition to proposing concrete steps to unlock value
at Supervalu, Blackwells requested representation on the Board of
Directors for three Blackwells nominees to help effect this change,
as well as the creation of a new Board committee to explore
concrete measures of realizing shareholder value.
Unfortunately, Supervalu has summarily rejected Blackwells’
request.
“In the spirit of constructive, open collaboration, Blackwells
has made good faith efforts to engage with the Company,” said Mr.
Aintabi. “The Board’s passivity and the Company’s persistent
underperformance have left us with no alternative but to run an
election contest and give shareholders an opportunity to vote for
enhanced Board leadership and support a mandate to explore all
alternatives to unlock value.”
Full text of the letter follows:
February 6, 2018
The Board of Directorsc/o Corporate SecretarySupervalu Inc.11840
Valley View RoadEden Prairie, MN 55344
Dear Members of the Board of Directors:
Blackwells Capital LLC, collectively with its affiliates
(“Blackwells”), owns 4.35% of the common stock and equivalents of
Supervalu Inc. (the “Company” or “Supervalu”), making us one of
your largest shareholders. After engaging with management multiple
times to discuss our concerns regarding Supervalu’s rapidly
deteriorating condition, we wrote to you on October 25, 2017,
proposing concrete steps to unlock value in the Company.
In the spirit of constructive and open collaboration, we
continued our good faith efforts to engage the Company in a meeting
with management on December 7, 2017, followed by a meeting with
non-executive Chairman Donald Chappel and President and CEO Mark
Gross, on January 17, 2017. We expounded upon the various points
that we believe would stabilize and greatly improve the fragile
situation that all Supervalu shareholders know too well and
expressed our belief that shareholders deserve real change in the
Company’s approach to operations, means to unlocking value and
governance.
In our view, the lackadaisical, misguided and value-destructive
complacency of the Company’s leadership necessitated our request
for representation on the Board of Directors (the “Board”) for
three Blackwells nominees, including myself, and the creation of a
new Board committee, which would include the Blackwells nominees,
to explore concrete measures of realizing shareholder value. The
Company summarily rejected our requests.
We conclude that the Board’s passivity and the Company’s
persistent underperformance have left us with no alternative but to
run an election contest and give all shareholders an opportunity to
vote for enhanced Board leadership and support a mandate to explore
all alternatives to unlock value.
As such, we will be submitting nominations for election of
directors to the Board in connection with the Company’s 2018 annual
meeting of shareholders. Shareholders can no longer allow
directors- who in our opinion sorely lack urgency, alignment of
interest and imagination- to continue to pursue their disastrous
status quo.
Lack of Urgency
“I am delighted to have the opportunity to help take the
Company to the next level and to work with the Board and management
team to set the strategic path for the future” Mark Gross, CEO
on 3 Feb. 2016. Supervalu’s share price has declined 49% since
then.
Supervalu’s performance has been disastrous, in absolute and
comparative terms, over the short, medium and long term. Yet the
current Board, whose members’ average tenure of 6.1 years coincides
with the destruction of more than $1.7 billion in shareholder
value, has patiently overseen this debacle.1 There are only 19
companies currently in the S&P 500 and Russell 2000 that have
performed worse than Supervalu over the last 10 years.
Share Price Performance
(%)2
1 Year 3 Year 5
Year 10 Year S&P 500
19.6% 33.2% 81.8% 105.5% S&P 600 Cons. Staples Sector 5.5%
27.6% 84.3% 273.6% Proxy Group (11.3)% 7.2% 61.8% 148.9% Wholesale
Peer Group (21.4)% (27.2)% 13.3% 55.7% Retail Peer Group (13.9)%
(23.3)% 33.4% 40.0% SVU (45.3)% (79.4)% (46.2)% (92.8)%
Underperformance vs S&P 500 (64.8)% (112.6)% (128.0)% (198.4)%
Underperformance vs Wholesale Peers
(23.9)% (52.2)% (59.5)% (148.6)% Underperformance vs Retail Peers
(31.4)% (56.1)% (79.6)% (132.8)%
The market’s confidence in Supervalu’s prospects is reflected in
the Company’s EV/EBITDA multiple of 5.2x- the third lowest of all
consumer staples peers. It is simply unreasonable for Supervalu to
expect shareholders to allow value destruction like this to
continue.
Misalignment of
Interests
“Our executive compensation program is designed to reward
strong financial performance, effective strategic leadership and
the creation of long-term value for our stockholders.” Proxy
statement, 6 June, 2017.
The Company has since paid its named executive officers in
excess of $30mm USD in FY 2016 and 2017, while losing nearly $1bn
of value from the split-adjusted $40 stock price seen in 2016.
Further, the entire Board has responded to the abysmal decline
in share price under their watch by collectively purchasing
$32,050.00 of stock since June 2011. Together, the Company’s
current Board members and executives own 0.53% of the Company’s
common stock and CEO Gross owns no stock at all.
Director alignment with shareholders is critical for governance.
Given Supervalu’s abysmal performance and clear lack of shared
interests, such alignment is necessary now more than ever
before.
