S-1/A 1 d74618ds1a.htm AMENDMENT NO. 7 TO FORM S-1 Amendment No. 7 to Form S-1
Table of Contents

As filed with the Securities and Exchange Commission on July 29, 2016

Registration No. 333–205546

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

AMENDMENT NO. 7

TO

FORM S-1

REGISTRATION STATEMENT

UNDER THE SECURITIES ACT OF 1933

 

 

Albertsons Companies, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware   5411   47-4376911

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification No.)

 

 

250 Parkcenter Blvd.

Boise, ID 83706

208-395-6200

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Robert A. Gordon, Esq.

Executive Vice President and General Counsel

Albertsons Companies, Inc.

250 Parkcenter Blvd.

Boise, ID 83706

(208) 395-6200

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Stuart D. Freedman, Esq.

Michael E. Gilligan, Esq.

Schulte Roth & Zabel LLP

919 Third Avenue

New York, NY 10022

Phone: (212) 756-2000

Fax: (212) 593-5955

 

William M. Hartnett, Esq.

Jonathan A. Schaffzin, Esq.

William J. Miller, Esq.

Cahill Gordon & Reindel LLP

80 Pine Street

New York, NY 10005

Phone: (212) 701-3000

Fax: (212) 378-2500

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effectiveness of this Registration Statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

 

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said section 8(a), may determine.

 

 

 


Table of Contents

The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any jurisdiction where such offer or sale is not permitted.

 

Subject to completion. Dated July 29, 2016

65,306,122 Shares

 

LOGO

Albertsons Companies, Inc.

Common Stock

 

 

This is an initial public offering of our common stock. We are offering 65,306,122 shares of our common stock. All of the shares of common stock are being sold by us.

We expect the initial public offering price to be between $23.00 and $26.00 per share. Currently, no public market exists for our common stock. We have been approved to list our common stock on the New York Stock Exchange (“NYSE”) under the symbol “ABS.”

 

 

Investing in our common stock involves a high degree of risk. See “Risk Factors” beginning on page 22 of this prospectus to read the factors you should consider before buying shares of the common stock.

 

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

 

 

 

     Per Share      Total  

Initial public offering price

   $                    $                

Underwriting discount and commissions(1)

   $         $     

Proceeds, before expenses, to us

   $         $     

 

(1) The underwriters will also be reimbursed for certain expenses incurred in the offering. See “Underwriting (Conflicts of Interest)” for additional information regarding underwriting compensation.

The underwriters may also purchase up to an additional 9,795,918 shares of common stock from us at the initial public offering price, less the underwriting discount and commissions, within 30 days from the date of this prospectus.

The underwriters expect to deliver the shares of our common stock to investors against payment on or about                     , 2016 through the book-entry facilities of The Depository Trust Company.

 

Goldman, Sachs & Co.   BofA Merrill Lynch   Citigroup     Morgan Stanley   

 

Deutsche Bank Securities   Credit Suisse   Barclays

 

Lazard   Guggenheim Securities   Jefferies   RBC Capital Markets   Wells Fargo Securities
BMO Capital Markets   SunTrust Robinson Humphrey
Telsey Advisory Group   Academy Securities   Ramirez & Co., Inc.   Blaylock Beal Van, LLC

 

 

The date of this prospectus is                             , 2016.


Table of Contents

LOGO


Table of Contents

TABLE OF CONTENTS

Prospectus

 

     Page  

Prospectus Summary

     1   

Risk Factors

     22   

Special Note Regarding Forward-Looking Statements

     48   

Use of Proceeds

     50   

Dividend Policy

     51   

IPO-Related Transactions and Organizational Structure

     52   

Capitalization

     54   

Dilution

     56   

Selected Historical Financial Information of AB Acquisition

     58   

Supplemental Selected Historical Financial Information of Safeway

     59   

Unaudited Pro Forma Condensed Consolidated Financial Information

     60   

Management’s Discussion and Analysis of Financial Condition and Results of Operations of AB Acquisition

     67   

Business

     100   

Management

     118   

Executive Compensation

     129   

Certain Relationships and Related Party Transactions

     153   

Principal Stockholders

     161   

Description of Capital Stock

     163   

Shares Eligible for Future Sale

     169   

Description of Indebtedness

     172   

Certain U.S. Federal Income and Estate Tax Considerations to Non-U.S. Holders

     180   

Underwriting (Conflicts of Interest)

     183   

Legal Matters

     190   

Experts

     190   

Where You Can Find More Information

     190   

Index To Financial Statements

     F-1   

 

 

Until                     , 2016 (25 days after the date of this prospectus), all dealers that buy, sell, or trade shares of our common stock, whether or not participating in our initial public offering, may be required to deliver a prospectus. This delivery requirement is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

Unless indicated otherwise, the information included in this prospectus assumes that (i) the shares of common stock to be sold in this offering are sold at $24.50 per share, which is the midpoint of the estimated offering range set forth on the cover page of this prospectus and (ii) all shares offered by us in this offering are sold.

 

 

We and the underwriters have not authorized anyone to provide any information other than that contained in this prospectus or in any free writing prospectus prepared by or on behalf of us or to which we have referred you. We and the underwriters take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. We and the underwriters are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where offers and sales are permitted. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of shares of our common stock.

 

i


Table of Contents

EXPLANATORY NOTE

Albertsons Companies, Inc., the registrant whose name appears on the cover of this registration statement, is a newly formed Delaware corporation. Shares of common stock of Albertsons Companies, Inc. are being offered by the prospectus that forms a part of this registration statement. AB Acquisition LLC (“AB Acquisition”) is a Delaware limited liability company. Albertsons Companies, Inc. was formed solely for the purpose of reorganizing the organizational structure of AB Acquisition and its direct and indirect consolidated subsidiaries in order for the registrant to be a corporation rather than a limited liability company. In connection with, and prior to and/or concurrently with the closing of, this offering, each member of AB Acquisition will directly or indirectly contribute all of its equity interests in AB Acquisition to Albertsons Companies, Inc. in exchange for shares of common stock of Albertsons Companies, Inc. As a result, AB Acquisition and its direct and indirect consolidated subsidiaries will become wholly-owned subsidiaries of Albertsons Companies, Inc. See “IPO-Related Transactions and Organizational Structure” for additional information.

As used in this prospectus, unless the context otherwise requires, references to (i) the terms “company,” “AB Acquisition,” “Albertsons Companies, Inc.,” “we,” “us” and “our” refer to AB Acquisition and its consolidated subsidiaries for periods prior to the consummation of the IPO-Related Transactions (as defined herein), and, for periods as of and following the consummation of the IPO-Related Transactions, to Albertsons Companies, Inc. and its consolidated subsidiaries, (ii) the term “ACL” refers to Albertsons Companies, LLC, and, where appropriate, its subsidiaries, (iii) the term “Albertsons” refers to Albertson’s LLC, and, where appropriate, its subsidiaries, (iv) the term “NAI” refers to New Albertson’s, Inc., and, where appropriate, its subsidiaries, (v) the term “United” refers to United Supermarkets, LLC, (vi) the term “Safeway” refers to Safeway Inc. and, where appropriate, its subsidiaries, and (vii) references to our “Sponsors” or the “Cerberus-led Consortium” refer to, collectively, Cerberus Capital Management, L.P. (“Cerberus”), Kimco Realty Corporation (“Kimco Realty”), Klaff Realty, LP (“Klaff Realty”), Lubert-Adler Partners, L.P. (“Lubert-Adler”), Schottenstein Stores Corporation (“Schottenstein Stores”) and their respective controlled affiliates and investment funds. For the convenience of the reader, except as the context otherwise requires, all information included in this prospectus is presented giving effect to the consummation of the IPO-Related Transactions.

BASIS OF PRESENTATION

Prior to or concurrently with this offering, we will effect the IPO-Related Transactions described under “IPO-Related Transactions and Organizational Structure.” The consolidated financial statements and consolidated financial data included in the prospectus are those of AB Acquisition and its consolidated subsidiaries and do not give effect to the IPO-Related Transactions. Other than the audited balance sheet, dated as of February 27, 2016, and the unaudited balance sheet, dated as of June 18, 2016, the historical financial information of Albertsons Companies, Inc. has not been included in this prospectus as it is a newly incorporated entity, has had no business transactions or activities to date and had no assets or liabilities during the periods presented in this prospectus.

We acquired Safeway on January 30, 2015 and United on December 29, 2013. Accordingly, this prospectus also includes the following historical financial statements:

 

    audited balance sheets of Safeway as of January 3, 2015 and December 28, 2013 and audited consolidated statements of income, comprehensive income (loss), stockholders’ equity and cash flows of Safeway for the 53 weeks ended January 3, 2015 and the 52 weeks ended December 28, 2013 and December 29, 2012; and

 

ii


Table of Contents
    audited balance sheets of United as of December 28, 2013 and January 26, 2013 and statements of comprehensive income, members’ equity and cash flows of United for the 48 weeks ended December 28, 2013.

We use a 52 or 53 week fiscal year ending on the last Saturday in February each year. Prior to fiscal year 2014, we used a 52 or 53 week fiscal year ending on the closest Thursday before the last Saturday in February each year. For ease of reference, unless the context otherwise indicates, we identify our fiscal years in this prospectus by reference to the calendar year of the first day of such fiscal year. For example, “fiscal 2014” refers to our fiscal year ended February 28, 2015 and “fiscal 2015” refers to our fiscal year ended February 27, 2016. Our first quarter consists of 16 weeks, and our second, third and fourth quarters generally consist of 12 weeks. For the fiscal year ended February 28, 2015, the fourth quarter included 13 weeks, and the fiscal year included 53 weeks. The fiscal years ended February 27, 2016, February 20, 2014, February 21, 2013 and February 23, 2012 included 52 weeks. Safeway’s last three fiscal years prior to the Safeway acquisition consisted of the 53-week period ended January 3, 2015, the 52-week period ended December 28, 2013 and the 52-week period ended December 29, 2012.

IDENTICAL STORE SALES

As used in this prospectus, the term “identical store sales” is defined as stores operating during the same period in both the current year and the prior year, comparing sales on a daily basis. Fuel sales are excluded from identical store sales, and internet sales are included in identical store sales of the store from which the products are sourced. Fiscal 2015 is compared with the 52-week period ending February 28, 2015. Fiscal 2014 is compared with the 53-week period ending February 27, 2014. On an actual basis, acquired stores become identical on the one-year anniversary date of their acquisition. Stores that are open during remodeling are included in identical store sales. The stores divested in order to secure Federal Trade Commission (“FTC”) clearance of the Safeway acquisition are excluded from the identical store sales calculation beginning on December 19, 2014, the announcement date of the divestitures. Also included in this prospectus, where noted, are supplemental identical store sales measures for AB Acquisition, which includes acquired Safeway, NAI and United stores, irrespective of their acquisition dates. Neither actual nor supplemental identical store sale measures in this prospectus include stores acquired in the recent A&P Transaction or the Haggen Transaction (each as defined herein).

PRO FORMA INFORMATION

This prospectus contains unaudited pro forma financial information prepared in accordance with Article 11 of Regulation S-X. The unaudited pro forma condensed consolidated statement of continuing operations for fiscal 2015 gives pro forma effect to:

 

    the effects of FTC-mandated divestitures related to our January 2015 acquisition of Safeway;

 

    the Pre-IPO Refinancing Transactions (as defined herein);

 

    the IPO-Related Transactions; and

 

    the issuance of 65,306,122 shares of common stock in this offering and the application of the estimated net proceeds from the sale of such shares to repay certain existing debt and to pay fees and expenses related to this offering, as described in “Use of Proceeds,”

in each case as if such transactions had been consummated on March 1, 2015, the first day of fiscal 2015. The unaudited pro forma condensed consolidated statement of continuing operations for the first

 

iii


Table of Contents

quarter of fiscal 2016 gives pro forma effect to the Pre-IPO Refinancing Transactions, the IPO-Related Transactions, this offering and the related use of proceeds as if such transactions had occurred on March 1, 2015, the first day of fiscal 2015. The unaudited pro forma condensed consolidated balance sheet as of June 18, 2016 gives pro forma effect to the Pre-IPO Refinancing Transactions, the IPO-Related Transactions, this offering and the related use of proceeds as if such transactions had occurred on June 18, 2016. See “Unaudited Pro Forma Condensed Consolidated Financial Information.”

TRADEMARKS AND TRADE NAMES

This prospectus includes our trademarks and service marks, including ALBERTSONS®, SAFEWAY®, ACME®, AMIGOS®, CARRS®, HAGGEN®, JEWEL-OSCO®, MARKET STREET®, PAVILIONS®, RANDALLS®, SAV-ON®, SHAW’S®, STAR MARKET®, TOM THUMB®, UNITED EXPRESS®, UNITED SUPERMARKETS®, VONS®, EATING RIGHT®, LUCERNE®, O ORGANICS®, OPEN NATURE®, MyMixx® and just for U®, which are protected under applicable intellectual property laws and are the property of our company and its subsidiaries. This prospectus also contains trademarks, service marks, trade names and copyrights of other companies, which are the property of their respective owners. Solely for convenience, trademarks and trade names referred to in this prospectus may appear without the ® or TM symbols. We do not intend our use or display of other parties’ trademarks, trade names or service marks to imply, and such use or display should not be construed to imply, a relationship with, or endorsement or sponsorship of us by, these other parties.

MARKET, INDUSTRY AND OTHER DATA

This prospectus includes market and industry data and outlook, which are based on publicly available information, reports from government agencies, reports by market research firms and/or our own estimates based on our management’s knowledge of and experience in the markets and businesses in which we operate. We believe this information to be reasonable based on the information available to us as of the date of this prospectus. However, we have not independently verified market and industry data from third-party sources. Historical information regarding supermarket and grocery industry revenues, including online grocery revenues, was obtained from IBISWorld. Forecasts regarding Food-at-Home inflation were obtained from the U.S. Department of Agriculture. Information with respect to our market share was obtained from Nielsen ACView All Outlets Combined (Food, Mass and Dollar but excluding Drug) for the first half of 2016. This information may prove to be inaccurate because of the method by which we obtained some of the data for our estimates or because this information cannot always be verified with complete certainty due to limits on the availability and reliability of raw data, the voluntary nature of the data gathering process and other limitations and uncertainties inherent in a survey of market size. In addition, market conditions, customer preferences and the competitive landscape can and do change significantly. As a result, you should be aware that the market and industry data included in this prospectus and our estimates and beliefs based on such data may not be reliable. We do not make any representations as to the accuracy of such industry and market data.

In addition, the market value reported in the appraisals of the properties described herein are an estimate of value, as of the date stated in each appraisal. The appraisals were subject to the following assumption: The estimate of market value as is, is based on the assumption that the existing occupant/user remains in occupancy in the foreseeable future, commensurate with the typical tenure of a user of this type, and is paying market rent as of the effective date of appraisal. Changes since the appraisal date in external and market factors or in the property itself can significantly affect the conclusions. As an opinion, the reported values are not necessarily a measure of current market value and may not reflect the amount which would be received if the property were sold today. While we and the

 

iv


Table of Contents

underwriters are not aware of any misstatements regarding any appraisals, market, industry or similar data presented herein, such data involves risks and uncertainties and is subject to change based on various factors, including those discussed under the sections entitled “Special Note Regarding Forward-Looking Statements” and “Risk Factors” in this prospectus.

NON-GAAP FINANCIAL MEASURES

We define EBITDA as generally accepted accounting principles (“GAAP”) earnings (net income (loss)) before interest, income taxes, depreciation, and amortization. We define Adjusted EBITDA as earnings (net income (loss)) before interest, income taxes, depreciation, and amortization, further adjusted to eliminate the effects of items management does not consider in assessing our ongoing performance. We define Adjusted Net Income as GAAP net income (loss) adjusted to eliminate the effects of items management does not consider in assessing ongoing performance. See “Prospectus Summary—Summary Consolidated Historical and Pro Forma Financial and Other Data” for further discussion and a reconciliation of Adjusted EBITDA and Adjusted Net Income.

EBITDA, Adjusted EBITDA and Adjusted Net Income (collectively, the “Non-GAAP Measures”) are performance measures that provide supplemental information we believe is useful to analysts and investors to evaluate our ongoing results of operations, when considered alongside other GAAP measures such as net income, operating income and gross profit. These Non-GAAP Measures exclude the financial impact of items management does not consider in assessing our ongoing operating performance, and thereby facilitate review of our operating performance on a period-to-period basis. Other companies may have different capital structures or different lease terms, and comparability to our results of operations may be impacted by the effects of acquisition accounting on our depreciation and amortization. As a result of the effects of these factors and factors specific to other companies, we believe EBITDA, Adjusted EBITDA and Adjusted Net Income provide helpful information to analysts and investors to facilitate a comparison of our operating performance to that of other companies. We also use Adjusted EBITDA, as further adjusted for additional items defined in our debt instruments, for board of director and bank compliance reporting. Our presentation of Non-GAAP Measures should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items.

