Fitch Ratings on July 27 placed SuperValu Inc.'s ratings on positive watch, a day after supermarket supplier United Natural Foods Inc. agreed to a $2.9 billion acquisition deal for the Minnesota-based wholesaler and grocer.
The ratings included in the action include SuperValu's long-term issuer default rating of B, in addition to BB/RR1 ratings on a $1 billion secured revolving credit facility and a $700 million secured term loan and a B/RR4 rating on $530 million senior unsecured notes.
Fitch expects that the combined entity resulting from the proposed purchase would be a leader in the wholesale grocery distribution market, with positive free cash flow deployed toward debt reduction and adjusted leverage forecast in the mid-to-high 4.0x range three years after deal completion. The entity could also be generating EBITDA of $750 million to $800 million at that time, the rating agency added, assuming about 50% synergy flow-through and modest top-line growth.
This represents a stronger credit rating profile than SuperValu's current stand-alone IDR. Fitch noted that the company's status as one of the largest wholesale distributors in the U.S. is weighted against its middling positions in the retail grocery market, with constraints including increased competition as well as SuperValu's drop in retail operating earnings and an expected EBITDA loss due to its transition service agreement with grocer Albertsons Cos. Inc. winding down.
Meanwhile, Fitch estimates that UNFI generates about $200 million of annual free cash flow, with pro forma free cash flow possibly being in the low-$100 million range given incremental interest expense.
Fitch said it plans to resolve the positive watch on SuperValu's ratings after the acquisition deal is completed, noting that developments that may lead to positive ratings action include using asset sale proceeds to reduce debt, or successfully carrying out wholesale operating strategies. However, the rating agency added that integration issues or consistently weak top-line performances could possibly result in negative ratings action.