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    Buyout Teams Lining Up for Albertsons

    Auction for big U.S. food retailer may include bids from drugstore chains CVS and Walgreens.

    NEW YORK -- The bidding line for U.S. grocer Albertsons Inc. is growing with buyout firms, a hedge fund and a real estate investment trust, according to sources, Reuters.com reported.

    While the private equity interest is heavy, sources say a corporate bid for Albertsons is also possible, with interest ranging from its U.S. competitors to European grocery giants. Albertsons' drugstore chain may have CVS Corp. or Walgreens placing bids, several analysts and a source close to the matter said in the Reuters.com report.

    Albertsons put itself up for sale earlier this month, having struggled to keep up with competition from discounters. The company also owns Shaws supermarkets and drugstores, OscoDrug and Sav-on. The retailer operates about 2,500 stores in 37 U.S. states, but pulled out of some unprofitable markets, including New Orleans and Omaha in recent years. In addition to its supermarkets and drugstores, Albertsons owns and operates 179 Albertsons Express stores, ranging in size from 1,100 to 2,000 square feet and offering gasoline.

    "I think this will be a very interesting auction," said Kurt Barnard, president of Barnard's Retail Consulting Group. "We are dealing with a fine name that has simply not been able to measure up to the requirements in the post Wal-Mart world." Barnard told Reuters.com that CVS or Walgreens were among the most likely corporate bidders.

    But so far, private equity interest leads the way. Sources told Reuters.com that Kohlberg Kravis Roberts & Co., The Texas Pacific Group and Apollo Management are one team. Thomas H. Lee, Bain Capital and Warburg Pincus are another. A third consists of hedge fund Cerberus Capital and Kimco Realty Corp. Yucaipa Cos., the investment firm owned by billionaire grocery magnate Ron Burkle, is also interested and looking to team up with other investors.

    Boise, Idaho-based Albertsons says it owns 60 percent of its stores, making it an attractive real-estate play for a financial buyer who could sell the assets and lease back the real estate, using the cash to pay down debt used to finance deal.

    Despite its struggles, Albertsons could fetch more than $16.5 billion, which includes $6.5 billion in debt, by some analysts' accounts. On Sept. 2, the retailer said it hired Goldman Sachs and The Blackstone Group to explore strategic options but added that no deal was guaranteed.

    In June, Albertson’s quarterly profit nearly tripled as sales rebounded from last year's California strike, but analysts have said the retailer is not doing enough to address competition in the grocery sector, particularly from Wal-Mart.

    One person close to the auction told Reuters.com that the Wal-Mart threat is overplayed, given that Albertsons has a strong presence in California and the northeast areas where Wal-Mart is less dominant.

    The auction is still in its early stages and presently no corporate bidder has emerged. Analysts speculated early on that European retailers such as Britain's Tesco plc, Belgian retailer Delhaize Group and France's Carrefour were among the likely candidates. But people familiar with the company and the auction are not ruling out interest from U.S. drugstores, particularly CVS, which may want to gobble up Albertsons's drug chains, OscoDrug and Sav-on, Reuters.com reported.

    According to CIBC analyst, Perry Caicco, Albertsons' standalone drugstore business, consisting of 700 stores, generates about $4.2 billion of sales and could fetch an estimated eight times their estimated earnings before interest, taxes, depreciation and amortization or $3 million.

    Reuters.com reported that Caicco noted that "Eckerd (drugstores) recently sold for 7.4 times EBITDA, but Osco and Sav-on assets are in better shape than Eckerd was, and CVS in particular seems to have an interest in adding stores in the mid-west and California."

    The asking price for Albertsons could range from $27 per share, to $33.70 per share, according to analysts. Shares of Albertsons closed at $26 on Friday, topping a 52-week high. Its stock has steadily climbed since it said went on the auction block.

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