Non-GAAP Measures have limitations as analytical tools, and you should not consider them in isolation or as substitutes for analysis of our operating results or cash flows as reported under GAAP. Some of these limitations are:

 

    Non-GAAP Measures do not reflect the anticipated synergies associated with the Safeway acquisition;

 

    Non-GAAP Measures do not reflect certain one-time or non-recurring cash costs to achieve the anticipated synergies associated with the Safeway acquisition;

 

    Non-GAAP Measures do not reflect changes in, or cash requirements for, our working capital needs;

 

    EBITDA and Adjusted EBITDA do not reflect the significant interest expense or the cash requirements necessary to service interest or principal payments on our debt;

 

    Although depreciation and amortization are non-cash charges, the assets being depreciated or amortized may have to be replaced in the future, and EBITDA and Adjusted EBITDA and, with respect to acquired intangible assets, Adjusted Net Income, do not reflect any cash requirements for such replacements;

 

    Non-GAAP Measures are adjusted for certain non-recurring and non-cash income or expense items that are reflected in our statements of operations;

 

v


Table of Contents
    Non-GAAP Measures do not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments; and

 

    Other companies in our industry may calculate these measures differently than we do, limiting their usefulness as comparative measures.

Because of these limitations, Non-GAAP Measures should not be considered as measures of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our GAAP results and using Non-GAAP Measures only for supplemental purposes. Please see our consolidated financial statements contained in this prospectus.

Pro Forma Adjusted EBITDA and Pro Forma Adjusted Net Income, as presented in this prospectus, are also supplemental measures of our performance that are not required by or presented in accordance with GAAP. See “Prospectus Summary—Summary Consolidated Historical and Pro Forma Financial and Other Data” for additional information.

 

vi


Table of Contents

PROSPECTUS SUMMARY

This summary highlights the information contained elsewhere in this prospectus. This summary may not contain all of the information that may be important to you or that you should consider before buying shares of our common stock. You should read the entire prospectus carefully. The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information appearing elsewhere in this prospectus. In particular, you should read the sections entitled “Risk Factors,” “Unaudited Pro Forma Condensed Consolidated Financial Information” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations of AB Acquisition” included elsewhere in this prospectus and our consolidated financial statements and the related notes.

OUR COMPANY

We are one of the largest food and drug retailers in the United States, with both strong local presence and national scale. As of June 18, 2016, we operated 2,311 stores across 35 states and the District of Columbia under 19 well-known banners, including Albertsons, Safeway, Vons, Jewel-Osco, Shaw’s, Acme, Tom Thumb, Randalls, United Supermarkets, Pavilions, Star Market, Carrs and Haggen. We operate in 122 Metropolitan Statistical Areas in the United States (“MSAs”) and are ranked #1 or #2 by market share in 68% of them. We provide our customers with a service-oriented shopping experience, including convenient and value-added services through 1,780 pharmacies and 380 adjacent fuel centers. We have approximately 282,000 talented and dedicated employees serving on average more than 34 million customers each week.

Our operating philosophy is simple: we run great stores with a relentless focus on driving sales growth. We believe that our management team, with decades of collective experience in the food and drug retail industry, has developed a proven and successful operating playbook that differentiates us from our competitors.

We implement our playbook through a decentralized management structure. We believe this approach allows our division and district-level leadership teams to create a superior customer experience and deliver outstanding operating performance. These leadership teams are empowered and incentivized to make decisions on product assortment, placement, pricing, promotional plans and capital spending in the local communities and neighborhoods they serve. Our store directors are responsible for implementing our operating playbook on a daily basis and ensuring that our employees remain focused on delivering outstanding service to our customers.

We believe that the execution of our operating playbook, among other factors, including improved economic conditions and consumer confidence, has enabled us to grow sales, profitability and free cash flow across our business. During fiscal 2014, fiscal 2015 and the first quarter of fiscal 2016, on a supplemental basis including acquired Safeway, NAI and United stores, our identical store sales grew at 4.6%, 4.8% and 2.9%, respectively. At Safeway, prior to our acquisition, the rate of identical store sales growth was 3.0% in fiscal 2014 and, following our acquisition, accelerated in fiscal 2015 and the first quarter of fiscal 2016 to 5.0% and 3.9%, respectively. The rates of identical store sales growth for our stores, on a supplemental basis including acquired Safeway, NAI and United stores, for fiscal 2014 and fiscal 2015 have been adjusted for the positive sales impact in one of our divisions during the second quarter of fiscal 2014 resulting from a labor dispute at a competitor that caused a temporary closure of its stores. Without adjusting for this impact, identical store sales growth for our stores, on a supplemental basis including acquired Safeway, NAI and United stores, during fiscal 2014 and fiscal

 



 

1


Table of Contents

2015 would have been 4.7% and 4.6%, respectively. We also believe that our third quarter 2015 identical store sales were positively impacted in certain markets by the poor performance or closure of certain Haggen Holdings, LLC (“Haggen”) stores.

We are currently executing on an annual synergy plan of approximately $800 million related to the acquisition of Safeway, which we expect to achieve by the end of fiscal 2018. We expect to deliver annual run-rate synergies related to the acquisition of Safeway of approximately $650 million by the end of fiscal 2016.

For fiscal 2015, we generated net sales of $58.7 billion, Adjusted EBITDA of $2.7 billion and free cash flow, which we define as Adjusted EBITDA less capital expenditures, of $1.7 billion. For the first quarter of fiscal 2016, we generated net sales of $18.4 billion, Adjusted EBITDA of $882 million and free cash flow of $484 million. In addition to realizing increased sales, profitability and free cash flow through the implementation of our operating playbook, we expect synergies from the Safeway acquisition to enhance our profitability and free cash flow over the next few years.

OUR INTEGRATION HISTORY

Over the past ten years, we have completed a series of acquisitions, beginning with our purchase of Albertson’s LLC in 2006 (the “Legacy Albertsons Stores”). This was followed in March 2013 by our acquisition of NAI from SUPERVALU INC. (“SuperValu”), which included the Albertsons stores that we did not already own (the “SVU Albertsons Stores”) and stores operating under the Acme, Jewel-Osco, Shaw’s and Star Market banners (the “NAI Stores”). In December 2013, we acquired United, a regional grocery chain in North and West Texas. In January 2015, we acquired Safeway in a transaction that significantly increased our scale and geographic reach. We also completed the acquisition of 73 stores from The Great Atlantic & Pacific Tea Company, Inc. (“A&P”) for our Acme banner and 35 stores from Haggen during fiscal 2015, and we acquired an additional 29 stores from Haggen during fiscal 2016, 15 of which operate under the Haggen banner. We continually review acquisition opportunities that we believe are synergistic with our existing store network and we intend to continue to participate in the ongoing consolidation of the food retail industry. Any future acquisitions may be material.

OUR OPERATING PLAYBOOK

Our operating playbook covers every major facet of store-level operations and is executed by local leadership under the supervision of our executive management team. Our playbook is based on the following key concepts:

 

    Operate Our Stores to the Highest Standards.    We ensure that our stores are always “full, fresh, friendly and clean.” Our efforts are driven through our rigorous G.O.L.D. (Grand Opening Look Daily) program that is focused on delivering fresh offerings, well-stocked shelves, and clean and brightly lit departments.

 

    Deliver Superior Customer Service.    We focus on providing superior customer service. We consistently invest in store labor and training, and our simple and well-understood sales- and EBITDA-based bonus structure ensures that our employees are properly incentivized. We measure customer satisfaction scores weekly and hold management accountable for continuous improvement. Our focus on customer service is reflected in our improving customer satisfaction scores and identical store sales growth.

 



 

2


Table of Contents
    Provide a Compelling Product Offering.    We focus on providing the highest quality fresh, natural and organic assortments to meet the demands of our customers, including through our private label brands, which we refer to as our own brands, such as Open Nature and O Organics. In addition, we offer high-volume, high-quality and differentiated signature products, including fresh fruit and vegetables cut in-store, cookies and fried chicken prepared using our proprietary recipes, in-store roasted turkey and freshly baked bread. Our decentralized operating structure enables our divisions to offer products that are responsive to local tastes and preferences.

 

    Offer an Attractive Value Proposition to Our Customers.    We maintain price competitiveness through systematic, selective and thoughtful price investment to drive customer traffic and basket size. We also use our loyalty programs, including just for U, MyMixx and our fuel-based rewards programs, as well as our strong own brand assortment, to improve customer perception of our value proposition.

 

    Drive Innovation Across our Network of Stores.    We focus on innovation to enhance our customers’ in-store experience, generate customer loyalty and drive traffic and sales growth. We ensure that our stores benefit from modern décor, fixtures and store layout. We systematically monitor emerging trends in food and source new and innovative products to offer in our stores. In addition, we are focused on continuing to deliver personalized and promotional offers to further develop our relationship with our customers. Our focus on personalization includes the expansion of our “click-and-pick” online and home delivery services in which items selected online by our customers are picked from our store shelves by our associates and delivered by our associates right to our customers’ kitchen counters.

 

    Make Disciplined Capital Investments.    We believe that our store base is modern and in excellent condition. We apply a disciplined approach to our capital investments, undertaking a rigorous cost-benefit analysis and targeting an attractive return on investment. Our capital budgets are subject to approval at the corporate level, but we empower our division leadership to prudently allocate capital to projects that will generate the highest return.

 



 

3


Table of Contents

IDENTICAL STORES SALES

We believe that the execution of our operating playbook has been an important factor in the acceleration of identical store sales growth across our company. The charts below illustrate historical identical store sales growth across AB Acquisition (on a supplemental basis including the acquired Safeway, NAI and United stores) and separately for the Safeway stores:

 

LOGO

 

(1) Calculated irrespective of date of acquisition.
(2) After adjusting for the positive sales impact in one of our divisions during the second quarter of fiscal 2014 resulting from a labor dispute at a competitor that caused a temporary closure of its stores.

 



 

4


Table of Contents

The following illustrative map represents our regional banners and combined store network as of June 18, 2016. We also operate 29 strategically located distribution centers and 18 manufacturing facilities. Approximately 46% of our operating stores are owned or ground-leased. Together, our owned and ground-leased properties have a value of approximately $10.2 billion.

LOGO

OUR COMPETITIVE STRENGTHS

We believe the following strengths differentiate us from our competitors and contribute to our ongoing success:

Powerful Combination of Strong Local Presence and National Scale.    We operate a portfolio of well-known banners with both strong local presence and national scale. We have leading positions in many of the largest and fastest-growing MSAs in the United States. Given the long operating history of our banners, many of our stores form an important part of the local communities and neighborhoods in which they operate and occupy “First-and-Main” locations. We believe that our combination of local presence and national scale provides us with competitive advantages in brand recognition, customer loyalty and purchasing, marketing and advertising and distribution efficiencies.

Best-in-Class Management Team with a Proven Track Record.    We have assembled a best-in-class management team with decades of operating experience in the food and drug retail industry. Our Chairman and Chief Executive Officer, Bob Miller, has over 50 years of food and drug retail experience, including serving as Chairman and CEO of Fred Meyer and Rite Aid and Vice Chairman of Kroger. We have created an Office of the CEO to set long-term strategy and annual objectives for our 14 divisions. The Office of the CEO is comprised of Bob Miller, Wayne Denningham (Chief Operating Officer), Justin Dye (Chief Administrative Officer) and Shane Sampson (Chief Marketing and Merchandising Officer), each of whom brings significant leadership and operational experience with long tenures at our company and within the industry. Our Executive and Senior Vice Presidents and

 



 

5


Table of Contents

our division, district and store-level leadership teams are also critical to the success of our business. Our ten Executive Vice Presidents, 18 Senior Vice Presidents and 14 division Presidents have an average of almost 20, 22 and 30 years of service, respectively, with our company.

Proven Operating Playbook.     We believe that the execution of our operating playbook has been an important factor in enabling us to accelerate identical store sales growth. During fiscal 2014, fiscal 2015 and the first quarter of fiscal 2016, on a supplemental basis including acquired Safeway, NAI and United stores, our identical store sales grew at 4.6%, 4.8% and 2.9%, respectively. Our Safeway stores delivered identical store sales growth of 3.0% in fiscal 2014 and, following our acquisition, accelerated in fiscal 2015 and the first quarter of fiscal 2016 to 5.0% and 3.9%, respectively. The rates of identical store sales growth for our stores, on a supplemental basis including acquired Safeway, NAI and United stores, for fiscal 2014 and fiscal 2015 have been adjusted for the positive sales impact in one of our divisions during the second quarter of fiscal 2014 resulting from a labor dispute at a competitor that caused a temporary closure of its stores. Without adjusting for this impact, identical store sales growth for our stores, on a supplemental basis including acquired Safeway, NAI and United stores, during fiscal 2014 and fiscal 2015 would have been 4.7% and 4.6%, respectively. We also believe that our third quarter 2015 identical store sales were positively impacted by the poor performance or closure of certain stores then owned by Haggen.

Strong Free Cash Flow Generation.    Our strong operating results, in combination with our disciplined approach to capital allocation, have resulted in the generation of strong free cash flow. We generated free cash flow of approximately $1.7 billion in fiscal 2015. Our ability to grow free cash flow will be enhanced by the synergies we expect to achieve from our acquisition of Safeway. We expect to deliver approximately $800 million of annual synergies by the end of fiscal 2018, and expect to achieve approximately $650 million of synergies related to the Safeway acquisition on an annual run-rate basis by the end of fiscal 2016.

Significant Acquisition and Integration Expertise.    Growth through acquisition is an important component of our strategy, both to enhance our competitiveness in existing markets (as with recent acquisitions for our Jewel-Osco banner) and to expand our footprint into new markets (as with the United acquisition). We acquired 73 stores from A&P for our Acme banner and 35 stores from Haggen for our Albertsons banner during fiscal 2015, and we acquired an additional 29 stores from Haggen during fiscal 2016, including 15 stores that operate under the Haggen banner. We continually review acquisition opportunities that we believe are synergistic with our existing store network. We have developed a proprietary and repeatable blueprint for integration, including a clearly defined plan for the first 100 days. We believe that our ability to integrate acquisitions is significantly enhanced by our decentralized approach, which allows us to leverage the expertise of incumbent local management teams. We have also developed significant expertise in synergy planning and delivery. We believe that the acquisition and integration experience of our management team, together with the considerable transactional expertise of our equity sponsors, positions us well for future acquisitions as the food and drug retail industry continues to consolidate.

 



 

6


Table of Contents

OUR STRATEGY

Our operating philosophy is simple: we run great stores with a relentless focus on sales growth. We believe there are significant opportunities to grow sales and enhance profitability and free cash flow through execution of the following strategies:

Continue to Drive Identical Store Sales Growth.    Consistent with our operating playbook, we plan to deliver identical store sales growth by implementing the following initiatives:

 

    Enhancing and Upgrading Our Fresh, Natural and Organic Offerings and Signature Products.    We continue to enhance and upgrade our fresh, natural and organic offerings across our meat, produce, service deli and bakery departments to meet the changing tastes and preferences of our customers. We also believe that continued innovation and expansion of our high-volume, high-quality and differentiated signature products will contribute to stronger sales growth.

 

    Expanding Our Own Brand Offerings.    We continue to drive sales growth and profitability by extending our own brand offerings across our banners, including high-quality and recognizable brands such as O Organics, Open Nature, Eating Right and Lucerne.

 

    Leveraging Our Effective and Scalable Loyalty Programs.    We believe we can grow basket size and improve the shopping experience for our customers by expanding our just for U, MyMixx and fuel-based loyalty programs. In addition, we believe we can further enhance our merchandising and marketing programs by utilizing our customer analytics capabilities, including advanced digital marketing and mobile applications. We are expanding our “click-and-pick” online ordering and home delivery offering to six new markets in fiscal 2016.

 

    Capitalizing on Demand for Health and Wellness Services.    We intend to leverage our portfolio of 1,780 pharmacies and our growing network of wellness clinics to capitalize on increasing customer demand for health and wellness services. Pharmacy customers are among our most loyal, and their average weekly spend is over 2.5x that of our non-pharmacy customers. We plan to continue to grow our pharmacy script counts through new patient prescription transfer programs and initiatives such as clinic, hospital and preferred network partnerships, which we believe will expand our access to patients. We believe that these efforts will drive sales growth and generate customer loyalty.

