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September 28, 2012 9:40 pm

Smart & Final sale advances to final round

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This article is provided to FT.com readers by mergermarket—a news service focused on providing actionable, origination intelligence to M&A professionals. www.mergermarket.com
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Smart & Final’s sale process has progressed to the final round, with up to three bidders remaining, three sources familiar with the matter told mergermarket. Ares Management and Centerbridge Partners are among the bidders, they added.

Final bids for the company are due around mid-October, noted the first source and a financial advisor not involved. In addition to the two private equity firms, a strategic is also involved, said the second source familiar and the financial advisor.

The warehouse grocery provider’s owner, Apollo Global Management, hired Morgan Stanley in June to conduct the sale, as reported. The company is being marketed on roughly USD 100m of annual EBITDA.

The sale process has been slow to progress, as potential buyers assess the retailer’s low earnings margins, which hover at less than 4%, amid a challenging environment for food retailers to pass through costs to their customers, said a second advisory source. Under the transaction, Smart & Final’s pro forma leverage on a lease adjusted basis is expected to come in at 6.25x based on USD 140m of rent adjusted EBITDA, said the second and third sources familiar.

Meanwhile, retail peer BJ’s Wholesale Club was acquired last year by Leonard Green & Partners and CVC Capital Partners for USD 2.8bn or roughly 7.1x EBITDA. In addition to BJ’s, Smart & Final competes with Sam’s Club, owned by Walmart, and Costco Wholesale.

Ares’ interest in the grocery retailer comes as no surprise, given the sponsor’s portfolio company 99 Cents Only Stores is based in Commerce, California, where Smart & Final is also headquartered, said a third advisory source. The similar base of operations could help Ares benefit from the two companies realizing certain corporate synergies, he noted.

Apollo acquired the warehouse grocer in 2007 in a leveraged buyout valued at USD 813m. Following the deal, in 2011, Smart & Final divested its Henry’s Farmers Market subsidiary to fellow Apollo portfolio company Sprouts Farmers Market. As a result of the deal, Smart & Final reduced its debt load by roughly USD 400m, according to a Moody’s report.

Representatives from Smart & Final, Apollo and Centerbridge did not return requests seeking comment. Ares and Morgan Stanley declined to comment.

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