Albertson’s Planned IPO Is Credit Positive
Last Wednesday, Albertsons Companies Inc., the newly formed parent of Albertson’s Holdings LLC (B1
stable) and New Albertson’s Inc. (B2 stable), announced that it expects to launch an initial public offering
this year. The planned IPO is credit positive because we expect the company to use most of the net
proceeds to repay debt.
Albertsons is owned by a consortium led by private-equity firm Cerberus Capital Management. In January
2015, Albertson’s Holdings acquired Safeway Inc. for $9.4 billion, a deal primarily financed with debt.
Subsequent to the transaction, New Albertson’s acquired 126 of the Safeway stores (Safeway Eastern
Division) from Albertson’s Holdings, while the remainder stayed with Albertson’s Holdings. The increased
debt burden related to the Safeway acquisition resulted in weak credit metrics for both companies, with pro
forma debt/EBITDA (including our adjustments for leases and pensions) at more than 7.0x at Albertson’s
Holdings and about 6.5x at New Albertson’s.
We do not yet know how much the proposed IPO will raise or the manner in which the company will apply
these proceeds toward the various debt instruments at Albertson’s Holdings and New Albertson’s. However,
we expect post-IPO credit metrics to improve significantly. Assuming a valuation of 6x trailing pro forma
consolidated adjusted EBITDA of $2.4 billion, the company would be valued at $14.4 billion. Further
assuming that Albertsons sells 10% of the combined company to the public at that valuation, the gross
proceeds would equal about $1.44 billion. Applying $1.4 billion in net proceeds toward debt reduction
would reduce debt/EBITDA to about 6.0x for Albertson’s Holdings and about 5.5x for New Albertson’s.
Although sooner than we expected, Albertson’s proposed IPO reflects management’s confidence in the
company’s growth prospects. Management has been successful in improving same-store sales across all
banners. In 2014, same-store sales grew 9.1% for New Albertson’s stores, swinging from a decline of 4.8% in
2012, while same-store growth for Safeway stores improved to 3% in 2014 from 1% growth in 2012. The
increased traffic in the stores is the result of lower prices, enhanced product selection and loyalty programs.
Even before the IPO announcement, we had expected Albertson’s credit metrics to improve within 18
months of the closing of the Safeway transaction. We expect improvements in operating performance and
synergies to enhance profitability as the company uses excess free cash flow to pay down debt.
Integration and execution challenges related to the Safeway acquisition, coupled with a high debt burden,
remain major risks for the company. But our current ratings reflect our expectation that profitability and
credit metrics will continue to improve, with debt/EBITDA for both Albertson’s Holdings and New
Albertson’s dipping below 6x in the next 18 months.