 

    Continuously Evaluating and Upgrading Our Store Portfolio.    We plan to pursue a disciplined capital allocation strategy to upgrade, remodel and relocate stores to attract customers to our stores and to increase store volumes. We believe that our store base is in excellent condition, and we have developed a remodel strategy that is both cost-efficient and effective.

 

    Driving Innovation.    We intend to drive traffic and sales growth through constant innovation. We will remain focused on identifying emerging trends in food and sourcing new and innovative products. We will also seek to build new, and enhance existing, customer relationships through our digital capabilities.

 

    Sharing Best Practices Across Divisions.    Our division leaders collaborate to ensure the rapid sharing of best practices. Recent examples include the expansion of our O Organics offering across banners, the accelerated roll-out of signature products such as Albertsons’ fresh fruit and vegetables cut in-store and a broader assortment and new fixtures for our wine and floral shops, implementing Safeway’s successful strategy across many of our banners.

 



 

7


Table of Contents

We believe the combination of these actions and initiatives, together with the attractive industry trends described in more detail under “Business—Our Industry,” will continue to drive identical store sales growth.

Enhance Our Operating Margin.    Our focus on identical store sales growth provides an opportunity to enhance our operating margin by leveraging our fixed costs. We plan to realize further margin benefit through added scale from partnering with vendors and by achieving efficiencies in manufacturing and distribution. In addition, we maintain a disciplined approach to expense management and budgeting.

Implement Our Synergy Realization Plan.    We are currently executing on an annual synergy plan of approximately $800 million from the acquisition of Safeway, which we expect to achieve by the end of fiscal 2018, with associated one-time costs of approximately $690 million (net of estimated synergy-related asset sale proceeds). Our detailed synergy plan was developed on a bottom-up, function-by-function basis by combined Albertsons and Safeway teams. The plan includes capturing opportunities from corporate and division cost savings, simplifying business processes and rationalizing headcount. Over time, Safeway’s information technology systems will support all of our stores, distribution centers and systems, including financial reporting and payroll processing, as we wind down our transition services agreement for our Albertsons, Acme, Jewel-Osco, Shaw’s and Star Market banners with SuperValu on a store-by-store basis. We have extended the expansive and high-quality own brand program developed at Safeway across all of our banners. We believe our increased scale will help us to optimize and improve our vendor relationships. We also plan to achieve marketing and advertising savings from lower print, production and broadcast rates in overlapping regions and reduced agency spend. Finally, we intend to consolidate managed care provider reimbursement programs, increase vaccine penetration and leverage our combined scale. During fiscal 2015, we achieved synergies from the Safeway acquisition of approximately $250 million, and we expect to achieve synergies of approximately $575 million in fiscal 2016, or approximately $650 million on an annual run-rate basis by the end of fiscal 2016, principally from savings related to corporate and division overhead, our own brands, vendor funds and marketing and advertising cost reductions. Approximately 80% of our $800 million annual synergy target is independent of sales growth, which we believe significantly reduces the risk of achieving our target.

Selectively Grow Our Store Base Organically and Through Acquisition.    We intend to continue to grow our store base organically through disciplined investment in new stores. We opened seven new stores in fiscal 2015 and expect to open 13 new stores in fiscal 2016. We acquired 73 stores from A&P for our Acme banner and 35 stores from Haggen for our Albertsons banner during fiscal 2015, and we acquired an additional 29 stores from Haggen during fiscal 2016, of which 15 operate under the Haggen banner. We evaluate acquisition opportunities on an ongoing basis as we seek to strengthen our competitive position in existing markets or expand our footprint into new markets. We believe our healthy balance sheet and decentralized structure provide us with strategic flexibility and a strong platform to make acquisitions. We believe our successful track record of integration and synergy delivery provides us with an opportunity to further enhance sales growth, leverage our cost structure and increase profitability and free cash flow through selected acquisitions. Consistent with this strategy, we regularly evaluate potential acquisition opportunities, including ones that would be significant to us, and we are currently participating in processes regarding several potential acquisition opportunities, including ones that would be significant to us. Certain of our acquisitions may involve the issuance of shares of our common stock. We cannot predict the timing of any contemplated transactions, and none are currently probable, but any pending transaction could be entered into as soon as shortly after the closing of this offering.

 



 

8


Table of Contents

OUR INDUSTRY

We operate in the $593 billion U.S. food and drug retail industry, a highly fragmented sector with a large number of companies competing locally and a limited number of companies with a national footprint. From 2011 through 2015, food and drug retail industry revenues increased at an average annual rate of 1.0%, driven in part by improving macroeconomic factors, including gross domestic product, household disposable income, consumer confidence and employment. While several food categories experienced price deflation in the first half of 2016, and several categories, including beef and eggs, are forecasted to experience price deflation in 2016, food-at-home inflation is forecasted to be between 0.25% and 1.25% in 2016, which should also benefit industry sales. In addition to macroeconomic factors, the following trends, in particular, are expected to drive sales growth across the industry:

 

    Customer Focus on Fresh, Natural and Organic Offerings.    Evolving customer tastes and preferences have caused food retailers to improve the breadth and quality of their fresh, natural, and organic offerings. This, in turn, has resulted in the increasing convergence of product selections between conventional and alternative format food retailers.

 

    Converging Approach to Health and Wellness.    Customers increasingly view their food shopping experience as part of a broader approach to health and wellness. As a result, food retailers are seeking to drive sales growth and customer loyalty by incorporating pharmacy and wellness clinic offerings in their stores.

 

    Increased Customer Acceptance of Own Brand Offerings.    Increased customer acceptance has driven growth in demand for own brand offerings, including the introduction of premium store brands. In general, own brand offerings have a higher gross margin than similarly positioned products of national brands.

 

    Loyalty Programs and Personalization.    To remain competitive and generate customer loyalty, food retailers are increasing their focus on loyalty programs that target the delivery of personalized offers to their customers. Food retailers are also expected to seek to strengthen customer loyalty by introducing mobile applications that allow customers to make purchases, access loyalty card data and check prices while in-store.

 

    Convenience as a Differentiator.    Industry participants are addressing customers’ desire for convenience through in-store amenities, including store-within-store sites such as coffee bars, banks and ATMs. Customer convenience is important for traditional grocers that must differentiate themselves from other mass retailers, club stores and other food retailers. The increasing penetration of e-commerce competition has prompted food retailers to develop or outsource online and mobile applications for home delivery, pickup and digital shopping solutions with customer convenience in mind. It has also resulted in the emergence of a number of online-only food and drug offerings.

RISKS RELATED TO OUR BUSINESS AND THIS OFFERING

An investment in our common stock involves a high degree of risk. You should carefully consider the risks highlighted in the section entitled “Risk Factors” following this prospectus summary before making an investment decision. These risks include, among others, the following:

 

    Various operating factors and general economic conditions affecting the food retail industry may adversely affect our business and operating results.

 



 

9


Table of Contents
    Competition in our industry is intense, and our failure to compete successfully may adversely affect our profitability and results of operations.

 

    Increased commodity prices may adversely impact our profitability.

 

    Integrating acquisitions may be time-consuming and create costs that could reduce our net income and cash flows.

 

    We may be adversely affected by risks related to our dependence on information technology (“IT”) systems. Any future intrusion into these IT systems, even if we are compliant with industry security standards, could materially adversely affect our reputation, financial condition and operating results.

 

    We may not be able to achieve the full amount of synergies that are anticipated, or achieve the synergies on the schedule anticipated, from the Safeway acquisition.

 

    Our substantial level of indebtedness could adversely affect our financial condition and prevent us from fulfilling our obligations under our indebtedness.

 

    Our debt instruments limit our flexibility in operating our business.

 

    There is no existing market for our common stock, and we do not know if one will develop to provide you with adequate liquidity. If our stock price fluctuates after this offering, you could lose a significant part of your investment.

 



 

10


Table of Contents

OUR CORPORATE STRUCTURE

Our business is currently conducted through our operating subsidiaries, which are wholly-owned by AB Acquisition. The equity interests of AB Acquisition immediately prior to the IPO-Related Transactions were owned (directly and indirectly) by entities affiliated with our Sponsors and certain current and former members of our management, whom we refer to as our “Existing Owners.” Albertsons Companies, Inc. is a newly formed entity.

In order to effectuate this offering, we expect to effect the following series of transactions prior to and/or concurrently with the closing of this offering that will result in the reorganization of our business so that it is owned by Albertsons Companies, Inc. Specifically, (i) our Existing Owners, other than KRS AB Acquisition and KRS ABS, LLC (collectively, “Kimco”) and Albertsons Management Holdco, LLC (“Management Holdco”), will contribute all of their direct and indirect equity interests in AB Acquisition to Albertsons Investor Holdings LLC (“Albertsons Investor”), including their interests in NAI Group Holdings Inc. (“NAI Group Holdings”) and Safeway Group Holdings Inc. (“Safeway Group Holdings”), (ii) Albertsons Investor, Kimco and Management Holdco will contribute all of their equity interests in AB Acquisition to Albertsons Companies, Inc. in exchange for common stock of Albertsons Companies, Inc., (iii) NAI Group Holdings, Safeway Group Holdings and other special purpose corporations owned by certain of the Sponsors through which they invested in AB Acquisition will be merged with and into Albertsons Companies, Inc., with Albertsons Companies, Inc. remaining as the surviving corporation in the mergers and (iv) certain stores owned by Albertson’s LLC will be contributed to a newly formed subsidiary, Albertson’s Stores Sub LLC, which subsidiary will be distributed to its ultimate owner AB Acquisition, AB Acquisition will transfer all of its equity interests in ACL to Albertsons Companies, Inc. and ACL will be merged with and into Albertsons Companies, Inc. with Albertsons Companies, Inc. remaining as the surviving corporation in the merger. As a result of the foregoing transactions, an aggregate of 349,832,761, 56,429,497 and 3,570,701 shares of our common stock will be owned by Albertsons Investor, Kimco and Management Holdco, respectively.

The chart below summarizes our corporate structure after giving effect to this offering and the IPO-Related Transactions, but before giving effect to dilution from outstanding restricted stock units or the exercise of the underwriters’ option to purchase additional shares:

 

LOGO

For a further discussion of the IPO-Related Transactions, see “IPO-Related Transactions and Organizational Structure.”

 



 

11


Table of Contents

RECENT DEVELOPMENTS

Haggen Transaction

During the fourth quarter of fiscal 2014, in connection with our acquisition of Safeway, we announced that we had entered into agreements to sell 168 stores as required by the FTC as a condition of closing the Safeway acquisition. We sold 146 of these stores to Haggen. On September 8, 2015, Haggen commenced a case under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware. After receiving FTC and state attorneys general clearance, and Bankruptcy Court approval, during the fourth quarter of fiscal 2015, we re-acquired 35 stores from Haggen for an aggregate purchase price of $33 million.

Haggen also secured Bankruptcy Court approval for bidding procedures for the sale of 29 additional stores. On March 25, 2016, we entered into a purchase agreement to acquire the 29 additional stores, which included 15 stores originally sold by us to Haggen as part of the FTC divestitures, and certain trade names and intellectual property, for an aggregate purchase price of approximately $114 million including acquired inventory. We completed the acquisition of these 29 stores on June 23, 2016. We refer to this acquisition, together with the fiscal 2015 acquisition of 35 stores from Haggen, in this prospectus as the “Haggen Transaction.”

The Haggen Transaction involves certain risks associated with integrating these acquisitions with our business. See “Risk Factors–Risks Related to the Safeway, A&P and Haggen Acquisitions and Integration.”

Pre-IPO Refinancing Transactions

On May 31, 2016, ACL, Albertsons, Safeway and NAI completed the sale of $1,250.0 million of principal amount of 6.625% senior notes due 2024 (the “2024 Notes”) which will mature on June 15, 2024. The net proceeds received from the issuance of the 2024 Notes were used to (i) pay the redemption price and accrued and unpaid interest in connection with the Redemption (as defined below), (ii) repay approximately $519 million of term loans then outstanding under the then existing B-3 term loan tranche under the Term Loan Agreement (as defined herein) and (iii) pay fees and expenses related to the Redemption and the issuance of the 2024 Notes.

On June 22, 2016, Albertsons amended the Term Loan Agreement to establish three new term loan tranches and amend certain provisions of the Term Loan Agreement. The new tranches consisted of $3,280.0 million of new term B-4 loans, $1,145.0 million of new term B-5 loans and $2,100.0 million of new term B-6 loans (the “New Term Loans”). The New Term Loans, together with $300.0 million of borrowings under our ABL Facility (as defined herein), were used to repay the term loans under the Term Loan Agreement that were outstanding as of June 22, 2016.

On June 24, 2016, ACL and Safeway fully redeemed $609.6 million of principal amount of 7.750% senior secured notes due 2022 that were issued under the indenture dated October 23, 2014 (the “Secured Notes” and such redemption, the “Redemption”). Upon consummation of the Redemption, in accordance with the Safeway Indenture (as defined herein), the collateral securing the Safeway Notes and the guaranties of the Safeway Notes by ACL and its subsidiaries, as applicable, were released.

We refer to the above transactions as the “Pre-IPO Refinancing Transactions.” For more information on our existing indebtedness, see “Description of Indebtedness.”

 



 

12


Table of Contents

CORPORATE INFORMATION

Albertsons Companies, Inc. is a Delaware corporation that was incorporated on June 23, 2015 to undertake this offering. Our principal executive offices are located at 250 Parkcenter Blvd., Boise, ID 83706. Our telephone number is (208) 395-6200 and our internet address is www.albertsons.com. Our website and the information contained thereon are not part of this prospectus and should not be relied upon by prospective investors in connection with any decision to purchase our common shares.

OUR EQUITY SPONSORS

We believe that one of our strengths is our relationship with our Sponsors. We believe we will benefit from our Sponsors’ experience in the retail industry, their expertise in mergers and acquisitions and real estate, and their support on various near-term and long-term strategic initiatives.

Cerberus.    Established in 1992, Cerberus and its affiliated group of funds and companies comprise one of the world’s leading private investment firms with approximately $30 billion of capital under management in four primary strategies: control and non-control private equity investments, distressed securities and assets, commercial mid-market lending, and real estate-related investments. In addition to its New York headquarters, Cerberus has offices throughout the United States, Europe and Asia.

Kimco Realty.    Kimco Realty is a real estate investment trust headquartered in New Hyde Park, New York that owns and operates North America’s largest publicly traded portfolio of neighborhood and community shopping centers. As of December 31, 2015, Kimco Realty owned interests in 564 shopping centers comprising 90 million square feet of leasable space across 38 states, Puerto Rico, Canada, Mexico and Chile. Publicly traded on the NYSE since 1991, and included in the S&P 500 Index, Kimco Realty has specialized in shopping center acquisitions, development and management for more than 50 years.

Klaff Realty.    Klaff Realty is a privately-owned real estate investment company based in Chicago, Illinois that engages in the acquisition, redevelopment and management of commercial real estate throughout the United States and South America, with a primary focus on retail and office. Klaff Realty has established a leadership position in the acquisition of distressed retail space. To date, Klaff Realty affiliates have acquired properties and invested in operating entities that control in excess of 200 million square feet with a value in excess of $17 billion.

Lubert-Adler.    Lubert-Adler was co-founded in 1997 by Ira Lubert and Dean Adler, who collectively have over 60 years of experience in underwriting, acquiring, repositioning, refinancing and disposing of real estate assets. Lubert-Adler has more than 20 investment professionals and has invested $7.5 billion of equity into assets valued at over $17 billion.

Schottenstein Stores.    Schottenstein Stores, together with its affiliate Schottenstein Property Group, is a privately-owned operator, acquirer and redeveloper of high quality power/big box, community and neighborhood shopping centers located throughout the United States predominantly anchored by national retailers.

