Albertsons, a Boise, Idaho-based supermarket chain set to launch its IPO around Oct. 14, also has to convince the market its heavy debt load won't interfere with profit growth. Only 36 private equity–backed deals have been done this year, according to Renaissance.
Albertsons pitch in its roadshow has been focused on improved profit margins at companies it acquires; that its numbers are likely to improve as it integrates Safeway, which it bought in January; and the 71 A&P stores it has agreed to buy.
In the first quarter of its current fiscal year, Albertsons lost $153 million on $27.2 billion of sales. Including Safeway and A&P, it would have had sales of $57.9 billion, adjusted earnings before interest, taxes and noncash charges of $2.5 billion and free cash flow of $1.7 billion for the 12 months ending this June.
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But Menlow said the Albertsons deal, at $23 to $26 a share for an equity valuation of $12.4 billion alongside $10.7 billion of post-IPO debt, is still too expensive. Albertsons size and profitability are still less than that of industry rival Kroger, its closest comparable. Linda Killian, a co-manager of Renaissance's IPO-focused exchange traded fund, said the Albertsons deal proposes a valuation lower than Kroger's by some metrics but higher than peers such as Delhaize and Koninklijke Ahold N.V., which also own U.S. supermarket chains.
The Safeway acquisition in particular is so new that the market is unlikely to give Albertsons the benefit of the doubt about how soon it can expand margins, KIllian said.
"It's hard to tell if they've improved anything," the IPO ETF manager said. "Same-store sales have improved since 2013, but so has the whole industry. Kroger is a longtime, very experienced operator with a consistent track record of improvement.''