The 2006 comedy ‘The Break-Up’ (underrated!) ends with a cordial yet awkward chance encounter between characters Gary and Brooke months after their separation. There’s a sense of both relief and ‘what could have been.’
With this week’s termination of the proposed merger between Kroger (NYSE: KR) and Albertsons Companies (NYSE: ACI), it appears the cordial part will have to wait (ACI quickly filed legal suit against KR) while the market considers ‘what could have been.’
From a net lease perspective, understanding real estate footprints could predict future news. ACI operates 2,269 stores with 39% (nearly 900 locations) owned fee simple or subject to ground leases. The company also owns (or ground leases) 55% of its industrial assets and its Boise, ID corporate office headquarters. KR disclosures note 2,800 total facilities and operation in leased premises for approximately half of their retail store locations.
Since the announcement of the deal, the share price of the two grocers have diverged. Laggard ACI trades at less than 5x EBITDA and 8x forward earnings on just a $10 billion market cap. Sponsor Cerberus Capital Management maintains ~25% ownership of the equity.
Although the low margin aspect of the grocery business can make additional lease obligations tough to swallow, ACI may attempt to monetize more real estate given the KR deal is off the table (shareholders will be antsy for something). Moving properties at a 12-15x rent multiple to buy back shares at 5x EBITDA (or paydown debt/reinvest/grow the business) may help rejuvenate investor interest in ACI after the 2-year merger battle. KR has utilized leaseback capital in the past, but the near all-time high share price and $44 billion market cap would seem to dampen pressure to sell assets.
As a consumer residing in a state where the merger would have led to store divestitures to unproven operators, the Observer’s stomach (and wallet) is okay with this break-up. For commercial real estate participants, ACI and KR will continue to be needle-moving retail tenants, whether together and separate.
-Sean Hostert