Our Sponsors will indirectly control us through their respective ownership of Albertsons Investor and Kimco and will continue to be able to control the election of our directors, determine our corporate and management policies and determine, without the consent of our other stockholders, the outcome of any corporate transaction or other matter submitted to our stockholders for approval, including potential mergers or acquisitions, asset sales and other significant corporate transactions. Following the completion of the IPO-Related Transactions and this offering, our Sponsors will indirectly own approximately 80.3% of our

 



 

13


Table of Contents

common stock, or 78.7% if the underwriters exercise their option to purchase additional shares in full. As a result, we expect to be a “controlled company” within the meaning of the corporate governance standards of the NYSE on which we have been approved to list our shares and, as a result, will qualify for, and intend to rely on, exemptions from certain corporate governance requirements. As a result, our stockholders will not have the same protections afforded to stockholders of companies that are subject to such requirements. Following the completion of the IPO-Related Transactions and this offering, we will be required to appoint to our board of directors individuals designated by Albertsons Investor. Furthermore, if we cease to be a controlled company under the applicable rules of the NYSE, but Albertsons Investor, Kimco and Management Holdco collectively own at least 35% of our then-outstanding common stock, Albertsons Investor shall have the right to designate a number of members of our board of directors equal to one director fewer than 50% of our board of directors and Albertsons Investor shall cause its directors appointed to our board of directors to vote in favor of maintaining a 13-person board. In connection with this offering, Albertsons Companies, Inc. will enter into a stockholders agreement with Albertsons Investor, Kimco and Management Holdco (the “Stockholders’ Agreement”), and if a permitted transferee or assignee of such party that succeeds to such party’s rights under the Stockholders’ Agreement (each transferee or assignee, a “Holder” and, collectively, the “Holders”) has beneficial ownership of less than 35% but at least 20% of our then-outstanding common stock, such Holder shall have the right to designate a number of members of our board of directors equal to the greater of (a) three or (b) 25% of the size of our board of directors (rounded up to the next whole number). If a Holder has beneficial ownership of less than 20% but at least 15% of our then-outstanding common stock, such Holder shall have the right to designate a number of directors equal to the greater of (a) two or (b) 15% of the size of our board of directors (rounded up to the next whole number). If a Holder has beneficial ownership of less than 15% but at least 10% of our then-outstanding common stock, such Holder shall have the right to designate one director to our board of directors.

The limited liability company agreement of AB Acquisition provides for the Cerberus-led Consortium to receive annual management fees of $13.75 million from our company over a 48-month period beginning on January 30, 2015, the date of the consummation of the Safeway acquisition. We paid the Cerberus-led Consortium management fees totaling $15 million for fiscal 2014, $6 million of which was paid under the previous limited liability company agreement of AB Acquisition and $9 million of which was paid upon the closing of the Safeway acquisition. We have paid management fees to the Cerberus-led Consortium totaling $13.75 million for fiscal 2015 and $13.75 million for fiscal 2016. In exchange for the management fees, the Cerberus-led Consortium has provided strategic advice to management, including with respect to acquisitions and financings. As of June 18, 2016, management fees over the remainder of the 48-month period total $27.5 million. Consistent with the terms of the limited liability company agreement of AB Acquisition, the remaining management fees will be paid in full upon the closing of this offering. We do not expect to pay any further management fees to the Cerberus-led Consortium following the completion of this offering.

The interests of our Sponsors may not coincide with the interests of other holders of our common stock. Additionally, our Sponsors are in the business of making investments in companies and may, from time to time, acquire and hold interests in businesses that compete directly or indirectly with us. Our Sponsors may also pursue acquisition opportunities that may be complementary to our business, and as a result, those acquisition opportunities may not be available to us. So long as the Cerberus-led Consortium continues to own a significant amount of the outstanding shares of our common stock through Albertsons Investor and Kimco, the Cerberus-led Consortium will continue to be able to strongly influence or effectively control our decisions, including potential mergers or acquisitions, asset sales and other significant transactions.

See “Risk Factors—Risks Related to This Offering and Owning Our Common Stock.”

 



 

14


Table of Contents

THE OFFERING

 

Issuer

Albertsons Companies, Inc.

 

Common stock outstanding immediately before this offering

409,832,959 shares.(1)

 

Common stock offered by us

65,306,122 shares.

 

Common stock to be outstanding immediately after this offering

475,139,081 shares.(1)

 

Option to purchase additional shares

We have granted to the underwriters a 30-day option to purchase up to 9,795,918 additional shares of our common stock at the initial public offering price less the underwriting discount and commissions.

 

Use of proceeds

We estimate that our net proceeds from this offering, after deducting underwriting discounts and approximately $13.0 million of estimated offering expenses, will be approximately $1,531 million, assuming the shares are offered at $24.50 per share, which is the midpoint of the estimated offering range set forth on the cover page of this prospectus.

 

  We intend to use the net proceeds from this offering to repay $1,531 million of principal under the Term Loan Facilities (as defined herein).

 

  See “Use of Proceeds.”

 

Dividend policy

We do not intend to pay dividends for the foreseeable future. The declaration and payment of any future dividends will be at the sole discretion of our board of directors and will depend upon, among other things, our earnings, financial condition, capital requirements, level of indebtedness, contractual restrictions with respect to payment of dividends, and other considerations that our board of directors deems relevant.

 

  See “Dividend Policy.”

 

NYSE trading symbol

“ABS.”

 

Conflicts of Interest

The net proceeds from this offering will be used to repay borrowings outstanding under the Term Loan Facilities. Because one or more funds or accounts managed or advised by an investment management affiliate of Guggenheim Securities, LLC are lenders under the Term Loan Facilities and may receive 5% or more of the net proceeds from this offering, Guggenheim Securities, LLC is deemed to have a “conflict of interest” within the meaning of Rule 5121 (“Rule 5121”) of the

 



 

15


Table of Contents
 

Financial Industry Regulatory Authority, Inc. (“FINRA”). As such, this offering is being conducted in accordance with the applicable requirements of Rule 5121. Rule 5121 requires that a “qualified independent underwriter” meeting certain standards participate in the preparation of the registration statement and prospectus and exercise the usual standards of due diligence with respect thereto. Goldman, Sachs & Co. will act as a “qualified independent underwriter” within the meaning of Rule 5121 in connection with this offering. Goldman, Sachs & Co. will not receive any additional fees for serving as a qualified independent underwriter in this offering. We have agreed, subject to certain terms and conditions, to indemnify Goldman, Sachs & Co. against certain liability incurred in connection with it acting as a qualified independent underwriter in this offering, including liabilities under the Securities Act of 1933, as amended (the “Securities Act”). Guggenheim Securities, LLC will not confirm sales to accounts in which it exercises discretionary authority without the prior written consent of the customer. See “Underwriting (Conflicts of Interest).”

 

Risk factors

For a discussion of risks relating to our company, our business and an investment in our common stock, see “Risk Factors” and all other information set forth in this prospectus before investing in our common stock.

 

Directed Share Program

At our request, the underwriters have reserved for sale, at the initial public offering price, up to 5% of the shares offered by this prospectus for sale within the United States to some of our directors, officers, employees, business associates and related persons. If these persons purchase reserved shares, it will reduce the number of shares available for sale to the general public. Any reserved shares that are not so purchased will be offered by the underwriters to the general public on the same terms as the other shares offered by this prospectus.

Unless otherwise indicated, all information in this prospectus excludes up to 9,795,918 shares of our common stock that may be sold by us if the underwriters exercise in full their option to purchase additional shares of our common stock.

 

(1) The number of shares of common stock outstanding immediately before this offering takes into account the conversion of profits interests and assumes (i) the shares are offered at $24.50, which is the midpoint of the estimated offering range set forth on the cover page of this prospectus and (ii) all shares offered by us in this offering are sold. An initial public offering price of $26.00, which is the high point of the estimated offering range set forth on the cover page of this prospectus, would increase the common stock outstanding immediately before this offering by 300,493 shares. An initial public offering price of $23.00, which is the low point of the estimated offering range set forth on the cover page of this prospectus, would decrease the common stock outstanding immediately before this offering by 339,687 shares. See “Principal Stockholders.”

 



 

16


Table of Contents

SUMMARY CONSOLIDATED HISTORICAL AND PRO FORMA FINANCIAL AND OTHER DATA

The following tables summarize our consolidated historical and pro forma financial and other data and should be read together with “Selected Historical Financial Information of AB Acquisition,” “Supplemental Selected Historical Financial Information of Safeway,” “Unaudited Pro Forma Condensed Consolidated Financial Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations of AB Acquisition,” and our consolidated financial statements and related notes included elsewhere in this prospectus. We have derived the summary balance sheet data as of June 18, 2016 and the consolidated statement of operations data for the first quarter of fiscal 2016 and the first quarter of fiscal 2015 from our unaudited condensed consolidated financial statements included elsewhere in this prospectus. We have derived the summary balance sheet data as of February 27, 2016 and the consolidated statement of operations data for fiscal 2015, fiscal 2014 and fiscal 2013 from our audited consolidated financial statements included elsewhere in this prospectus. Our historical results set forth below are not necessarily indicative of results to be expected for any future period.

Our consolidated financial statements for the period from February 22, 2013 to March 20, 2013 reflect only the historical results of the Legacy Albertsons Stores prior to the 2013 acquisition of NAI. Commencing on March 21, 2013, our consolidated financial statements also include the financial position, results of operations and cash flows of NAI. In December 2013, we acquired United. Commencing on December 29, 2013, our consolidated financial statements also include the financial position, results of operations and cash flows of United. In addition, on January 30, 2015, we acquired Safeway. Commencing on January 31, 2015, our consolidated financial statements also include the financial position, results of operations and cash flows of Safeway.

 



 

17


Table of Contents

The Safeway acquisition (including the related FTC-mandated divestitures) had a material impact on our results of operations. Accordingly, we have included in this prospectus pro forma financial information which gives effect to the FTC-mandated divestitures, the IPO-Related Transactions and this offering for fiscal 2015 and the 16 weeks ended June 18, 2016 as more fully described in the notes below. See “Unaudited Pro Forma Condensed Consolidated Financial Information” for additional information.

 

    16 Weeks Ended
June 18, 2016
    16 Weeks Ended
June 20, 2015
    Fiscal 2015     Fiscal
2014(8)
    Fiscal
2013(3)
 

(in millions, except per share amounts,
identical store sales and store count)

 

Pro
Forma(2)(7)

   

Actual

   

Actual

    Pro
Forma(2)(7)
    Actual     Actual(1)     Actual  

Results of Operations:

           

Sales and other revenue

  $ 18,392      $ 18,392      $ 18,051      $ 58,290      $ 58,734      $ 27,199      $ 20,055   

Gross profit

  $ 5,121      $ 5,121      $ 4,918      $ 15,928      $ 16,062      $ 7,503      $ 5,399   

Selling & administrative expenses

    4,921        4,922        4,821        15,549        15,660        8,152        5,874   

Bargain purchase gain

                                              (2,005
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    200        199        97        379        402        (649     1,530   

Interest expense, net

    275        314        284        824        951        633        390   

Other (income) expense

    (5     (5     (5     (7     (7     96          
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes

    (70     (110     (182     (438     (542     (1,378     1,140   

Income tax (benefit) expense

    (27     24        (29     (170     (40     (153     (573
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations, net of tax

    (43     (134     (153     (268     (502     (1,225     1,713   

Income from discontinued operations, net of tax

                                              20   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

  $ (43   $ (134   $ (153   $ (268   $ (502   $ (1,225   $ 1,733   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Per Share Data:

             

Net loss per share—basic and diluted(4)

  $ (0.09         (0.56      

Weighted average shares outstanding—basic and diluted(4)

    475            475         

Other Financial Data:

             

Adjusted EBITDA(5)

  $ 882      $ 882      $ 728      $ 2,658      $ 2,681      $ 1,099      $ 586   

Adjusted Net Income(5)

    141        100        55        417        365        58        174   

Adjusted Net Income per share—basic and diluted(5)

    0.30            0.88         

Capital expenditures

    398        398        228        960        960        337        128   

Free cash flow(6)

    484        484        500        1,698        1,721        762        458   

Other Operating Data:

             

Identical store sales

    2.9     2.9     5.1     4.6     4.4     7.2     1.6

Store count (at end of fiscal period)

    2,311        2,311        2,205        2,271        2,271        2,382        1,075   

Gross square footage (at end of fiscal period) (in millions)

    115        115        110        113        113        118        56   

Fuel sales

  $ 813      $ 813      $ 1,010      $ 2,953      $ 2,955      $ 387      $ 47   

Balance Sheet Data (at end of period):

             

Cash and equivalents

  $ 701      $ 1,476      $ 989        $ 580      $ 1,126      $ 307   

Total assets

    23,651        24,427        24,469          23,770        25,678        9,281   

Total members’ equity

    2,859        1,453        2,064          1,613        2,169        1,760   

Total debt

    10,776        12,913        12,145          12,226        12,569        3,694   

 

Supplemental
Identical Store
Sales

  Fiscal 2016   Fiscal 2015     Fiscal 2014     Fiscal 2013     Fiscal 2012  
 

Q1’16

 

Q4’15

 

Q3’15

  Q2’15     Q1’15     Q4’14     Q3’14     Q2’14     Q1’14     Q4’13     Q3’13     Q2’13     Q1’13     Q4’12     Q3’12     Q2’12     Q1’12  

AB Acquisition(a)(b)

  2.9%   4.7%   5.1%     4.5%        4.3%        4.1%        4.8%        5.4%        4.8%        3.5%        3.0%        1.1%        (0.1)%        (0.9)%        (0.6)%        (1.3)%        (0.6)%   

Safeway(c)

  3.9%   5.8%   5.6%     4.9%        3.8%        3.5%        3.2%        3.1%        2.2%        1.1%        1.8%        1.8%        1.1%        1.4%        1.3%        0.1%        1.0%   

 

(a) Includes acquired Safeway, NAI and United stores, irrespective of date of acquisition.
(b) After adjusting for the positive sales impact in one of our divisions during the second quarter of fiscal 2014 resulting from a labor dispute at a competitor that caused a temporary closure of its stores, identical store sales growth for AB Acquisition during the second quarter of fiscal 2014 and the second quarter of fiscal 2015 would have been 4.6% and 5.2%, respectively, and, excluding the Safeway stores, would have been 6.7% and 5.7%, respectively.
(c) Includes Safeway’s Eastern Division, now owned by NAI.

 



 

18


Table of Contents

 

(1) For the period from February 21, 2014 to January 30, 2015, our consolidated financial statements include the financial position, results of operations and cash flows of Albertsons, NAI and United. Commencing on January 31, 2015, our consolidated financial statements also include the financial position, results of operations and cash flows of Safeway.

 

(2) The pro forma information for fiscal 2015 gives effect to the FTC-mandated divestitures as if they had been consummated on the first day of fiscal 2015. Additionally, the pro forma information for fiscal 2015 and the 16 weeks ended June 18, 2016 reflects the Pre-IPO Refinancing Transactions, the IPO-Related Transactions and the issuance of shares of our common stock in this offering and the application of the estimated net proceeds thereof (as described in “Use of Proceeds”), as if these events had occurred on the first day of fiscal 2015. This assumes net proceeds of this offering to us of $1,531 million (assuming no exercise of the underwriters’ option to purchase additional shares), based on an initial public offering price of $24.50 per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses. See “Unaudited Pro Forma Condensed Consolidated Financial Information” for a presentation of such pro forma financial data for fiscal 2015 and the 16 weeks ended June 18, 2016.

For fiscal 2015, a $1.00 increase in the assumed initial public offering price of $24.50 per share (the midpoint of the price range set forth on the cover page of this prospectus) would have resulted in pro forma net loss of ($266) million and pro forma net loss per share-basic of $(0.56), and a $1.00 decrease in the assumed initial public offering price of $24.50 per share would have resulted in pro forma net loss of $(270) million and pro forma net loss per share-basic of $(0.57), in each case, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remained the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses. Similarly, a decrease of one million shares in the number of shares offered by us, as set forth on the cover page of this prospectus, would have resulted in pro forma net loss of ($269) million and pro forma net loss per share-basic of $(0.57), assuming the assumed initial public offering price of $24.50 per share (the midpoint of the price range set forth on the cover page of this prospectus) remained the same and after deducting the estimated underwriting discounts and commissions and estimated expenses. An increase of one million shares in the number of shares offered by us, as set forth on the cover page of this prospectus, assuming no change in the assumed initial public offering price of $24.50 per share, would have resulted in pro forma net loss of ($268) million and pro forma net loss per share–basic of $(0.56). The above assumes that any resulting change in net proceeds increases or decreases, as applicable, the amount used to repay indebtedness.

For the 16 weeks ended June 18, 2016, a $1.00 increase in the assumed initial public offering price of $24.50 per share (the midpoint of the price range set forth on the cover page of this prospectus) would have resulted in pro forma net loss of $(43) million and pro forma net loss per share-basic of $(0.09), and a $1.00 decrease in the assumed initial public offering price of $24.50 per share would have resulted in pro forma net loss of $(44) million and pro forma net loss per share-basic of $(0.09), in each case, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remained the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses. Similarly, a decrease of one million shares in the number of shares offered by us, as set forth on the cover page of this prospectus, would have resulted in pro forma net loss of ($43) million and pro forma net loss per share-basic of $(0.09), assuming the assumed initial public offering price of $24.50 per share (the midpoint of the price range set forth on the cover page of this prospectus) remained the same and after deducting the estimated underwriting discounts and commissions and estimated expenses. An increase of one million shares in the number of shares offered by us, as set forth on the cover page of this prospectus, assuming no change in the assumed initial public offering price of $24.50 per share, would have resulted in pro forma net loss of ($43) million and pro forma net loss per share–basic of $(0.09). The above assumes that any resulting change in net proceeds increases or decreases, as applicable, the amount used to repay indebtedness.

