SuperValu shares soar 65% after United Natural Foods agrees to acquire grocery chain

SuperValu Inc. shares soared 65% Thursday, after United Natural Foods Inc. said it has agreed to acquire the food distributor and grocery chain in a deal valued at about $2.9 billion, including debt.

United Natural FoodsUNFI, -14.18% , which specializes in healthier food options, distributes more than 110,000 products to more than 43,000 customer locations, including natural-product stores and conventional supermarkets. The company is paying $32.50 per SuperValu shareSVU, +64.22% , equal to a 67% premium over the stock’s closing price Wednesday.

The deal will expand its range and help the company reach a broader spectrum of customers, said Steve Spinner, UNFI’s chief executive, in a statement. Spinner is to lead the combined company, and Sean Griffin, the company’s chief operating officer, has been tapped to head up the SuperValu integration effort. UNFI said it will exit SuperValu’s retail business, which comprises 3,000 stores. The company has spent more than two years executing a transformation plan aimed at returning to its wholesale roots.

UNFI expects the deal to generate run-rate cost synergies of more than $175 million by the third year after it closes, which is expected to take place in the fourth quarter. After the first year, it is expected to boost adjusted per-share earnings and to contribute to double-digit adjusted EPS growth after that.

“This combination provides Unified with significant scale enabling us to serve the country’s most innovative and fastest-growing retailers and e-tailers,” Spinner told analysts on a conference call, according to a FactSet transcript. “Our industry continues to evolve scale, efficiency, merchandising, services and products selection and are what our customers need and want. This combination is what our retailers demand.”

Moody’s said the deal makes strategic sense, coming at a time of growing competition in the food retailing business. Inc.’sAMZN, -2.44%acquisition of Whole Foods has created a deep-pocketed giant in the grocery category that has put pressure on competitors.

The UNFI-SuperValu deal “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,” said Moody’s Vice President Mickey Chadha in commentary.

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“With extremely thin margins at SuperValu and organic growth opportunities hard to come by due to the challenging business environment for its wholesale distribution customers, which are primarily independent food retailers or small retail grocery chains that are challenged the most in the current promotional environment, it makes sense to join forces with UNFI, which has over 35% of its sales to grocery stores that specialize in faster-growing natural and organic foods including Whole Foods,” he said.

SuperValu has been under pressure from activist shareholder Blackwells Capital LLC to boost its financial performance. On Tuesday, Blackwells released a presentation calling on shareholders to vote for its six nominees for the board to ensure change and unlock value.

United Natural Foods shares dropped 13% on the news, however, and are now down 28% for 2018, while the S&P 500 indexSPX, -0.27%has gained 6.3%.

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