United Natural Foods UNFI has announced that it will acquire SuperValu SVU in a deal valued at $2.9 billion. UNFI is paying $32.50 per SuperValu share, which is a 67% premium to the stock’s Wednesday closing price.

UNFI is the largest publicly traded wholesale distributor to the natural and organic industry in the United States and Canada. Amazon’s AMZN grocery store Whole Foods accounts for roughly 33% of the company’s business.

On the other side of the deal, SuperValu is one of the largest grocery wholesalers and retailers in the U.S. The company has been narrowing its focus on its wholesale business recently, with 80% of fourth-quarter fiscal 2018 sales coming from distribution of groceries and other products, logistics services, and professional service solutions to retail stores and other wholesale customers.

Management has also unveiled plans to sell Shop’N’Save, its main retail business.

On reports of the news, SuperValu stock price soared 65.8% through trading Thursday. Conversely, UNFI stock dropped 16.21%.

The drop in UNFI price likely suggest that investors think the acquisition was overpriced. SuperValu has been going through struggles lately, such as its fourth-quarter fiscal 2018 results missing both top and bottom line Zacks Consensus Estimates. The company’s stock had lost 7.6% on the year prior to reports of the deal.

UNFI plans to finance the deal significantly through debt, and Goldman Sachs has committed financing for the transaction.  The company acknowledged that its EBITDA-to-debt ratio would be high.

UNFI plans to sell off SuperValu’s retail assets in order to reduce leverage.

Synergies and Benefits

While the market seemed to disprove of UNFI’s acquisition, the deal could end up paying off for the natural foods supplier, particularly in the long-term.

From UNFI’s perspective, the deal will help to diversify the company and allow it to expand at a time of increased consolidation in the grocery industry. CEO Steve Spinner stated that, “Combining our leading position in natural and organic foods with SuperValu’s presence in fast-turning products makes ups the partner of choice for a broader range of customers.”

Most of SuperValu’s issues have been coming from the company’s retail business, while the wholesale arm does serve a network of 3,437 stores. UNFI can utilize those new sales channels to greatly expand its customer base. Moreover, UNFI will no longer need to heavily depend on Whole Foods, as its contract with the grocer is set to expire in 2025.

UNFI has also had issues with keeping up with higher-than-anticipated demand and has incurred higher labor expenses across several distribution centers.  Natural and organic products have high-growth potential, and UNFI can’t afford to not be able to deliver. The company now has greater scale it can use to increase efficiencies and better meet the needs of its customer base.

UNFI stated that the deal will lead to $175 million in synergies by the third year. Further, it will be accretive to earnings after the first year and grow EPS by double digits.

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