Heavily-shorted shares of Supervalu /quotes/zigman/242335 /quotes/nls/svu SVU -6.85% surged 39% to $3.04 Monday afternoon on heavy volume following news reports that Cerberus Capital was trying to line up debt financing to buy the troubled supermarket chain.
Also Monday, J.P. Morgan upped its credit rating on Supervalu to neutral from underweight, further fueling gains in the stock. .
Supervalu’s bonds are rising in value too, suggesting investors are more comfortable holding the troubled grocer’s debt. The price on Supervalu’s 8% bonds maturing in 2016 has risen to 97 cents on the dollar, according to Andrew Brenner, head of international fixed income at National Alliance Securities.
That’s up from 90 cents on Friday and 84 cents in the middle of last week, he said.
In its upgrade, J.P. Morgan cited a growing belief that private equity is taking a close look at Supervalu. The hobbled grocery chain indicated Oct. 18 it was in active dialogue with several interested buyers. Debtwire and Reuters both reported Cerberus was keen to get financing to pursue Supervalu.
“We believe the solid liquidity and now potential interest in the business will support the bonds,” J.P. Morgan credit analyst Carla Casella wrote in a research note. “The downside risk is that the company comes out in the next week or so and announces it is not selling itself or any of its businesses.”
According to Casella, two reasons private equity buyers may be interested:
(1) Supervalu has a lot of low-cost debt that would not need to be refinanced.
(2) The company owns 40% of its real estate. This can be used as financing to keep the cost of financing a leveraged buyout relatively low.
While Supervalu’s business has showed few signs of a turnaround in recent months, the company is still generating enough cash flow to pay down debt and invest in its stores. This should ease liquidity concerns.
News that a private equity firm may buy all or part of Supervalu is likely spooking investors who had bet the stock would continue to decline. Supervalu is among the most heavily shorted stocks on the S&P 1500, with 41% of its shares sold short, the most recent FactSet data shows.
-Matt Andrejczak @MarketwatchMatt
-Deborah Levine @dlevineMW
