SuperValu to pay down term loan with Save-A- Lot proceeds, lower leverage to 1.5 times

By Paul Deckelman

New York, Oct. 19 – SuperValu Inc. plans to use the bulk of the expected net proceeds it stands to reap from its planned $1.365 billion sale of its Save-A-Lot retail supermarket chain to private-equity firm Onex Corp. to shore up its balances sheet, via both a large mandatory pre-payment against its term loan and a smaller additional term loan payment, dropping its leverage ratio to the maximum allowed under its credit facility covenants.

‘This transaction is strategic for SuperValu,” the Eden Prairie, Minn.-based supermarket chain operator and wholesale grocery distributor’s president and chief executive officer, Mark Gross, told analysts on the company’s Wednesday conference call following the release of its results for its 2016 fiscal second quarter.

“It will de-lever the balance sheet and allow us to better focus and execute on our strategic plan.”

SuperValu’s chief financial officer, Bruce H. Besanko, said that the company expects to close on the Save-A-Lot sale by the end of January. He said that upon completion of the sale, SuperValu will use a portion of the cash proceeds from the deal – net of the typical fees and expenses in a transaction of this nature, as well as the taxes the company will owe in the next six months – to make a mandatory pre-payment of $750 million against its outstanding term loan balance.

SuperValu plans to make an additional voluntary payment against the term loan of between $50 million and $100 million, Besanko said, in order to bring its net secured leverage ratio of debt as a multiple of EBITDA, , as defined in its credit agreement, down to the required 1.5 times.

After that, he said, “we’ll use the remaining net proceeds, estimated to be in the range of $275 [million] to $350 million after customary adjustments at closing, to further reduce debt and improve our capital structure, as well as to fund corporate and growth initiatives.

During the question-and-answer portion of the conference call that followed the formal presentations by Gross, Besanko, and by Eric A. Claus, Save-A-Lot’s CEO, Besanko reiterated to an analyst that “we would intend to use the cash to de-lever the balance sheet, invest in the business and then invest in our corporate pension obligation, all of that designed to improve and make our balance sheet stronger, improve our capital structure and continue to make the prudent investments in our business.

Debt levels reduced

Besanko, who also serves as chief operating officer and executive vice president for SuperValu, said that at the end of the fiscal second quarter on Sept. l0, the company’s outstanding debt, including capital lease obligations, totaled $2.38 billion, a sequential net decrease of approximately $100 million during the quarter and a net decrease of $140 million since the end the company’s 2015 fiscal year on Feb. 27.

SuperValu had $2.164 billion of long-term debt at the end of the quarter, down from $2.197 billion on Feb. 27. Its current portion of long-term debt stood at $24 million, down from $124 million on Feb. 27, while its capital lease obligations had declined slightly to $197 million from $203 million.

Net interest expense in the second quarter was $41 million, compared to $44 million a year ago, with the decrease in interest expense “primarily driven by lower outstanding debt balances,” Besanko said.

On the liquidity front, he said, the company ended the quarter with approximately $830 million of available capacity under its asset-based loan facility.

Cash and cash equivalents at Sept. 10 was $57 million, unchanged from the end of fiscal 2015.

Besanko said SuperValu generated approximately $153 million of operating cash flow from its continuing operations in the second quarter, bringing its year-to-date total to $274 million, with about $50 million of that spent during the quarter on capital expenditures.

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