Cerberus On The Hunt After Gun Flap

Target: Supervalu Inc.

Price: $500 million

Sponsor: Cerberus Capital Management

In the month since Cerberus Capital Management announced plans to sell its portfolio company Freedom Group, a gunmaker whose product was used to kill 20 Connecticut schoolchildren, the New York buyout shop has taken steps to complete at least four other deals, including partial acquisitions as well as buyouts and exits, from Austria and England to the United States and Japan.

The firm has not indicated any progress on the Freedom Group exit, and the other transactions have been percolating below the surface for some time, as sister news service Reuters reported. The firm is nearing a deal to buy parts of grocery chain Supervalu Inc. in the United States and all of the British pub group Admiral Taverns. At the same time, the New York-based buyout shop expects to retain a majority stake in the Austrian bank Bawag PSK after regulators allowed a hedge fund to increase its holding, but Cerberus set an exit from the Japanese bank Aozora Bank Ltd in a global offering that would cut the U.S. buyout firm’s stake to 7.7 percent from 58 percent.

Cerberus is bearing down on a deal to buy parts of Supervalu Inc., a Minneapolis-based grocer that has been closing stores and cutting costs to reverse losses and cut debt. It suspended its dividend in July to fund aggressive price cuts and it also put itself up for sale, according to a person familiar with the matter. Cerberus and its partners plan to buy some Supervalu assets and take a stake in the remaining public company after banks balked at financing a deal for all of the third-largest U.S. supermarket operator on the proposed terms, the person said. The person spoke on condition of anonymity because negotiations are confidential.

A Supervalu spokesman said the company’s review of strategic alternatives was proceeding and that it was in “active discussions with several parties.” He declined to comment further. Supervalu owns store chains that include Jewel-Osco, Save-A-Lot and Albertsons. Cerberus declined to comment.

A deal for all of Supervalu would have required that Cerberus contribute about $900 million as equity, according to another person familiar with the talks. After some banks objected, the deal was downsized and the equity became about $500 million, the source added. Save-A-Lot, one of Supervalu’s better performing businesses that competes with Kroger Co.’s discount Food-4-Less chain, is likely to be sold separately, the second person and another person familiar with the matter said.

Cerberus’ Supervalu strategy is widely expected to mirror its playbook at Albertsons, the supermarket chain sold to the private equity investor, Supervalu and CVS Caremark Corp. for $10 billion in 2006. Cerberus acquired 655 Albertsons locations and a few belonging to various other brands in the complicated carve-out, under which Supervalu bought the remaining 564 Albertsons stores. Cerberus sold most of its assets, but held on to Albertsons.

In October, Supervalu posted a net loss of $111 million, or 52 cents per share, for the second quarter ending on Sept. 8 compared with a year-earlier profit of $60 million, or 28 cents a share.

In a separate deal, Cerberus has struck a deal to buy British pub group Admiral Taverns from part state-owned Lloyds Banking Group, which is shedding non-core businesses. While terms were not disclosed, two people familiar with the matter said the deal had an enterprise value—debt plus equity—of £200 million ($323 million). The debt portion was around £150 million, with Cerberus providing £50 million cash, the people said.

Lloyds took control of Admiral, which operates 1,100 pubs, as part of a restructuring in 2009 involving a debt-for-equity swap after the firm was swamped with £900 million of debt. Like many British pub groups, Admiral was hit by the country’s moves into recession, with a smoking ban not helping. Admiral reported £27 million underlying core earnings in the year to June. It hopes to sell around 100 underperforming pubs to boost profit.

Cerberus will retain the existing senior management team. “Admiral’s business provides an ideal platform for the acquisition of additional tenanted pubs in the UK,” Lee Millstein, senior managing director at Cerberus, said.

Admiral Taverns management and Lloyds were advised by PWC, while Cerberus was advised by Sapient Corporate Finance.

In a second European deal, Austrian bank Bawag PSK is getting a €200 million ($264.42 million) capital injection from shareholders and investors, boosting its core equity ratio around 10.3 percent by end of this year from 7.8 percent last year, the bank said. Under the deal, Cerberus will remain the controlling shareholder, owning around 52 percent stake, while U.S. hedge fund Golden Tree Asset Management will hold around 39 percent interest, it said.

Austria’s competition regulator said on Dec. 12 it planned to allow Golden Tree Asset Management to raise its stake in Bawag PSK to up to 40 percent from less than 10 percent.

And in Japan, Cerberus plans to sell up to ¥148 billion ($1.7 billion) of shares in Aozora Bank Ltd in a global offering that the Japanese bank said would cut the U.S. buyout firm’s stake to 7.7 percent from 58 percent. Cerberus has been the controlling shareholder in mid-sized lender Aozora for much of the past decade, but is in the process of cutting its exposure to Japan, where there are increasingly few distressed investment opportunities for foreign funds.

In September, Aozora said Cerberus intended to reduce its stake, but did not clarify at the time how the U.S. firm planned to divest its holding. The New York-based private equity fund has paid more than ¥101 billion for the 58 percent holding it has been building since 2000. Cerberus will sell 275 million shares in Japan and another 275 million shares overseas. It may also sell up to 41.25 million additional shares depending on the demand.

An official at Cerberus’ Tokyo office declined to comment.

The private equity fund bought Aozora, formerly known as Nippon Credit Bank, after the bank was temporarily put under government control during Japan’s financial crisis in the late 1990s, when several Japanese lenders struggled under the weight of bad loans. Cerberus bought a minority stake in Aozora in 2000, then became its biggest shareholder in 2003 when Softbank Corp sold its 48.87 percent share to Cerberus for ¥101 billion. It took the bank public in 2006.

The Aozora sale would mark another exit from Japanese investments for Cerberus, which plans to sell its holdings in Seibu Holdings, an operator of railways, resort hotels and real estate properties. It has hired investment banks to handle that sale, sources told Reuters.

Greg Roumeliotis and Olivia Oran are correspondents for Reuters in New York. Additional reporting by Anjuli Davies, Marilyn Gerlach, Emi Emoto and Taro Fuse.