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Warehouse Grocer Eyes Possible Sale

Private equity groups, a big player among supermarkets, may bid on Smart & Final, whose profit last year fell 36% despite revenue growth.

April 04, 2006|Jerry Hirsch | Times Staff Writer

Warehouse food retailer Smart & Final Inc. is test marketing a new product -- itself.

The City of Commerce-based chain said Monday that it planned to hire legal and financial advisors to help it determine "strategic alternatives," Wall Street-speak that usually means selling the company.

Analysts say the 250-store chain has been hampered by a majority shareholder that has shown little interest in the business but a sale could position Smart & Final for significant growth.

"This really meets the profile of a company a private equity group would be interested in," said Karen Short, an analyst with Soleil Securities Group in New York. "It isn't a turnaround play, there is significant opportunity for growth in existing and new markets; it has a low level of debt and good management."

For The Record
Los Angeles Times Thursday April 06, 2006 Home Edition Main News Part A Page 2 National Desk 1 inches; 43 words Type of Material: Correction
Smart & Final: An article in Tuesday's Business section on the possible sale of Smart & Final Inc. said the company reported profit of $19.3 million last year, down 36% from a year earlier. The profit was in fact $21.4 million, down 29%.

Private equity groups have been big players in the supermarket industry in recent years. In January, Cerberus Capital Management and Kimco Realty Corp. agreed to acquire 655 Albertsons stores with about $10 billion in annual revenue and several distribution centers as part of a larger sale of the Boise, Idaho-based retailer.

And last year, Los Angeles billionaire Ron Burkle's Yucaipa Cos. purchased interests in the Wild Oats Markets Inc. natural food chain and Pathmark Stores Inc. supermarkets on the East Coast. Yucaipa will probably take a look at Smart & Final, analysts and industry sources said.

Investors are expecting a sale. Smart & Final shares jumped $1.01, more than 6%, on Monday, to $17.40, valuing the company at $556 million. The stock has risen 35% this year amid speculation of a sale. The shares have been particularly hot since March 16, when French retailer Casino Guichard-Perrachon, which owns 56% of Smart & Final, said it planned to sell $2.4 billion of assets to reduce debt.

Smart & Final executives decided to hire advisors because of Casino's announcement, but the company cautioned Monday that there was no assurance that a deal would result. Casino has not said what it plans to do with its stake in Smart & Final.

Smart & Final has stores in California, Oregon, Washington, Arizona, Nevada, Idaho and a joint venture in Baja California. The retailer has about 6,000 employees.

The company could sell for $18.50 to $20 a share, or as much as $643 million, said Jonathan Ziegler, an analyst with J.M. Dutton & Associates in El Dorado Hills, Calif.

Smart & Final traces its roots to 1871, when Herman Hellman, Bernard Cohn and brothers Abraham and Jacob Haas opened a grocery business in a two-story brick building on Los Angeles Street. Hellman, Haas & Co. sold groceries, gunpowder and shepherd supplies.

The name changed to Haas, Baruch & Co. in 1889, and the company's Iris brand made its debut in 1895.

On a separate track, Jim Smart and Hildane Final in 1914 formed Smart & Final Wholesale Grocers, the first "cash-and-carry" wholesaler in the West, where customers picked out their own groceries instead of having a store clerk round everything up.

Smart & Final bought Haas Baruch in 1953, and the name became Smart & Final Iris Co. Two years later, Smart & Final was purchased by the Thriftimart supermarket chain.

Casino bought the company in 1984. Smart & Final went public in 1991, but Casino maintained a large stake in the business.

A discounter, Smart & Final is a warehouse-style store that sells packaged goods and restaurant supplies, including $1.69-a-bottle wine, 35-pound containers of peanut oil, commercial food slicing machines, clamshell "to-go" containers, canned goods, fresh meats and vegetables.

Unlike other warehouse stores, the retailer doesn't require a membership. It has 105 stores in Southern California.

It was one of the beneficiaries of the 4 1/2 -month supermarket strike and lockout in Southern and Central California 2 1/2 years ago.

Shoppers who didn't want to cross picket lines at Ralphs, Vons and Albertsons packed warehouse chains such as Smart & Final and Costco, as well as smaller grocers such as Trader Joe's.

"The strike provided exposure to people who had not shopped our stores before, and when they discovered our concept, they liked it," said Randall Oliver, the retailer's spokesman.

Smart & Final also has gained from greater consumer acceptance of warehouse stores, Oliver said. The strike helped to boost sales by 13% to $1.96 billion from 2003 to 2004 and the chain appears to have kept much of the business. Sales rose 2.5% in the last year to just north of $2 billion.

Profit has not done as well, falling 36% to $19.3 million last year. The company outgrew its distribution system and facilities but has spent an undisclosed amount on a new supply chain management system and several new warehouses.

Smart & Final is "in a much better position going forward," Oliver said.

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