breakingviews / Financial Insight: Shopping for Supermarkets; Investors Look Likely to Win With Private-Equity Offers; Threats Increase for Vonage
Private-equity houses are circling supermarkets.</br></br>A group including Kohlberg Kravis Roberts has expressed an interest in J Sainsbury, the United Kingdom's third-largest supermarket chain by sales. In the U.S., Albertson's last year was taken private for more than $9 billion, and Roundy's, a $2 billion Midwestern chain, this past week said it was seeking a buyer. Supermarket shareholders may be wary of selling out too cheaply. Past experience suggests that's not such a big risk.</br></br>It's easy to see why the buyout shops are interested. Supermarkets have stable cash flows and lots of property. Private-equity funds can make a mint by stocking them with debt. KKR had a blowout success doing this with Safeway, which it acquired in 1986. In just four years, the buyout pioneer made seven times its original investment.</br></br>Shareholders don't want to leave such rich pickings on the table. But before holding out, they should consider the experience of Kroger, a chain that is once again subject to buyout speculation. In 1988, KKR offered $64 a share, or a 60% premium, for the Cincinnati company. Rather than take the money, management engineered a massive $40 per- share dividend, which it funded with debt. In its wake, the stock fell to about $18 a share. At that point, it looked like shareholders would have been better off selling out.</br></br>But management then got down to restructuring the business. It sold several prize assets and cut costs. As a result, Kroger's shares increased by an average of 20% a year over the following decade, beating the Standard & Poor's 500-stock index by a cool five percentage points each year.