 

(3) The results of operations for the period from February 22, 2013 through March 20, 2013 reflect the financial position, results of operations and cash flows of the Legacy Albertsons Stores acquired on June 2, 2006. Commencing on March 21, 2013, our consolidated financial statements also include the financial position, results of operations and cash flows of the SVU Albertsons Stores and the NAI Stores. Commencing on December 29, 2013, our consolidated financial statements also include the financial position, results of operations and cash flows of United.

 

(4) Gives effect to the items described in note 2 above as if they had occurred on the first day of fiscal 2014 and fiscal 2015, as applicable. See “Unaudited Pro Forma Condensed Consolidated Financial Information” for a presentation of such pro forma financial data.

 

(5) Adjusted EBITDA is a Non-GAAP Measure defined as earnings (net income (loss)) before interest, income taxes, depreciation and amortization, further adjusted to eliminate the effects of items management does not consider in assessing ongoing performance. Adjusted Net Income is a Non-GAAP Measure defined as (net income (loss)) adjusted to eliminate the effects of items management does not consider in assessing ongoing performance. Pro forma amounts give effect to the items described in note 2 above, as applicable, as if they had occurred on the first day of our fiscal 2014 and fiscal 2015, as applicable.

Adjusted EBITDA and Adjusted Net Income are Non-GAAP Measures that provide supplemental information we believe is useful to analysts and investors to evaluate our ongoing results of operations, when considered alongside other GAAP

 



 

19


Table of Contents

measures such as net income, operating income and gross profit. These Non-GAAP Measures exclude the financial impact of items management does not consider in assessing our ongoing operating performance, and thereby facilitate review of our operating performance on a period-to-period basis. Other companies may have different capital structures or different lease terms, and comparability to our results of operations may be impacted by the effects of acquisition accounting on our depreciation and amortization. As a result of the effects of these factors and factors specific to other companies, we believe Adjusted EBITDA and Adjusted Net Income provide helpful information to analysts and investors to facilitate a comparison of our operating performance to that of other companies. Set forth below is a reconciliation of Adjusted Net Income and Adjusted EBITDA to net income:

 

     16 Weeks
Ended June 18,
2016
    16 Weeks
Ended June 20,
2015
    Fiscal 2015     Fiscal
2014(8)
    Fiscal
2013(3)
 

(in millions)

   Pro
Forma
    Actual     Actual     Pro
Forma
    Actual     Actual     Actual  

Net (Loss) Income

   $ (43   $ (134   $ (153   $ (268   $ (502   $ (1,225   $ 1,733   

Adjustments:

              

Bargain purchase gain

   $      $      $      $      $      $      $ (2,005

(Gain) loss on interest rate and commodity swaps, net

     (9     (9     (1     16        16        98          

Store transition and related costs(a)

                                               167   

Acquisition and integration costs(b)

     74        74        73        342        342        352        174   

Termination of long-term incentive plans

                                        78          

Equity-based compensation expense

     16        16        56        98        98        344        6   

Net (gain) loss on property dispositions, asset impairments and lease exit costs

     (44     (44     (6     103        103        228        (2

LIFO expense

     14        14        6        30        30        43        12   

Amortization and write-off of debt discount, deferred financing costs and loss on extinguishment of debt

     35        35        19        82        82        72        75   

Pension and post-retirement expense, net of cash contributions(c)

     80        80        5        7        7        (3     (8

Amortization of intangible assets resulting from acquisitions

     121        121        110        377        377        149        116   

Other(d)

     14        15        15        63        63        (14     12   

Tax impact of adjustments to Adjusted Net Income(e)

     (117     (68     (69     (433     (251     (64     (106
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted Net Income

   $ 141      $ 100      $ 55      $ 417      $ 365      $ 58      $ 174   

Adjustments:

              

Tax impact of adjustments to Adjusted Net Income(e)

   $ 117      $ 68      $ 69      $ 433      $ 251      $ 64      $ 106   

Income tax (benefit) expense

     (27     24        (29     (170     (40     (153     (573

Amortization and write-off of original issue discount, deferred financing costs and loss on extinguishment of debt

     (35     (35     (19     (82     (82     (72 )       (75 )  

Interest expense – continued operations

     275        314        284        824        951        633        390   

Interest expense – discontinued operations

                                               4   

Amortization of intangible assets resulting from acquisitions

     (121     (121     (110     (377     (377     (149     (116

Depreciation and amortization

     532        532        478        1,613        1,613        718        676   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 882      $ 882      $ 728      $ 2,658      $ 2,681      $ 1,099      $ 586   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

  (a) Includes costs related to the transition of stores acquired in the NAI acquisition by improving store conditions and enhancing product offerings.
  (b) Includes costs related to the Safeway acquisition (including the charge associated with the settlement of appraisal rights litigation), the A&P Transaction (as defined herein), the Haggen Transaction, the NAI acquisition and the United acquisition.
  (c) Excludes the company’s cash contribution of $260 million to the Employee Retirement Plan of Safeway Inc. and its domestic subsidiaries (the “Safeway ERP”) under a settlement with the Pension Benefit Guaranty Corporation (the “PBGC”) in connection with the closing of the Safeway acquisition.

 



 

20


Table of Contents
  (d) Primarily includes non-cash lease adjustments related to deferred rents and deferred gains on lease expenses related to closed stores and discontinued operations and costs related to facility closures and the transition to a decentralized operating model.
  (e) The tax impact was determined based on the taxable status of the subsidiary to which each of the above adjustments relates.

 

(6) We define “free cash flow” as Adjusted EBITDA less capital expenditures. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations of AB Acquisition,” included elsewhere in this prospectus, for a reconciliation of cash flow from operating activities to free cash flow.

 

(7) The pro forma balance sheet data as of June 18, 2016 gives effect to pro forma adjustments to reflect the IPO-Related Transactions, the Pre-IPO Refinancing Transactions and the issuance of 62,489,795 shares of common stock in this offering (excluding the remaining 2,816,327 shares of common stock being issued in this offering, which are deemed to have been used to pay underwriting discounts and offering expenses) and the application of $1,531 million of the proceeds to us from the sale of such shares by us to repay certain existing debt, as described in “Use of Proceeds,” as if these events had occurred on June 18, 2016. This assumes net proceeds from this offering to us of $1,531 million (assuming no exercise of the underwriters’ option to purchase additional shares), based on an initial public offering price of $24.50 per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting underwriter discounts and commissions and estimated offering expenses. See “Unaudited Pro Forma Condensed Consolidated Financial Information” for a presentation of such unaudited pro forma condensed consolidated balance sheet data.

 

  A $1.00 increase (decrease) in the assumed initial public offering price of $24.50 per share (the midpoint of the price range set forth on the front cover of this prospectus) would not result in a change in cash and cash equivalents or total assets and would (decrease) increase total long-term debt by ($63) million and would increase (decrease) total stockholders’ equity by $63 million, in each case assuming no exercise of the underwriters’ option to purchase additional shares and assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remained the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses. Similarly, a one million share increase (decrease) in the number of shares offered by us, as set forth on the front cover of this prospectus, would not result in a change in cash and cash equivalents or total assets and would (decrease) increase total long-term debt by ($23) million and would increase (decrease) total stockholders’ equity by $23 million, in each case assuming no exercise of the underwriters’ option to purchase additional shares and assuming the initial public offering price of $24.50 per share (the midpoint of the price range set forth on the front cover page of this prospectus) remained the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses. The above assumes that any resulting change in net proceeds increases or decreases, as applicable, the amount used to repay indebtedness.

 

(8) The fiscal year ended February 28, 2015 included 53 weeks.

 



 

21


Table of Contents

RISK FACTORS

An investment in our common stock involves a high degree of risk. You should carefully consider the following information, together with other information in this prospectus, before buying shares of our common stock. If any of the following risks or uncertainties actually occur, our business, financial condition, prospects, results of operations and cash flow could be materially adversely affected. Additional risks or uncertainties not currently known to us, or that we deem immaterial, may also impair our business operations. We cannot assure you that any of the events discussed in the risk factors below will not occur. In that case, the market price of our common stock could decline and you may lose all or a part of your investment.

Risks Related to Our Business and Industry

Various operating factors and general economic conditions affecting the food retail industry may affect our business and may adversely affect our business and operating results.

Our operations and financial performance are affected by economic conditions such as macroeconomic conditions, credit market conditions and the level of consumer confidence. While the combination of improved economic conditions, the trend towards lower unemployment, higher wages and lower gasoline prices have contributed to improved consumer confidence, there is continued uncertainty about the strength of the economic recovery. If the economy does not continue to improve or if it weakens, or if gasoline prices rebound, consumers may reduce spending, trade down to a less expensive mix of products or increasingly rely on food discounters, all of which could impact our sales. In addition, consumers’ perception or uncertainty related to the economic recovery and future fuel prices could also dampen overall consumer confidence and reduce demand for our product offerings. Both inflation and deflation affect our business. Food deflation could reduce sales growth and earnings, while food inflation could reduce gross profit margins. Several food categories experienced price deflation in the first half of 2016, and several items, such as beef and eggs, are forecasted to experience price deflation in 2016. We are unable to predict if the economy will continue to improve or predict the rate at which the economy may improve or the direction of gasoline prices. If the economy does not continue to improve or if it weakens or fuel prices increase, our business and operating results could be adversely affected.

Competition in our industry is intense, and our failure to compete successfully may adversely affect our profitability and operating results.

The food and drug retail industry is large and dynamic, characterized by intense competition among a collection of local, regional and national participants. We face strong competition from other food and/or drug retailers, supercenters, club stores, discount stores, online providers, specialty and niche supermarkets, drug stores, general merchandisers, wholesale stores, convenience stores and restaurants. Shifts in the competitive landscape, consumer preference or market share may have an adverse effect on our profitability and results of operations.

As a result of consumers’ growing desire to shop online, we also face increasing competition from both our existing competitors who have incorporated the internet as a direct-to-consumer channel and internet-only providers that sell grocery products. Although we have a growing internet presence and offer our customers the ability to shop online for both home delivery and in-store pick-up, there is no assurance that these online initiatives will be successful. In addition, these initiatives may have an adverse impact on our profitability as a result of lower gross profits or greater operating costs to compete.

Our ability to attract customers is dependent, in large part, upon a combination of channel preference, location, store conditions, quality, price, service and selection. In each of these areas,

 

22


Table of Contents

traditional and non-traditional competitors compete with us and may successfully attract our customers to their stores by matching or exceeding what we offer. In recent years, many of our competitors have added locations and adopted a multi-channel approach to marketing and advertising. Our responses to competitive pressures, such as additional promotions, increased advertising, additional capital investment and the development of our internet offerings, could adversely affect our profitability and cash flow. We cannot guarantee that our competitive response will succeed in increasing or maintaining our share of retail food sales.

An increasingly competitive industry and a low level of inflation in food prices have made it difficult for food retailers to achieve positive identical store sales growth on a consistent basis. Our competitors have attempted to maintain or grow their share of retail food sales through capital and price investment, increased promotional activity and new store growth, creating a more difficult environment to consistently increase year-over-year sales. Several of our primary competitors are larger than we are or have greater financial resources available to them and, therefore, may be able to devote greater resources to invest in price, promotional activity and new or remodeled stores in order to grow their share of retail food sales. Price investment by our competitors has also, from time to time, adversely affected our operating margins. In recent years, we have invested in price in order to remain competitive and generate sales growth; however, there can be no assurance this strategy will continue to be successful.

Because we face intense competition, we need to anticipate and respond to changing consumer preferences and demands more effectively than our competitors. We devote significant resources to differentiating our banners in the local markets where we operate and invest in loyalty programs to drive traffic. Our local merchandising teams spend considerable time working with store directors to make sure we are satisfying consumer preferences. In addition, we strive to achieve and maintain favorable recognition of our own brands and offerings, and market these offerings to consumers and maintain and enhance a perception of value for consumers. While we seek to continuously respond to changing consumer preferences, there is no assurances that our responses will be successful.

Our continued success is dependent upon our ability to control operating expenses, including managing health care and pension costs stipulated by our collective bargaining agreements to effectively compete in the food retail industry. Several of our primary competitors are larger than we are, or are not subject to collective bargaining agreements, allowing them to more effectively leverage their fixed costs or more easily reduce operating expenses. Finally, we need to source, market and merchandise efficiently. Changes in our product mix also may negatively affect our profitability. Failure to accomplish our objectives could impair our ability to compete successfully and adversely affect our profitability.

Profit margins in the food retail industry are low. In order to increase or maintain our profit margins, we develop operating strategies to increase revenues, increase gross margins and reduce costs, such as new marketing programs, new advertising campaigns, productivity improvements, shrink reduction initiatives, distribution center efficiencies, manufacturing efficiencies, energy efficiency programs and other similar strategies. Our failure to achieve forecasted revenue growth, gross margin improvement or cost reductions could have a material adverse effect on our profitability and operating results.

Increased commodity prices may adversely impact our profitability.

Many of our own and sourced products include ingredients such as wheat, corn, oils, milk, sugar, proteins, cocoa and other commodities. Commodity prices worldwide have been volatile. Any increase in commodity prices may cause an increase in our input costs or the prices our vendors seek from us. Although we typically are able to pass on modest commodity price increases or mitigate vendor efforts to increase our costs, we may be unable to continue to do so, either in whole or in part, if commodity

 

23


Table of Contents

prices increase materially. If we are forced to increase prices, our customers may reduce their purchases at our stores or trade down to less profitable products. Both may adversely impact our profitability as a result of reduced revenue or reduced margins.

Fuel prices and availability may adversely affect our results of operations.

We currently operate 380 fuel centers that are adjacent to many of our store locations. As a result, we sell a significant amount of gasoline. Increased regulation or significant increases in wholesale fuel costs could result in lower gross profit on fuel sales, and demand could be affected by retail price increases as well as by concerns about the effect of emissions on the environment. We are unable to predict future regulations, environmental effects, political unrest, acts of terrorism and other matters that may affect the cost and availability of fuel, and how our customers will react, which could adversely affect our results of operations.

Our stores rely heavily on sales of perishable products, and product supply disruptions may have an adverse effect on our profitability and operating results.

Reflecting consumer preferences, we have a significant focus on perishable products. Sales of perishable products accounted for approximately 40.3% of our total sales in fiscal 2015. We rely on various suppliers and vendors to provide and deliver our perishable product inventory on a continuous basis. We could suffer significant perishable product inventory losses and significant lost revenue in the event of the loss of a major supplier or vendor, disruption of our distribution network, extended power outages, natural disasters or other catastrophic occurrences.

Severe weather and natural disasters may adversely affect our business.

Severe weather conditions such as hurricanes, earthquakes, floods, extended winter storms, heat waves or tornadoes, as well as other natural disasters, in areas in which we have stores or distribution centers or from which we source or obtain products may cause physical damage to our properties, closure of one or more of our stores, manufacturing facilities or distribution centers, lack of an adequate work force in a market, temporary disruption in the manufacture of products, temporary disruption in the supply of products, disruption in the transport of goods, delays in the delivery of goods to our distribution centers or stores, a reduction in customer traffic and a reduction in the availability of products in our stores. In addition, adverse climate conditions and adverse weather patterns, such as drought or flood, that impact growing conditions and the quantity and quality of crops yielded by food producers may adversely affect the availability or cost of certain products within the grocery supply chain. Any of these factors may disrupt our business and adversely affect our business.

Threats or potential threats to security of food and drug safety, the occurrence of a widespread health epidemic or regulatory concerns in our supply chain may adversely affect our business.

Acts or threats, whether perceived or real, of war or terror or other criminal activity directed at the food or drug store industry or the transportation industry, whether or not directly involving our stores, could increase our operating costs and operations, or impact general consumer behavior and consumer spending. Other events that give rise to actual or potential food contamination, drug contamination or food-borne illnesses, or a widespread regional, national or global health epidemic, such as pandemic flu, could have an adverse effect on our operating results or disrupt production and delivery of our products, our ability to appropriately staff our stores and potentially cause customers to avoid public gathering places or otherwise change their shopping behaviors.

We source our products from vendors and suppliers and related networks across the globe who may be subject to regulatory actions or face criticism due to actual or perceived social injustices,

 

24


Table of Contents

including human trafficking, child labor or environmental, health and safety violations. A disruption in our supply chain due to any regulatory action or social injustice could have an adverse impact on our supply chain and ultimately our business, including potential harm to our reputation.

We could be affected if consumers lose confidence in the food supply chain or the quality and safety of our products.

