After Apollo Management LP bought Southern California warehouse/supermarket hybrid Smart & Final Inc. last week, the prevailing question was: “Why?”
The New York-based private equity firm has a well-deserved reputation for pulling out savvy deals, and paid roughly $812 million for a 140-year-old grocery chain that sometimes seems uncomfortable lodged between warehouse stores such as Costco and traditional supermarkets such as Ralphs.
The deal’s announcement came the same day the City of Commerce-based chain posted a 45 percent drop in fourth quarter profits amid an ultra-competitive and unsettled Southern California market sector fraught with labor disputes.
“The deal is what it is,” said Steven McSorley, an analyst with New York-based Cathay Financial. “Smart & Final has a niche market it serves well and past that, it’s hard to find any huge risks or any huge rewards apparent with the deal as it was announced. Only time will tell.”
Apollo agreed to pay Smart & Final shareholders the largest being Paris-based grocer Casino Guichard-Perrachon SA with a 52 percent interest $22 per share in cash, a 15 percent premium on the Feb. 16 closing price. Shares have gained 13 percent since the announcement indicating the market’s approval of the deal.
The deal came amid a flurry of activity in the supermarket sector last week, topped by Austin, Texas-based Whole Foods Market Inc.’s $565 million acquisition of Boulder, Colo.-based Wild Oats Markets Inc. both of which have a presence in the Southern California market.
Moreover, there was Arden Group Inc. the operator of upscale Gelson’s supermarkets cutting a labor agreement with the United Food and Commercial Workers union. The pact comes as the major supermarket chains such as Safeway Inc. get ready to negotiate with the union the first negotiations since the devastating 2003-2004 grocery strike.
However, Smart & Final only employs about 135 union workers, mainly at its 53 Smart Foodservice Cash & Carry stores mostly in the Pacific Northwest, with only three in California.
The main key to the deal, though, may be the company’s real estate holdings. The grocer, which was L.A.’s first, owns 43 of its 253 stores outright, some of which are “pretty solid real estate,” according to Freidman Billings Ramsey & Co. analyst Karen Short.
And despite the poor fourth quarter earnings, the company has pulled down profits of nearly $110 million over the past 5 years. McSorely traced those profits to an odd but successful niche approach serving commercial wholesale restaurants as well as family grocery needs.