Lack of Imagination
“Finally, is [sic] our retail business, which today is a good
complement to our wholesale business. The team has made good
progress over the past several years on improving the basics,
cleaning up the stores, working on improving the offering and
striving for improved pricing. In addition to generating
considerable profits, our retail banners continue to act as a good
platform…We’ll continue to invest in our retail banners…” Marc
Gross, CEO on 26 April, 2016. Supervalu’s share price has declined
62% since then and the Retail division’s comp store sales have been
negative in each of the 8 quarters since.
It is clear to us that the current Supervalu directors lack the
imagination necessary to explore alternative strategies and options
for maximizing shareholder value. This is hardly surprising given
the members’ backgrounds—only one of Supervalu’s nine current
directors has any direct retail operational experience. Neither
directors Irwin Cohen nor Phil Francis have had food sector
experience for the past 15 years. None of the last three Board
chairs comes from the wholesale or retail food industry: current
chairman Chappel’s background is in waste management, while prior
chairmen Wayne Sales and Gerry Torch came from Canadian Tire and
the now bankrupt Toys R Us, respectively.
To combat the shortcomings of the Board and management,
Blackwells has engaged leading industry strategic advisors,
consultants, executives and specialists. We have interviewed former
Supervalu executives and Board members, visited a multiplicity of
Supervalu operating sites, and performed in-depth analysis
into:
- The competitive dynamics surrounding
Supervalu’s wholesaling and retailing activities;
- The Company’s real estate portfolio
(including its sale leaseback potential);
- Legal, tax and accounting implications
for any restructuring;
- M&A scenarios and strategic
desirability; and
- Labor relations.
We also assessed the Food Supply and Logistics industries, which
are similarly mature, fragmented and competitive sectors that have
seen aggressive consolidation that has catalyzed shareholder value
from increased scale, magnitude and market share.
Based on this detailed research and due diligence, we have
arrived at six key observations about the Company and its strategic
position:
1.
The Company’s business model has failed
to keep up with competitors and partners
a. There are significant opportunities to improve margins and drive
growth through pricing models (especially with CPG companies),
direct-to-store delivery and white-label ecommerce solutions for
independent retailers
2.
Significant capital is trapped on the
Company’s balance sheet
a. > $1.8bn of owned real estate that must be unlocked
3.
Supervalu’s retail operations are
valued by the market negatively3
a. based on their drain on cash flow and lack of competitive
advantage which is masking a strong wholesale turnaround
4.
Stronger alignment of the Board,
management and Supervalu’s shareholders is required
a. Change is needed immediately to arrest the incessant value
destruction, including incentivization of key hires that management
is dragging its feet on hiring;
5.
There is compelling consolidation
opportunity involving Supervalu and a peer
a. For example, SpartanNash, United Foods,
C&S or a vertical strategic company, which could create
enormous competitive advantage, synergies and up to 77% buyer
accretion4; and
6.
The Company’s current disclosure regime
obscures the strength of its core wholesale assets
a. Significantly depressing overall valuation.
We believe the Board as currently constituted is either
incapable of or disinterested in implementing the changes needed to
rescue the Company. New directors that are prepared to work with
the full Board and management to unlock value for all shareholders
are desperately needed. To that end, in the coming weeks, we plan
on delivering our nomination letter to the Company. If elected, our
nominees will work with the Board to better guide management in the
development of actionable plans around operational, financial and
strategy opportunities, including those we’ve already identified.
Our nominees will move the Company forward, including initiating
the formation of a special committee to immediately begin a review
of its strategic alternatives, which would include a merger or a
sale of the Company.
As demonstrated by our significant investment, Blackwells
believes in Supervalu. It is unfortunate that the current Board is
unable to guide the Company or accept our good faith input. Despite
our efforts and continuous engagement, they have left us with no
option but to pursue Board representation, which we are confident
our fellow shareholders will support.
In relation to this letter, we have also made available a
presentation detailing the points contained herein. This
presentation is available on our website www.savesupervalu.com.
Over the course of our engagement with Supervalu shareholders, we
will show that through focused effort and a dedication to unlocking
value, SVU’s share price can reach approx.
$45.05/share, or an increase of 215%.
We, as always, remain open to a continuing dialogue with the
Company, but reserve our rights to take whatever actions in the
future that we believe may be required to protect the best
interests of all shareholders.
Sincerely,/s/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.
1 Source: Bloomberg.
2 Prices as of February 5th, 2018. The wholesale peer group
consists of SPTN and UNFI. The retail peer group consists of
Kroger, Weis Markets, Ingles Markets, Village Supermarkets and
Sprouts Farmers Market. The proxy peer group, as defined in the
Company’s most recent proxy statement, includes the following
listed companies: Core-mark, Office Depot, SpartanNash, SYNNEX
Corp, Sysco Corp, TechData Corp, WW Grainger and Wesco
International. The proxy group also includes the following unlisted
companies: Publix Super Markets, Staples, Whole Foods Markets and
Toys R US.
3 Based on analysis of publicly available information.
Assumptions as provided in the Blackwells presentation.
4 Based on Blackwells research. Assumptions as provided in the
Blackwells presentation.
View source
version on businesswire.com: http://www.businesswire.com/news/home/20180207005608/en/
Gagnier CommunicationsDan Gagnier / Patrick
Reynolds646-569-5897