We could be adversely affected if consumers lose confidence in the safety and quality of certain food products. Adverse publicity about these types of concerns, whether valid or not, may discourage consumers from buying our products or cause production and delivery disruptions. The real or perceived sale of contaminated food products by us could result in product liability claims, a loss of consumer confidence and product recalls, which could have a material adverse effect on our business.

Certain risks are inherent in providing pharmacy services, and our insurance may not be adequate to cover any claims against us.

We currently operate 1,780 pharmacies, and, as a result, we are exposed to risks inherent in the packaging, dispensing, distribution, and disposal of pharmaceuticals and other healthcare products, such as risks of liability for products which cause harm to consumers, as well as increased regulatory risks and related costs. Although we maintain insurance, we cannot guarantee that the coverage limits under our insurance programs will be adequate to protect us against future claims, or that we will be able to maintain this insurance on acceptable terms in the future, or at all. Our results of operations, financial condition or cash flows may be materially adversely affected if in the future our insurance coverage proves to be inadequate or unavailable, or there is an increase in the liability for which we self-insure, or we suffer harm to our reputation as a result of an error or omission.

We are subject to numerous federal and state regulations. Each of our in-store pharmacies must be licensed by the state government. The licensing requirements vary from state to state. An additional registration certificate must be granted by the U.S. Drug Enforcement Administration (“DEA”), and, in some states, a separate controlled substance license must be obtained to dispense controlled substances. In addition, pharmacies selling controlled substances are required to maintain extensive records and often report information to state and federal agencies. If we fail to comply with existing or future laws and regulations, we could suffer substantial civil or criminal penalties, including the loss of our licenses to operate pharmacies and our ability to participate in federal and state healthcare programs. As a consequence of the severe penalties we could face, we must devote significant operational and managerial resources to complying with these laws and regulations.

In 2014, Safeway received two subpoenas from the DEA concerning its record keeping, reporting and related practices associated with the loss or theft of controlled substances. We are not a party to any pending DEA administrative or judicial proceeding arising from or related to these subpoenas. We are cooperating with the DEA on these matters and have met with the DEA on several occasions. We anticipate that there will be monetary fines assessed, and that the DEA may seek administrative remedies. We have recorded an estimated liability for this matter, which is based on information currently available to us and may change as new information becomes available. On June 7, 2016, we received a third subpoena requesting information concerning potential diversion of controlled substances by a former employee. We are in the process of responding to the third subpoena, and we are currently unable to determine the probability of the outcome of this matter or the range of reasonably possible loss, if any. Application of federal and state laws and regulations could subject our current practices to allegations of impropriety or illegality, or could require us to make significant changes to our operations. In addition, we cannot predict the impact of future legislation and regulatory changes on our pharmacy business or assure that we will be able to obtain or maintain the regulatory approvals required to operate our business.

 

25


Table of Contents

Integrating acquisitions may be time-consuming and create costs that could reduce our net income and cash flows.

Part of our strategy includes pursuing acquisitions that we believe will be accretive to our business. If we consummate an acquisition, the process of integrating the acquired business may be complex and time consuming, may be disruptive to the business and may cause an interruption of, or a distraction of management’s attention from, the business as a result of a number of obstacles, including, but not limited to:

 

    a failure of our due diligence process to identify significant risks or issues;

 

    the loss of customers of the acquired company or our company;

 

    negative impact on the brands or banners of the acquired company or our company;

 

    a failure to maintain or improve the quality of customer service;

 

    difficulties assimilating the operations and personnel of the acquired company;

 

    our inability to retain key personnel of the acquired company;

 

    the incurrence of unexpected expenses and working capital requirements;

 

    our inability to achieve the financial and strategic goals, including synergies, for the combined businesses; and

 

    difficulty in maintaining internal controls, procedures and policies.

Any of the foregoing obstacles, or a combination of them, could decrease gross profit margins or increase selling, general and administrative expenses in absolute terms and/or as a percentage of net sales, which could in turn negatively impact our net income and cash flows.

We may not be able to consummate acquisitions in the future on terms acceptable to us, or at all. In addition, future acquisitions are accompanied by the risk that the obligations and liabilities of an acquired company may not be adequately reflected in the historical financial statements of that company and the risk that those historical financial statements may be based on assumptions which are incorrect or inconsistent with our assumptions or approach to accounting policies. Any of these material obligations, liabilities or incorrect or inconsistent assumptions could adversely impact our results of operations and financial condition.

A significant majority of our employees are unionized, and our relationship with unions, including labor disputes or work stoppages, could have an adverse impact on our operations and financial results.

As of February 27, 2016, approximately 164,000 of our employees were covered by collective bargaining agreements. During fiscal 2015, collective bargaining agreements covering approximately 12,000 employees were renegotiated. During fiscal 2016, collective bargaining agreements covering approximately 87,000 employees are scheduled to expire. In future negotiations with labor unions, we expect that health care, pension costs and/or contributions and wage costs, among other issues, will be important topics for negotiation. If, upon the expiration of such collective bargaining agreements, we are unable to negotiate acceptable contracts with labor unions, it could result in strikes by the affected workers and thereby significantly disrupt our operations. As part of our collective bargaining agreements, we may need to fund additional pension contributions, which would negatively impact our free cash flow. Further, if we are unable to control health care and pension costs provided for in the collective bargaining agreements, we may experience increased operating costs and an adverse impact on our financial results.

Increased pension expenses, contributions and surcharges may have an adverse impact on our financial results.

In connection with the Safeway acquisition, we assumed Safeway’s defined benefit retirement plans for substantially all Safeway employees not participating in multiemployer pension plans. We also assumed defined benefit retirement plans in connection with the United and NAI acquisitions. The

 

26


Table of Contents

funded status of these plans (the difference between the fair value of the plan assets and the projected benefit obligation) is a significant factor in determining annual pension expense and cash contributions to fund the plans. In recent years, cash contributions have declined due to improved market conditions and the impact of the pension funding stabilization legislation, which increased the discount rate used to determine pension funding. However, in the fourth quarter of fiscal 2014, under a settlement agreement with the PBGC in connection with the closing of the Safeway acquisition, Safeway contributed $260 million to its largest pension plan. As a result, we do not expect to make additional contributions to this plan until 2018.

If financial markets do not improve or if financial markets decline, increased pension expense and cash contributions may have an adverse impact on our financial results. Under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), the PBGC has the authority to petition a court to terminate an underfunded pension plan under limited circumstances. In the event that our defined benefit pension plans are terminated for any reason, we could be liable to the PBGC for the entire amount of the underfunding, as calculated by the PBGC based on its own assumptions (which likely would result in a larger obligation than that based on the actuarial assumptions used to fund such plans). Under ERISA and the Internal Revenue Code of 1986, as amended (the “Code”), the liability under these defined benefit plans is joint and several with all members of the control group, such that each member of the control group would be liable for the defined benefit plans of each other member of the control group.

In addition, we participate in various multiemployer pension plans for substantially all employees represented by unions that require us to make contributions to these plans in amounts established under collective bargaining agreements. Under the Pension Protection Act of 2006 (the “PPA”), contributions in addition to those made pursuant to a collective bargaining agreement may be required in limited circumstances in the form of a surcharge that is equal to 5% of the contributions due in the first year and 10% each year thereafter until the applicable bargaining agreement expires.

Pension expenses for multiemployer pension plans are recognized by us as contributions are made. Benefits generally are based on a fixed amount for each year of service. Our contributions to multiemployer plans were $74.2 million, $113.4 million and $379.8 million during fiscal 2013, fiscal 2014 and fiscal 2015, respectively. In fiscal 2016, we expect to contribute approximately $400 million to multiemployer pension plans, subject to collective bargaining conditions.

Based on an assessment of the most recent information available, the company believes that most of the multiemployer plans to which it contributes are underfunded. The company is only one of a number of employers contributing to these plans, and the underfunding is not a direct obligation or liability of the company. However, the company has attempted, as of February 27, 2016, to estimate its share of the underfunding of multiemployer plans to which the company contributes, based on the ratio of its contributions to the total of all contributions to these plans in a year. As of February 27, 2016, our estimate of the company’s share of the underfunding of multiemployer plans to which it contributes was $3.2 billion. The company’s share of underfunding described above is an estimate and could change based on the results of collective bargaining efforts, investment returns on the assets held in the plans, actions taken by trustees who manage the plans’ benefit payments, interest rates, if the employers currently contributing to these plans cease participation, and requirements under the PPA, the Multiemployer Pension Reform Act of 2014 and applicable provisions of the Code.

Additionally, underfunding of the multiemployer plans means that, in the event we were to exit certain markets or otherwise cease making contributions to these plans, we could trigger a substantial withdrawal liability. Any accrual for withdrawal liability will be recorded when a withdrawal is probable and can be reasonably estimated, in accordance with GAAP. All trades or businesses in the employer’s control group are jointly and severally liable for the employer’s withdrawal liability.

 

27


Table of Contents

As a part of the Safeway acquisition, we assumed withdrawal liabilities related to Safeway’s previous closure of its Dominick’s division. The respective pension plans have asserted that we may become obligated to pay an estimated maximum withdrawal liability of approximately $510 million if one of the pension plans, the UFCW & Employers Midwest Pension Fund (the “UFCW Midwest Plan”), were to experience a mass withdrawal. A mass withdrawal would require monthly installment payments to be made by us in perpetuity. Our installment payments would be limited to 20 years if we are not part of, or the UFCW Midwest Plan does not experience, a mass withdrawal. Upon the Safeway acquisition, we recorded a $221.8 million multiemployer pension withdrawal liability related to Safeway’s withdrawal from these plans, a difference of $288.2 million from the maximum withdrawal liability. Our current estimate of the withdrawal liability is based on the fact that a mass withdrawal from the UFCW Midwest Plan has not occurred and our management’s belief that a mass withdrawal liability is remote. We are also disputing in arbitration certain factors used to determine the allocation of the unfunded vested benefits and therefore the annual pension payment installments due to the UFCW Midwest Plan. Our estimated liability reflects our best estimate of the probable outcome of this arbitration. Based on the current facts and circumstances, we believe it is reasonably possible that the estimated liability could change from the amount currently recorded as a result of the arbitration, but because our management believes that a mass withdrawal from the UFCW Midwest Plan is remote, it believes the payment of the maximum liability of approximately $510 million is also remote. The amount of the withdrawal liability recorded as of February 27, 2016 with respect to the Dominick’s division was $202.7 million, primarily reflecting minimum required payments made subsequent to the date of consummation of the Safeway acquisition.

On July 19, 2015, A&P filed a Chapter 11 petition in the United States Bankruptcy Court. Our company and A&P participate in four of the same multiemployer pension plans. The bankruptcy of A&P has adversely affected the funding of these pension plans. Our subsidiary, Acme Markets, Inc. (“Acme Markets”), purchased 73 A&P stores. We purchased some but not all of the A&P stores that have contribution obligations to the four plans. Some of the A&P stores that we purchased contribute to five plans to which we do not contribute. We estimate that our share of the unfunded actuarial accrued liability in the four plans to which we and A&P have contributed increased by approximately $58 million for the stores we have acquired, and that the share of the unfunded actuarial accrued liability in the additional five plans attributable to the stores we have acquired is approximately $28 million. A&P and Acme Markets represent the substantial majority of all contributions to one of these plans (although there are approximately eight other contributing employers) and that plan’s unfunded actuarial accrued liability is currently estimated as $308 million based on that plan’s latest disclosure as of December 31, 2014. It is likely the A&P stores we did not purchase have withdrawn from the four plans in which we participate because no entity purchased them or the stores were sold to a buyer who is not obligated to contribute to the plans; therefore, our contingent liability for the underfunding of these plans likely increased further because liability for the plans’ underfunding shifted to the remaining employers in each of the plans.

See Note 14—Employee Benefit Plans and Collective Bargaining Agreements in our consolidated financial statements, included elsewhere in this prospectus, for more information relating to our participation in these multiemployer pension plans.

Unfavorable changes in government regulation may have a material adverse effect on our business.

Our stores are subject to various federal, state, local and foreign laws, regulations and administrative practices. We must comply with numerous provisions regulating health and sanitation standards, food labeling, energy, environmental, equal employment opportunity, minimum wages and licensing for the sale of food, drugs and alcoholic beverages. We cannot predict either the nature of future laws, regulations, interpretations or applications, or the effect either additional government laws,

 

28


Table of Contents

regulations or administrative procedures, when and if promulgated, or disparate federal, state, local and foreign regulatory schemes would have on our future business. In addition, regulatory changes could require the reformulation of certain products to meet new standards, the recall or discontinuance of certain products not able to be reformulated, additional record keeping, expanded documentation of the properties of certain products, expanded or different labeling and/or scientific substantiation. Any or all of such requirements could have an adverse effect on our business.

The minimum wage continues to increase and is subject to factors outside of our control. Changes to wage regulations could have an impact on our future results of operations.

A considerable number of our employees are paid at rates related to the federal minimum wage. Additionally, many of our stores are located in states, including California, where the minimum wage is greater than the federal minimum wage and where a considerable number of employees receive compensation equal to the state’s minimum wage. For example, as of June 18, 2016, we employed approximately 71,000 associates in California, where the current minimum wage was recently increased to $10.00 per hour effective January 1, 2016, and will gradually increase to $15.00 per hour from January 1, 2017 to January 1, 2022. In Maryland, where we employed approximately 9,000 associates as of June 18, 2016, the minimum wage was recently increased to $8.25 per hour, and will gradually increase to $10.10 per hour by July 1, 2018. Moreover, municipalities may set minimum wages above the applicable state standards. For example, the minimum wage in Seattle, Washington, where we employed approximately 2,100 associates as of June 18, 2016, was recently increased to $11.00 per hour, and will increase to $15.00 per hour effective January 1, 2017 for employers with more than 500 employees nationwide. In Chicago, Illinois, where we employed approximately 5,800 associates as of June 18, 2016, the minimum wage was recently increased to $10.00 per hour, and will gradually increase to $13.00 per hour by July 1, 2019. Any further increases in the federal minimum wage or the enactment of additional state or local minimum wage increases could increase our labor costs, which may adversely affect our results of operations and financial condition.

The food retail industry is labor intensive. Our ability to meet our labor needs, while controlling wage and labor-related costs, is subject to numerous external factors, including the availability of qualified persons in the workforce in the local markets in which we are located, unemployment levels within those markets, prevailing wage rates, changing demographics, health and other insurance costs and changes in employment and labor laws. Such laws related to employee hours, wages, job classification and benefits could significantly increase operating costs. For example, we are currently evaluating recent revisions to the Fair Labor Standards Act regulations which could result in increased labor costs to our business and negatively impact profitability. In the event of increasing wage rates, if we fail to increase our wages competitively, the quality of our workforce could decline, causing our customer service to suffer, while increasing wages for our employees could cause our profit margins to decrease. If we are unable to hire and retain employees capable of meeting our business needs and expectations, our business and brand image may be impaired. Any failure to meet our staffing needs or any material increase in turnover rates of our employees may adversely affect our business, results of operations and financial condition.

Our historical financial statements may not be indicative of future performance.

In light of our acquisitions of NAI in March 2013, United in December 2013, and Safeway in January 2015, our operating results only reflect the impact of those acquisitions from those respective dates, and therefore comparisons with prior periods are difficult. As a result, our limited historical financial performance as owners of NAI, United and Safeway may make it difficult for stockholders to evaluate our business and results of operations to date and to assess our future prospects and viability. Furthermore, given the nature of the assets acquired, our recent operating history has resulted in revenue and profitability growth rates that may not be indicative of our future results of operations.

 

29


Table of Contents

In addition, Safeway completed the distribution of its remaining shares of Blackhawk Network Holdings, Inc. (“Blackhawk”) in April 2014, the sale of the net assets of Canada Safeway Limited in November 2013 and closed or sold its Dominick’s stores in the fourth quarter of 2013. In addition, Property Development Centers, LLC (“PDC”) was sold in December 2014, and Safeway’s 49% interest (the “Casa Ley Interest”) in Casa Ley, S.A. de C.V. (“Casa Ley”), a Mexico-based food and general merchandise retailer, is expected to be divested, with the net proceeds being paid to Safeway’s former stockholders.

As a result of the foregoing transactions and the implementation of new business initiatives and strategies, our historical results of operations are not necessarily indicative of our ongoing operations and the operating results to be expected in the future.

Our unaudited pro forma financial information may not be representative of our future results.

The pro forma financial information included in this prospectus does not purport to be indicative of the financial information that will result from our future operations. In addition, the pro forma financial information presented in this prospectus is based in part on certain assumptions that we believe are reasonable. We cannot assure you that our assumptions will prove to be accurate over time. Accordingly, the pro forma financial information included in this prospectus does not purport to be indicative of what our results of operations and financial condition will be in the future.

