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In battle with Wal-Mart, Albertsons now may sell

2nd-largest U.S. grocery chain exploring options

Albertsons Inc., the second-largest U.S. grocery chain, may put itself up for sale after struggling to compete with Wal-Mart Stores Inc. The company's shares surged 11 percent, the biggest gain in almost 18 years.

Goldman, Sachs & Co. and Blackstone Group LP were hired as financial advisers to explore strategic alternatives, Boise-based Albertsons said Friday in a statement. The company, with a market value of $8.49 billion and debt of $5.66 billion, may sell for as much as $20 billion, analysts said.

Albertsons profit has fallen in three of the past four years as Wal-Mart has expanded in the grocery business, adding since 2000 more than 1,000 U.S. supercenters that sell food. Low prices at Wal-Mart, the world's largest retailer, have helped it become the biggest U.S. food seller and thwarted Albertsons efforts to win customers.

"Wal-Mart is having a big impact in a lot of their markets," said Brad Houle, who helps manage $1.1 billion including about 196,000 Albertsons shares at Davidson Investment Advisors in Great Falls, Mont. Albertsons is "stuck in the middle relative to other food retailers."

Albertsons has lost sales to Kroger Co., the largest U.S. supermarket chain, and No. 3 Safeway Inc., which have been cutting prices. It was also hurt by a 20-week strike in Southern California that began in 2003.

Shares of Albertsons rose on speculation private-equity firms may bid for the company. The grocer, with 2,500 U.S. stores in 37 states — including 47 in Utah — may be attractive for its real estate and cash flow, said Gary Giblen, director of research at Brean Murray & Co. in New York. Most of the stores are in California, Illinois and Texas.

It's unlikely Safeway or Kroger would bid for the whole company since their stores overlap with Albertsons, said Pete Hastings, a bond analyst with Morgan Keegan in Memphis, Tenn. International buyers could include Tesco Plc, the U.K.'s biggest food retailer; Carrefour SA, the world's second largest retailer; and Delhaize Group, the Belgian owner of the Food Lion supermarket chain in the United States, analysts said.

Albertsons shares rose $2.32 to close at $23.05 Friday on the New York Stock Exchange after earlier reaching $26.40. The stock has declined 17 percent in the past year through Thursday. Safeway gained 43 cents to $24.13. Kroger rose 10 cents to $19.91.

Albertsons generated $2.1 billion of cash last year. Capital spending fell to $1.1 billion, leaving just over $1 billion of so-called free cash flow, which investors prize. Albertsons traded for about 3.9 times its cash flow Thursday. Kroger and Safeway traded for 6.2 and 5.9 times cash flow, respectively.

Buyout firms may be "more interested in pieces of the company," said Prudential Equity Group LLC analyst Robert Campagnino, who rates the shares "underweight."

The company's breakup value is $27 a share, said Andy Wolf, an analyst at BB&T Capital Markets in Richmond, Va., who rates the shares "hold." Albertsons could sell for 8 to 11 times earnings before interest, taxes or depreciation, or for $14 billion to $20 billion, Hastings said. Albertsons paid 6.9 times Ebitda for Shaw's Supermarkets Inc. last year.

Private-equity firms have bought retailers this year to capitalize on their ability to generate cash and for the value of their real estate. Kohlberg Kravis Capital LLC, Vornado Realty Trust and Bain Capital bought Toys "R" Us Inc. for $6.6 billion. Albertsons owns the land and buildings on 40 percent of its stores, said Hastings.

Wal-Mart has increased its sales of food by more than doubling the number of supercenters, which sell a full range of groceries in addition to clothing and general merchandise, to more than 1,700 as of January from 721 in January 2000. The discounter also began opening smaller grocery stores in 1998 to fill in gaps between supercenters or in regions where it was difficult to find land for larger stores.

Revenue from groceries has risen at Wal-Mart to 28 percent of U.S. store sales from 18 percent five years earlier.

In June, Safeway, Kroger and Albertsons had their debt ratings cut one level by Standard & Poor's. S&P said Friday it may cut Albertsons credit ratings to junk.

Wal-Mart has been encroaching on some of Albertsons and Kroger's largest markets. It has opened 327 supercenters, discount stores and Neighborhood Markets in Texas, the third-largest market for Albertsons and Kroger, which have 157 and 205 stores there, respectively.

Wal-Mart is expanding supercenters into California. It's opening 40 supercenters there in the next few years, including its first in Los Angeles County this week.

Contributing: Rachel Katz; Brett Cole; David Russell; Tom Contiliano