- 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
NEW YORK – February 7, 2018 – 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 Directors
c/o Corporate Secretary
11840 Valley View Road
Eden 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. There are only 19 companies currently in the S&P 500 and Russell 1 2000 that have performed worse than Supervalu over the last 10 years.
|Share Price Performance (a)|
|1 – Year||3 – Year||5 – Year||10 – Year|
|S&P 600 Cons. Staples Sector||5.5%||27.6%||84.3%||273.6%|
|Wholesale Peer Group||(21.4)%||(27.2)%||13.3%||55.7%|
|Retail Peer Group||(13.9)%||(23.3)%||33.4%||40%|
|Underperformance vs S&P
|Underperfornance vs Wholesale
|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
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. 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:
- 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
- Significant capital is trapped on the Company’s balance sheet
a. > $1.8bn of owned real estate that must be unlocked
- Supervalu’s retail operations are valued by the market negatively
a. based on their drain on cash flow and lack of competitive advantage which is masking a strong wholesale turnaround
- 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;
- 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 accretion ; and
- 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.
Based on analysis of publicly available information. Assumptions as provided in the Blackwells
Based on Blackwells research. Assumptions as provided in the Blackwells presentation.
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.
Dan Gagnier / Patrick Reynolds