Unfavorable changes in, failure to comply with or increased costs to comply with environmental laws and regulations could adversely affect us. The storage and sale of petroleum products could cause disruptions and expose us to potentially significant liabilities.

Our operations, including our 380 fuel centers, are subject to various laws and regulations relating to the protection of the environment, including those governing the storage, management, disposal and cleanup of hazardous materials. Some environmental laws, such as the Comprehensive Environmental Response, Compensation and Liability Act and similar state statutes, impose strict, and under certain circumstances joint and several, liability for costs to remediate a contaminated site, and also impose liability for damages to natural resources.

Federal regulations under the Clean Air Act require phase out of the production of ozone-depleting refrigerants that include hydrochlorofluorocarbons, the most common of which is R-22. By 2020, production of new R-22 refrigerant gas will be completely phased out; however, recovered and recycled/reclaimed R-22 will be available for servicing systems after 2020. The company is reducing its R-22 footprint while continuing to repair leaks, thus extending the useful lifespan of existing equipment. For fiscal 2016, $5 million has been budgeted for system retrofits, and we budgeted approximately $5 million in subsequent years. Leak repairs are part of the ongoing refrigeration maintenance budget. We may be required to spend additional capital above and beyond what is currently budgeted for system retrofits and leak repairs which could have a significant impact on our business, results of operations and financial condition.

Third-party claims in connection with releases of or exposure to hazardous materials relating to our current or former properties or third-party waste disposal sites can also arise. In addition, the presence of contamination at any of our properties could impair our ability to sell or lease the contaminated properties or to borrow money using any of these properties as collateral. The costs and liabilities associated with any such contamination could be substantial, and could have a material adverse effect on our business. Under current environmental laws, we may be held responsible for the remediation of environmental conditions regardless of whether we lease, sublease or own the stores or other facilities and regardless of whether such environmental conditions were created by us or a prior owner or tenant. In addition, the increased focus on climate change, waste management and other environmental issues may result in new environmental laws or regulations that negatively affect us directly or indirectly through increased costs on our suppliers. There can be no assurance that environmental contamination relating to prior, existing or future sites or other environmental changes will not adversely affect us through, for example, business interruption, cost of remediation or adverse publicity.

 

30


Table of Contents

We are subject to, and may in the future be subject to, legal or other proceedings that could have a material adverse effect on us.

From time to time, we are a party to legal proceedings, including matters involving personnel and employment issues, personal injury, antitrust claims, intellectual property claims and other proceedings arising in or outside of the ordinary course of business. In addition, there are an increasing number of cases being filed against companies generally, which contain class-action allegations under federal and state wage and hour laws. We estimate our exposure to these legal proceedings and establish reserves for the estimated liabilities. Assessing and predicting the outcome of these matters involves substantial uncertainties. Although not currently anticipated by management, unexpected outcomes in these legal proceedings or changes in management’s forecast assumptions or predictions, could have a material adverse impact on our results of operations.

We may be adversely affected by risks related to our dependence on IT systems. Any future changes to or intrusion into these IT systems, even if we are compliant with industry security standards, could materially adversely affect our reputation, financial condition and operating results.

We have complex IT systems that are important to the success of our business operations and marketing initiatives. If we were to experience failures, breakdowns, substandard performance or other adverse events affecting these systems, or difficulties accessing the proprietary business data stored in these systems, or in maintaining, expanding or upgrading existing systems or implementing new systems, we could incur significant losses due to disruptions in our systems and business.

Our ability to effectively manage the day-to-day business of approximately 900 Albertsons and NAI stores depends significantly on IT services and systems provided by SuperValu pursuant to two transition services agreements (the “SVU TSAs”). Prior to Albertsons’ and NAI’s transition onto Safeway’s IT systems, the failure of SuperValu’s systems to operate effectively or to integrate with other systems, or unauthorized access into SuperValu’s systems, could cause us to incur significant losses due to disruptions in our systems and business.

We receive and store personal information in connection with our marketing and human resources organizations. The protection of our customer and employee data is critically important to us. Despite our considerable efforts to secure our respective computer networks, security could be compromised, confidential information could be misappropriated or system disruptions could occur, as has occurred with a number of other retailers. If we (or through SuperValu) experience a data security breach, we could be exposed to government enforcement actions, possible assessments from the card brands if credit card data was involved and potential litigation. In addition, our customers could lose confidence in our ability to protect their personal information, which could cause them to stop shopping at our stores altogether. The loss of confidence from a data security breach involving our employees could hurt our reputation and cause employee recruiting and retention challenges.

Improper activities by third parties, exploitation of encryption technology, new data-hacking tools and discoveries and other events or developments may result in future intrusions into or compromise of our networks, payment card terminals or other payment systems. In particular, the techniques used by criminals to obtain unauthorized access to sensitive data change frequently and often cannot be recognized until launched against a target; accordingly, we may not be able to anticipate these frequently changing techniques or implement adequate preventive measures for all of them. Any unauthorized access into our customers’ sensitive information, or data belonging to us or our suppliers, even if we are compliant with industry security standards, could put us at a competitive disadvantage, result in deterioration of our customers’ confidence in us, and subject us to potential litigation, liability, fines and penalties and consent decrees, resulting in a possible material adverse impact on our financial condition and results of operations.

 

31


Table of Contents

As merchants who accept debit and credit cards for payment, we are subject to the Payment Card Industry (“PCI”) Data Security Standard (“PCI DSS”) issued by the PCI Council. PCI DSS contains compliance guidelines and standards with regard to our security surrounding the physical administrative and technical storage, processing and transmission of individual cardholder data. By accepting debit cards for payment, we are also subject to compliance with American National Standards Institute (“ANSI”) data encryption standards and payment network security operating guidelines. In addition, we are required to comply with PCI DSS version 3.1 for our 2016 assessment, and are replacing or enhancing our in-store systems to comply with these standards. Failure to be PCI compliant or to meet other payment card standards may result in the imposition of financial penalties or the allocation by the card brands of the costs of fraudulent charges to us. Despite our efforts to comply with these or other payment card standards and other information security measures, we cannot be certain that all of our (or through SuperValu) IT systems will be able to prevent, contain or detect all cyber-attacks or intrusions from known malware or malware that may be developed in the future. To the extent that any disruption results in the loss, damage or misappropriation of information, we may be adversely affected by claims from customers, financial institutions, regulatory authorities, payment card associations and others. In addition, the cost of complying with stricter privacy and information security laws and standards, including PCI DSS version 3.1 and ANSI data encryption standards, could be significant.

Furthermore, on October 1, 2015, the payment card industry began to shift liability for certain transactions to retailers who are not able to accept Europay, Mastercard, and Visa (“EMV”) chip card transactions (the “EMV Liability Shift”). As a result, before the implementation of EMV chip card technology is completed by our company, we may be liable for costs incurred by payment card issuing banks and other third parties or subject to fines and higher transaction fees, which could have an adverse effect on our business, financial condition or cash flows.

Termination of the SuperValu transition services agreement or the failure of SuperValu to perform its obligations thereunder could adversely affect our business, financial results and financial condition.

Our ability to effectively monitor and control the operations of Albertsons and NAI depends to a large extent on the proper functioning of our IT and business support systems. In connection with our acquisition of NAI, Albertsons and NAI each entered into a comprehensive transition services agreement with SuperValu. Pursuant to the SVU TSAs, Albertsons and NAI each pay fees to SuperValu for certain services, including back office, administrative, IT, procurement, insurance and accounting services. The SVU TSAs limit the liability of SuperValu to instances in which SuperValu has committed gross negligence in regard to the provision of services or has breached its obligations under the SVU TSAs. The SVU TSAs terminated and replaced a transition services agreement providing for substantially similar services, which we had previously entered into with SuperValu in connection with our June 2006 acquisition of the Legacy Albertsons Stores. We plan to complete the transition of our Albertsons and NAI stores, distribution centers and systems onto Safeway’s IT systems by mid-2018, but may suffer disruptions as part of that process. In addition, we are dependent upon SuperValu to continue to provide these services to Albertsons and NAI until we transition Albertsons and NAI onto Safeway’s IT system and otherwise replace SuperValu as a service provider to Albertsons and NAI. In addition, we may depend on SuperValu to manage IT services and systems for additional stores we acquire, including the A&P stores we have acquired, until we are able to transition such stores onto Safeway’s IT system. The failure by SuperValu to perform its obligations under the SVU TSAs prior to Albertsons’ and NAI’s transition onto Safeway’s IT systems and to other service providers (external or internal) could adversely affect our business, financial results, prospects and results of operations.

Furthermore, SuperValu manages and operates NAI’s distribution center located in the Lancaster, Pennsylvania area. Under the Lancaster Agreement (as defined herein), SuperValu supplies NAI’s Acme and Shaw’s stores from the distribution center under a shared costs arrangement.

 

32


Table of Contents

The failure by SuperValu to perform its obligations under the Lancaster Agreement could adversely affect our business, financial results and financial condition.

Our third-party IT services provider discovered unauthorized computer intrusions in 2014. These intrusions could adversely affect our brands and could discourage customers from shopping in our Albertsons and NAI stores.

Our third-party IT services provider for Albertsons and NAI, SuperValu, informed us in the summer of 2014 that it discovered unlawful intrusions to approximately 800 Shaw’s, Star Market, Acme, Jewel-Osco and Albertsons banner stores in an attempt to obtain payment card data. We have contacted the appropriate law enforcement authorities regarding these incidents and have coordinated with our merchant bank and payment processors to address the situation. We maintain insurance to address potential liabilities for cyber risks and, in the case of Albertsons and NAI, are self-insured for cyber risks for periods prior to August 11, 2014. We have also notified our various insurance carriers of these incidents and are providing further updates to the carriers as the investigation continues.

We believe the intrusions may have been an attempt to collect payment card data. The unlawful intrusions have given rise to putative class action litigation complaints against SuperValu and our company on behalf of customers. The class action complaints were dismissed without prejudice on January 7, 2016. The plaintiffs filed a motion to alter or amend the court’s judgment, which was denied on April 20, 2016. The court also denied leave to amend the complaint. On October 6, 2015, we received a letter from the Office of Attorney General of the Commonwealth of Pennsylvania stating that the Illinois and Pennsylvania Attorneys General Offices are leading a multi-state group that includes the Attorneys General for 14 other states requesting specified information concerning the two data breach incidents. We are in the process of providing the requested information. In addition, the payment networks required that forensic investigations be conducted of the intrusions. The forensic firm retained by us to conduct an investigation has issued separate reports for each intrusion (copies of which have been provided to the payment card networks). In both reports, the forensic firm found that not all of the PCI DSS standards had been met and that some of this non-compliance may have contributed to or caused at least some portion of the compromise that occurred during the intrusions. We believe it is probable that the payment card networks will make claims against us. These claims will likely include amounts for incremental counterfeit fraud losses and non-ordinary course operating expenses (such as card reissuance costs) that the payment card networks assert they or their issuing banks have incurred, and could also include a case management assessment. If the payment card networks assert claims against us, we currently intend to dispute those claims and assert available defenses. At the present time, we believe that it is probable that we will incur a loss in connection with the potential claims from the payment card networks. We have recorded an estimated liability for probable losses that we expect to incur in connection with the potential claims to be made by the payment card networks. The estimated liability is based on information currently available to us and may change as new information becomes available or when the payment card networks assert their claims against us. We will continue to evaluate information as it becomes available and will record an estimate of additional loss, if any, when it is both probable that a loss has been incurred and the amount of the loss is reasonably estimable. Currently, the potential range of any loss above our currently recorded amount cannot be reasonably estimated given no claims have yet been asserted and because significant factual and legal issues remain unresolved. On October 20, 2015, we agreed with one of our third-party payment administrators to provide a $15 million letter of credit to cover any claims from the payment networks and to maintain a minimum level of card processing until the potential claims from the payment networks are resolved.

There can be no assurance that we will not suffer a similar criminal attack in the future or that unauthorized parties will not gain access to personal information of our customers. While we have recently implemented additional security software and hardware designed to provide additional

 

33


Table of Contents

protections against unauthorized intrusions, there can be no assurance that unauthorized individuals will not discover a means to circumvent our security. Computer intrusions could adversely affect our brands, have caused us to incur legal and other fees, may cause us to incur additional expenses for additional security measures and could discourage customers from shopping in our stores.

We use a combination of insurance and self-insurance to address potential liabilities for workers’ compensation, automobile and general liability, property risk (including earthquake and flood coverage), director and officers’ liability, employment practices liability, pharmacy liability and employee health care benefits.

We use a combination of insurance and self-insurance to address potential liabilities for workers’ compensation, automobile and general liability, property risk (including earthquake and flood coverage), director and officers’ liability, employment practices liability, pharmacy liability and employee health care benefits and cyber and terrorism risks. We estimate the liabilities associated with the risks retained by us, in part, by considering historical claims experience, demographic and severity factors and other actuarial assumptions which, by their nature, are subject to a high degree of variability. Among the causes of this variability are unpredictable external factors affecting future inflation rates, discount rates, litigation trends, legal interpretations, benefit level changes and claim settlement patterns.

The majority of our workers’ compensation liability is from claims occurring in California. California workers’ compensation has received intense scrutiny from the state’s politicians, insurers, employers and providers, as well as the public in general.

Our long-lived assets, primarily stores, are subject to periodic testing for impairment.

Our long-lived assets, primarily stores, are subject to periodic testing for impairment. We have incurred significant impairment charges to earnings in the past. Long-lived asset impairment charges were $40.2 million, $266.9 million and $2.0 million in fiscal 2015, fiscal 2014 and fiscal 2013, respectively. Failure to achieve sufficient levels of cash flow at reporting units could result in impairment charges on long-lived assets.

Our operations are dependent upon the availability of a significant amount of energy and fuel to manufacture, store, transport and sell products.

Our operations are dependent upon the availability of a significant amount of energy and fuel to manufacture, store, transport and sell products. Energy and fuel costs are influenced by international, political and economic circumstances and have experienced volatility over time. To reduce the impact of volatile energy costs, we have entered into contracts to purchase electricity and natural gas at fixed prices to satisfy a portion of our energy needs. We also manage our exposure to changes in energy prices utilized in the shipping process through the use of short-term diesel fuel derivative contracts. Volatility in fuel and energy costs that exceeds offsetting contractual arrangements could adversely affect our results of operations.

We may have liability under certain operating leases that were assigned to third parties.

We may have liability under certain operating leases that were assigned to third parties. If any of these third parties fail to perform their obligations under the leases, we could be responsible for the lease obligation.

For example, in connection with FTC-mandated divestitures, we assigned leases with respect to 93 store properties to Haggen. On September 8, 2015, Haggen commenced a case under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware. In November 2015, we participated in Haggen’s bankruptcy auction for its non-core stores, and after additional negotiations with Haggen and having received FTC and state attorneys general clearance

 

34


Table of Contents

and Bankruptcy Court approval, we acquired 19 assigned store leases for an aggregate purchase price of approximately $10.7 million. We previously assigned 42 leases to Haggen that were acquired by other retailers or by landlords in the auction, and three others were modified during the bankruptcy process, eliminating our contingent lease liability. Haggen conducted a subsequent sale process with respect to its 33 core stores, which resulted in the sale to us of 29 stores (including six leases and two ground leases previously assigned by us to Haggen) for an aggregate purchase price of $113.8 million, including the cost of acquired inventory, subject to adjustment. Haggen rejected, in its bankruptcy case, 11 store leases for which we have contingent lease liability. As a result, we recorded a loss of $32.2 million for this contingent liability, of which $30.6 million was recorded during fiscal 2015 and $1.6 million was recorded in the first quarter of fiscal 2016.

With respect to other leases we have assigned to third parties (including the leases Haggen had acquired from us but assigned to other retailers in its bankruptcy), because of the wide dispersion among third parties and the variety of remedies available, we believe that if an assignee became insolvent it would not have a material effect on our financial condition, results of operations or cash flows. No liability has been recorded for assigned leases in our consolidated balance sheet related to these contingent obligations.

We may be unable to attract and retain key personnel, which could adversely impact our ability to successfully execute our business strategy.

The continued successful implementation of our business strategy depends in large part upon the ability and experience of members of our senior management. In addition, our performance is dependent on our ability to identify, hire, train, motivate and retain qualified management, technical, sales and marketing and retail personnel. We cannot assure you that we will be able to retain such personnel on acceptable terms or at all. If we lose the services of members of our senior management or are unable to continue to attract and retain the necessary personnel, we may not be able to successfully execute our business strategy, which could have an adverse effect on our business.

Risks Related to the Safeway, A&P and Haggen Acquisitions and Integration

We may not be able to successfully integrate and combine Safeway with Albertsons and NAI, which could cause our business to suffer.

