Facebook
Twitter
Charlie Munger, vice chairman of Berkshire Hathaway (NYSE: BRK-B) and Warren Buffett confidant, offered a scatological, though pithy, investing observation a few years ago. “When you mix raisins with turds,” Munger observed, “they are still turds.”
Mix the good with the bad – good company, bad company; good employee, bad employee; good asset, bad asset – and it’s all bad in the end. In my experience, Munger’s observation is spot on. The bad inevitably overruns the good.
What, then, should be expected when the bad is mixed with the bad? Is it possible that some counterbalancing alchemy occurs so that a good emerges?
Of course not. Mixing two bads only gets you more bad, though Wall Street frequently attempts to convince you otherwise. The impending IPO of two moribund supermarket chains – Albertsons and Safeway – is the latest attempt.
Time certainly flies. Safeway has been a private company for less than a year. In January, Cerberus Capital Management, a leveraged buyout firm, paid $34.92 per Safeway share to take control of Safeway and meld it into privately owned Albertsons (also formerly public). At the time, management of the new combination was all a flutter with hope and potential.
“This merger creates a unified, strong organization that is dedicated to bringing a better shopping experience to more customers across the country,” gushed Albertsons CEO Bob Miller. “Our combined geographic footprint, vast range of brands and products, and service-oriented staff will enable us to meet evolving shopping preferences.”
Color me skeptical on the “better shopping experience.” I live in Colorado, where both Safeway and Albertsons have a presence. I’m familiar with both grocery chains. I have also had the opportunity to kick the tires of the new combination. All I can say is that both chains continue to leave me underwhelmed.
More important, they continue to leave other Coloradoans underwhelmed as well. In May, Safeway announced it would close nine Denver-area stores. Albertsons, meanwhile, continues to reduce its Colorado presence. This has been its modus for the past 10 years. The latest store closing in Colorado Springs reduces Albertson’s Colorado store count to 20. The closed stores are money-losers. They fail to generate a sufficient return on invested capital. Therefore, it’s only sensible to close them.
Location plays a role in retailing success, but so does managerial acumen. Interestingly, Wal-Mart (NYSE: WMT) has opened five of its new Neighborhood Market stores at previous Albertsons locations. The new Wal-Mart stores appear to be doing well.
To be sure, the shopping experience at Albertsons and Safeway might be better in other states, but I’m skeptical. In the fiscal year ended Feb. 28, Albertsons posted a loss of $1.2 billion on $27.2 billion in sales.
Despite losing money, the combined Safeway and Albertsons is too good for Cerberus to keep to itself. Cerberus announced this past Friday that it wants to raise $1.84 billion floating Albertsons shares to the public.
It’s unclear how many shares and at what price the investment banks will pitch the Albertsons IPO. Whatever the number and price, you can be sure that the controlling interest will benefit. Cerberus plans to use the proceeds to reduce its grocery conglomerate’s $12.8 billion debt, which is triple the debt of the prior year. The IPO reduces Cerberus’ financial risk as much as anything.
Albertsons and Safeway might have upside potential, but again I’m skeptical. Experience tempers my enthusiasm. Experience tells me that invigorating a moribund brand ranks with extracting raisins from turds in both difficulty and success. Combining two moribund brands neither lessens the difficulty nor raises the success rate.
But as Wall Street has proven time immemorial, combining two moribund brands can easily enrich the pitchman who can convince enough people otherwise.
Buffett’s Island Paradise
Imagine the ultimate safe haven for investors—no personal or corporate income tax, no capital gains tax—where wealth can be amassed far faster than you ever dreamed possible. This island paradise is no dream. It’s real. And it’s why Warren Buffett and many other mega-wealthy investors have parked billions of dollars here. Go here to join them today.