With Acme’s future hanging in the balance, its owner plans public stock offering

For the third time in five years, investors who own Albertsons, the Idaho-based company that sells $60 billion worth of groceries a year through Philly’s Acme Markets, Safeway and 18 other chains, are trying to sell stock in an initial public offering (IPO).

Will it really happen this time? A 2015 sale was canceled when larger rival Walmart reported weak profits and the stock market lost interest in groceries. The 2017 IPO was canceled after Amazon bought Whole Foods for $14 billion, making investors uneasy about stepped-up competition for Albertsons’ 2,200-plus old-school supermarkets.

Will the 20 percent drop in the S&P 500 kill the appetite for this and other planned IPOs? "IPOs do dramatically slow in bear markets,” said Jeffrey DeMaso, director of research at Adviser Investments, New York. “My guess is, if the market snaps back quickly — hey, it’s possible! — they’ll carry on with the IPO.”

Or the owners may be frustrated again in their attempt to unload shares. (The investors, not the stores, are selling, and will collect any proceeds.)

For years, Albertsons and its local affiliates such as Acme “lost market share due to management not reinvesting in stores,” says Robert Costello Jr., founder of $150 million-asset Costello Asset Management in Huntingdon Valley, who has followed Albertsons and its predecessors since the early 1990s.

“It’s a highly competitive retail industry,” and markets like Philadelphia are “overstored,” he added.

The company’s network of decades-old store brands dominates “prime locations,” but the deep debt imposed by its private-equity owners makes it tough to grow: At least until recently, ”they would rather load up on debt, to pay themselves” than update stores to compete with Wegman’s and other growing chains, Costello said.

But the company has attempted a turnaround in advance of going public. The March 6 IPO filing with the Securities and Exchange Commission came less than one year into CEO Vivek Sankaran’s efforts to spruce up stores and add more self-checking and delivery services.

Sankaran joined Albertsons from PepsiCo in a wave of new management drafted by the owners’ group that includes the buyout firm Cerberus Capital Management (owner of Chrysler Corp. before its 2008 government bailout) and four real estate investors, among them Philadelphia-based Lubert, Adler & Co.. These owners bought Acme and several larger store chains from Supervalu Inc. in 2013 for $100 million in cash, and assumed their $3.2 billion in debt.

In a cheerful letter to would-be investors, Sankaran bragged that his team has successfully merged the store chains and developed “a robust strategic framework” that “rests on the four pillars of growth, productivity, technology, and talent-and-culture." (Acme has more stores than other Philadelphia-area chains, but ShopRite and other chains with larger stores have greater total sales, according to industry databases.)

Other members of Sankaran’s turnaround-and-take-it-public team include Chris Rupp, chief customer and digital officer, who was previously general manager of Microsoft Xbox Business Engineering and of Amazon’s vast Fulfillment warehousing division.

Albertsons is big. Trailing only Walmart and Kroger among U.S. grocers, it employs 270,000 workers, including 170,000 who are members of the United Food and Commercial Workers (UFCW) and other labor unions. It has 2,260 stores (57 new ones in the last five years, while 121 older stores were sold or shut). It also has 33 million customers a week, many lifelong loyalists. Across the company, its stores are an average of 85 years old, with the ACMEs being older. The first Acme was opened in 1891, in South Philly.

With U.S. grocery spending growing less than 2 percent a year and the population aging, Albertsons is trying to boost its margins by selling more of its own brands — now about one-quarter of total sales — and more fresh meats, produce and ready-to-eat food that it can sell at a higher markup than canned and boxed supplies.

The company operates 50 Pennsylvania stores; 73 in New Jersey; and 18 in Delaware, along with an office center near Malvern and a warehouse distribution center in Denver, Lancaster County.

Albertsons is only modestly profitable: The company lost money in three of the last five years, even though it has collected nearly $1 billion in income tax credits thanks to the Trump tax reforms of 2017. It has also raised nearly half a billion dollars in the first nine months of the current fiscal year by selling and writing down store properties, many of which it now leases back from the new owners.

Albertsons is also deep in debt — the company owes nearly $8 billion, mostly to its private-equity owners who used borrowed money to buy Safeway and other chains and left the company with a debt-payment burden that now tops $4 million a day, even at today’s reduced interest rates.

But that’s down from $12 billion in debt two years ago — Albertsons took advantage of near-record low interest rates to pay down some of its borrowing.

Still, the company also has unpaid liabilities of nearly $5 billion to its union pension plans.

In a March report to clients, Moody’s Investors Service analysts rated Albertsons one of the “weakest” U.S. companies that still have investment-grade (B or better) credit ratings.

Why sell stock now? The day before Albertsons filed for its IPO, the company trimmed its pension liabilities through a pact with UFCW locals in the Philadelphia area on a new arrangement that will combine Acme workers’ Mid-Atlantic UFCW and Participating Pension Fund plans into the larger, national Food Employers Labor Relations Association and UFCW Pension Fund.

That larger fund is expected to become insolvent by next year, Albertsons noted in its SEC filing. Most unfunded pension obligations would be taken over by the federal Pension Benefit Guaranty Corp (PBGC). Albertsons would also pay into a new pension plan to support benefits not covered by PBGC, and another new, 401(k)-style retirement plan.

The change will cut Albertsons yearly contribution to the successor pension plans to $23 million, from a previous $27 million, but will also likely require expensive new payments for the two new plans, which haven’t been assessed yet, the report said.

Albertsons complains that rising minimum wages in Democratic-run states such as California and New Jersey will eat into profits and force an unpleasant choice between boosting wages or leaving jobs unfilled, which could hurt “our brand and business image.”

The company has been boosting its investment in self-checkout lanes, bagged food pickup and delivery, and other digitally enabled services, to avoid having to boost wages. But it has also been cutting back on some initiatives; in November it laid off 56 people at a meals-preparation center in Hatfield, and Costello said he’s heard from managers who have been offered buyouts in recent months. “A lot of their workforce is over 50,” he said.