UPDATE: SUPERVALU (SVU) Pops as LBO Odds Seen at 50%

October 22, 2012 9:58 AM EDT
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(Updated - October 22, 2012 10:17 AM EDT)

Shares of SUPERVALU Inc. (NYSE: SVU) are surging early Monday as a buyout of the embattled supermarket chain gains some credibility.

JPMorgan's debt analyst Carla Casella upgraded SUPERVALU bonds from Underweight to Neutral on Monday citing a 50 percent chance of a LBO.

"We are upgrading the credit from Underweight to Neutral as we believe the solid liquidity and now potential interest in the business will support the bonds," Casella states.

In a potential LBO, the analyst expects a buyer to refinance the bank debt, 2013 maturities, and SVU 2014 and 2016 bonds, using new bank lines, CMBS, equity, and potentially bonds (if there is a shortfall) to finance the deal. Under this scenario, SVU's '14s and '16s could trade up 1.5-8.5 points, respectively, to 101. "We would expect these and the ABS 2013 bonds to be refinanced due to the short maturity date (they trade over par). The remaining Albertson's (Sell) and, to a lesser extent, American Stores (Hold) bonds would likely be layered with CMBS."

Commenting on what may have sparked PE interest, the analyst notes: 1) Results have been poor, keeping the stock weak - i.e., a turn-around that may have turn-around like upside. 2) It has a lot of low-cost debt that would not need to be refinanced. 3) It has a lot of owned real estate (40%) that can be used as part of a financing to keep cost of financing an LBO relatively low.

With earnings on October 18, SUPERVALU said it has received "a number of indications of interest and is in active dialogue with several parties."

Shares of SVU last traded at $2.78, up 27 percent.

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