We may not be able to successfully integrate and combine the operations, management, personnel and technology of Safeway with the operations of Albertsons and NAI. If the integration is not managed successfully by our management, we may experience interruptions in our business activities, a deterioration in our employee and customer relationships, increased costs of integration and harm to our reputation with consumers, all of which could have a material adverse effect on our business. We may also experience difficulties in combining corporate cultures, maintaining employee morale and retaining key employees. In addition, the integration of our businesses will impose substantial demands on our management. There is no assurance that the benefits of consolidation will be achieved as a result of the Safeway acquisition or that our businesses will be successfully integrated in a timely manner.

We may not be able to achieve the full amount of synergies that are anticipated, or achieve the synergies on the schedule anticipated, from the Safeway acquisition.

Although we currently expect to achieve annual synergies from the Safeway acquisition of approximately $800 million by the end of fiscal 2018, with associated one-time costs of approximately $1.1 billion, or approximately $690 million, net of estimated synergy-related asset sale proceeds, inclusion of the projected synergies in this prospectus should not be viewed as a representation that we in fact will achieve this annual synergy target by the end of fiscal 2018, or at all. Although we

 

35


Table of Contents

currently expect to achieve synergies from the Safeway acquisition of approximately $575 million during fiscal 2016, or approximately $650 million on an annual run-rate basis by the end of fiscal 2016, the inclusion of these expected synergy targets in this prospectus should not be viewed as a representation that we will in fact achieve these synergies by the end of fiscal 2016, or at all. To the extent we fail to achieve these synergies, our results of operations may be impacted, and any such impact may be material.

We have identified various synergies including corporate and division overhead savings, our own brands, vendor funds, the conversion of Albertsons and NAI onto Safeway’s IT systems, marketing and advertising cost reduction and operational efficiencies within our back office, distribution and manufacturing organizations. Actual synergies, the expenses and cash required to realize the synergies and the sources of the synergies could differ materially from these estimates, and we cannot assure you that we will achieve the full amount of synergies on the schedule anticipated, or at all, or that these synergy programs will not have other adverse effects on our business. In light of these significant uncertainties, you should not place undue reliance on our estimated synergies.

We have incurred, and will continue to incur, significant integration costs in connection with Safeway.

We expect that we will continue to incur a number of costs associated with integrating the operations of Safeway, including associated one-time costs of approximately $1.1 billion, or approximately $690 million, net of estimated synergy-related asset sale proceeds, to achieve expected synergies. The substantial majority of these costs will be non-recurring expenses resulting from the Safeway acquisition and will consist of our transition of Albertsons and NAI to Safeway’s IT systems, consolidation costs and employment-related costs. Achieved synergies required approximately $175 million of one-time integration-related capital expenditures in fiscal 2015, and anticipated synergies are expected to require approximately $325 million of one-time integration-related capital expenditures in fiscal 2016. Additional unanticipated costs may be incurred in the integration of Safeway’s business and proceeds from the sale of surplus assets may be lower than anticipated. Although we expect that the elimination of duplicative costs, as well as the realization of other efficiencies related to the integration of the businesses, may offset incremental transaction and merger-related costs over time, this net benefit may not be achieved in the near term, or at all.

New business initiatives and strategies may be less successful than anticipated and could adversely affect our business.

The introduction, implementation, success and timing of new business initiatives and strategies, including, but not limited to, initiatives to increase revenue or reduce costs, may be less successful or may be different than anticipated, which could adversely affect our business.

We will be required to make payments under the contingent value rights within agreed periods even if the sale of the Casa Ley Interest is not completed within those periods.

If the Casa Ley Interest is not sold prior to January 30, 2018, we are obligated to make a cash payment to the holders of contingent value rights (the “Casa Ley CVRs”) in an amount equal to the fair market value of the unsold Casa Ley Interest, minus certain fees, expenses and assumed taxes that would have been deducted from the proceeds of a sale of the Casa Ley Interest. The sale process for the Casa Ley Interest will be conducted by a committee, or person controlled by a committee, as representative of the former Safeway stockholders, and we cannot control such sales process. If we are required to make a payment under the contingent value rights agreement with respect to the Casa Ley CVRs, our liquidity may be adversely affected.

 

36


Table of Contents

We have not provided any detailed financial information with respect to A&P or Haggen or any pro forma information reflecting the A&P Transaction or the Haggen Transaction in this prospectus.

Pursuant to applicable Securities and Exchange Commission (“SEC”) rules, this prospectus does not include or incorporate by reference any detailed financial information with respect to the assets acquired pursuant to the A&P Transaction or the Haggen Transaction for periods prior to the transactions. In addition, in accordance with applicable SEC rules, we are not required to provide and have not provided any pro forma information giving effect to these transactions. A&P’s and Haggen’s financial condition and results of operations for periods prior to their entry into bankruptcy are of limited utility in assessing the potential impact of the A&P Transaction and the Haggen Transaction on our financial condition because we have purchased or are purchasing only certain assets and assuming certain liabilities of A&P and Haggen.

We will incur significant acquisition-related costs in connection with the A&P Transaction and the Haggen Transaction.

We expect to incur a number of costs associated with integrating the operations of the acquired A&P and Haggen stores. The amount of one-time opening and transition costs required to improve store conditions and reposition the 137 stores we acquired from A&P and Haggen is greater on a per store basis than our previous acquisitions. Although we expect that the elimination of duplicative costs, as well as the realization of other efficiencies related to the integration of the acquired A&P and Haggen stores, may offset these costs over time, this net benefit may not be achieved in the near term, or at all.

We may not be able to achieve the full amount of synergies that are anticipated or achieve the synergies on the schedule anticipated from the A&P Transaction.

Although we currently expect to achieve annual synergies from the A&P Transaction of approximately $49 million by the end of fiscal 2019, inclusion of the projected synergies in this prospectus should not be viewed as a representation that we in fact will achieve this annual synergy target by the end of fiscal 2019, or at all. To the extent we fail to achieve these synergies, our results of operations may be impacted, and any such impact may be material.

We have identified various synergies including sourcing, distribution and IT. Actual synergies, the expenses and cash required to realize the synergies and the sources of the synergies could differ materially from our estimates, and we cannot assure you that we will achieve the full amount of synergies on the schedule anticipated, or at all. In light of these significant uncertainties, you should not place undue reliance on our estimated synergies from the A&P Transaction.

Risks Relating to Our Indebtedness

Our substantial level of indebtedness could adversely affect our financial condition and prevent us from fulfilling our obligations under our indebtedness.

We have a significant amount of indebtedness. As of June 18, 2016 and after giving pro forma effect to the Pre-IPO Refinancing Transactions, this offering and the application of the use of the net proceeds of this offering, we would have had $10.2 billion of debt outstanding, and we would have been able to borrow an additional $2.5 billion under our revolving credit facilities.

Our substantial indebtedness could have important consequences to you. For example, it could:

 

    adversely affect the market price of our common stock;

 

37


Table of Contents
    increase our vulnerability to general adverse economic and industry conditions;

 

    require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes, including acquisitions;

 

    limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

 

    place us at a competitive disadvantage compared to our competitors that have less debt; and

 

    limit our ability to borrow additional funds.

In addition, we cannot assure you that we will be able to refinance any of our debt or that we will be able to refinance our debt on commercially reasonable terms. If we were unable to make payments or refinance our debt or obtain new financing under these circumstances, we would have to consider other options, such as:

 

    sales of assets;

 

    sales of equity; or

 

    negotiations with our lenders to restructure the applicable debt.

Our debt instruments may restrict, or market or business conditions may limit, our ability to use some of our options.

Despite our significant indebtedness levels, we may still be able to incur substantially more debt, which could further exacerbate the risks associated with our substantial leverage.

We and our subsidiaries may be able to incur substantial additional indebtedness in the future. The terms of the credit agreements that govern the ABL Facility and the Term Loan Facilities (collectively, the “Senior Secured Credit Facilities”) and the indentures that govern the NAI Notes (as defined herein), the Safeway Notes (as defined herein) and the 2024 Notes permit us to incur significant additional indebtedness, subject to certain limitations. If new indebtedness is added to our and our subsidiaries’ current debt levels, the related risks that we and they now face would intensify. See “Description of Indebtedness.”

Our debt instruments limit our flexibility in operating our business.

Our debt instruments contain various covenants that limit our and our restricted subsidiaries’ ability to engage in specified types of transactions, including, among other things:

 

    incur additional indebtedness or provide guarantees in respect of obligations of other persons, or issue disqualified or preferred stock;

 

    pay dividends on, repurchase or make distributions in respect of our capital stock or make other restricted payments;

 

    prepay, redeem or repurchase debt;

 

    make loans, investments and capital expenditures;

 

    sell or otherwise dispose of certain assets;

 

    incur liens;

 

    engage in sale and leaseback transactions;

 

    restrict dividends, loans or asset transfers from our subsidiaries;

 

38


Table of Contents
    consolidate, merge, sell or otherwise dispose of all or substantially all of our assets;

 

    enter into a new or different line of business; and

 

    enter into certain transactions with our affiliates.

A breach of any of these covenants could result in a default under our debt instruments. In addition, any debt agreements we enter into in the future may further limit our ability to enter into certain types of transactions. In addition, the restrictive covenants in the revolving portion of our Senior Secured Credit Facilities require us, in certain circumstances, to maintain a specific fixed charge coverage ratio. Our ability to meet that financial ratio can be affected by events beyond our control, and we cannot assure you that we will meet it. A breach of this covenant could result in a default under our Senior Secured Credit Facilities. Moreover, the occurrence of a default under our Senior Secured Credit Facilities could result in an event of default under our other indebtedness. Upon the occurrence of an event of default under our Senior Secured Credit Facilities, the lenders could elect to declare all amounts outstanding under our Senior Secured Credit Facilities to be immediately due and payable and terminate all commitments to extend further credit. Even if we are able to obtain new financing, it may not be on commercially reasonable terms, or terms that are acceptable to us. See “Description of Indebtedness.”

We may not have the ability to raise the funds necessary to finance the change of control offer required by the indentures governing the 2016 Safeway Notes, the 2017 Safeway Notes, the 2019 Safeway Notes, the 2020 Safeway Notes, the 2021 Safeway Notes (each as defined herein) and the 2024 Notes (collectively, the “CoC Notes”).

Upon the occurrence of certain kinds of change of control events, we will be required to offer to repurchase outstanding CoC Notes at 101% of the principal amount thereof plus accrued and unpaid interest to the date of repurchase. However, it is possible that we will not have sufficient funds at the time of the change of control to make the required repurchase of the CoC Notes or that restrictions in our debt instruments will not allow such repurchases. Our failure to purchase the tendered notes would constitute an event of default under the indentures governing the CoC Notes which, in turn, would constitute a default under our Senior Secured Credit Facilities. In addition, the occurrence of a change of control would also constitute a default under our Senior Secured Credit Facilities. A default under our Senior Secured Credit Facilities would result in a default under our indentures if the lenders accelerate the debt under our Senior Secured Credit Facilities.

Moreover, our debt instruments restrict, and any future indebtedness we incur may restrict, our ability to repurchase the notes, including following a change of control event. As a result, following a change of control event, we may not be able to repurchase the CoC Notes unless we first repay all indebtedness outstanding under our Senior Secured Credit Facilities and any of our other indebtedness that contains similar provisions, or obtain a waiver from the holders of such indebtedness to permit us to repurchase the CoC Notes. We may be unable to repay all of that indebtedness or obtain a waiver of that type. Any requirement to offer to repurchase the outstanding CoC Notes may therefore require us to refinance our other outstanding debt, which we may not be able to do on commercially reasonable terms, if at all. These repurchase requirements may also delay or make it more difficult for others to obtain control of us.

Substantially all of our assets are pledged as collateral under the Senior Secured Credit Facilities.

As of June 18, 2016, our total indebtedness was approximately $12.4 billion, and after giving effect to the Pre-IPO Refinancing Transactions, this offering and the use of the net proceeds of this offering, our total indebtedness as of June 18, 2016 would have been approximately $10.2 billion on a pro forma

 

39


Table of Contents

basis, including $5.6 billion outstanding under our Senior Secured Credit Facilities. In addition, as of June 18, 2016, we had $617.7 million of outstanding standby letters of credit under our Senior Secured Credit Facilities. Substantially all of our and our subsidiaries’ assets are pledged as collateral for this indebtedness. As of June 18, 2016, and after giving pro forma effect to the Pre-IPO Refinancing Transactions, this offering and the use of the net proceeds of this offering, our revolving credit facilities would have permitted additional borrowings of up to a maximum of $2.5 billion under the borrowing bases as of that date. If we are unable to repay all secured borrowings under our Senior Secured Credit Facilities when due, whether at maturity or if declared due and payable following a default, the trustee or the lenders, as applicable, would have the right to proceed against the collateral pledged to secure the indebtedness and may sell the assets pledged as collateral in order to repay those borrowings, which could have a material adverse effect on our business, financial condition, results of operations or cash flows.

Increases in interest rates and/or a downgrade of our credit ratings could negatively affect our financing costs and our ability to access capital.

We have exposure to future interest rates based on the variable rate debt under our credit facilities and to the extent we raise additional debt in the capital markets to meet maturing debt obligations, to fund our capital expenditures and working capital needs and to finance future acquisitions. Daily working capital requirements are typically financed with operational cash flow and through the use of various committed lines of credit. The interest rate on these borrowing arrangements is generally determined from the inter-bank offering rate at the borrowing date plus a pre-set margin. Although we employ risk management techniques to hedge against interest rate volatility, significant and sustained increases in market interest rates could materially increase our financing costs and negatively impact our reported results.

We rely on access to bank and capital markets as sources of liquidity for cash requirements not satisfied by cash flows from operations. A downgrade in our credit ratings from the internationally recognized credit rating agencies could negatively affect our ability to access the bank and capital markets, especially in a time of uncertainty in either of those markets. A rating downgrade could also impact our ability to grow our business by substantially increasing the cost of, or limiting access to, capital.

Risks Related to This Offering and Owning Our Common Stock

There is no existing market for our common stock, and we do not know if one will develop to provide you with adequate liquidity. If the stock price fluctuates after this offering, you could lose a significant part of your investment.

Prior to this offering, there has not been a public market for our common stock. We cannot predict the extent to which investor interest in our company will lead to the development of an active trading market on the NYSE or otherwise or how liquid that market might become. If an active trading market does not develop, you may have difficulty selling shares of our common stock that you buy. The initial public offering price for the shares will be determined by negotiations between us and the underwriters and may not be indicative of prices that will prevail in the open market following this offering. The market price of our common stock may be influenced by many factors, some of which are beyond our control, including:

 

    the failure of securities analysts to cover our common stock after this offering, or changes in financial estimates by analysts;

 

    changes in, or investors’ perception of, the food and drug retail industry;

 

40


Table of Contents
    the activities of competitors;

 

    future issuances and sales of our common stock, including in connection with acquisitions;

 

    our quarterly or annual earnings or those of other companies in our industry;

 

    the public’s reaction to our press releases, our other public announcements and our filings with the SEC;

 

    regulatory or legal developments in the United States;

 

    litigation involving us, our industry, or both;

 

    general economic conditions; and

 

    other factors described elsewhere in these “Risk Factors.”

As a result of these factors, you may not be able to resell your shares of our common stock at or above the initial offering price. In addition, the stock market often experiences extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of a particular company. These broad market fluctuations and industry factors may materially reduce the market price of our common stock, regardless of our operating performance.

The Cerberus-led Consortium controls us and may have conflicts of interest with other stockholders in the future.

After the completion of this offering, and assuming an offering of 65,306,122 shares by us, the Cerberus-led Consortium will indirectly control approximately 80.3% of our common stock. As a result, the Cerberus-led Consortium will continue to be able to control the election of our directors, determine our corporate and management policies and determine, without the consent of our other stockholders, the outcome of any corporate transaction or other matter submitted to our stockholders for approval, including potential mergers or acquisitions, asset sales and other significant corporate transactions. Eight of our 12 directors are either employees of, or advisors to, members of the Cerberus-led Consortium, as described under “Management.” The Cerberus-led Consortium, through Albertsons Investor and Kimco, will also have sufficient voting power to amend our organizational documents. The interests of the Cerberus-led Consortium may not coincide with the interests of other holders of our common stock. Additionally, Cerberus and the members of the Cerberus-led Consortium are in the business of making investments in companies and may, from time to time, acquire and hold interests in businesses that compete directly or indirectly with us. Cerberus and the members of the Cerberus-led Consortium may also pursue, for its own members’ accounts, acquisition opportunities that may be complementary to our business, and as a result, those acquisition opportunities may not be available to us. So long as the Cerberus-led Consortium continues to own a significant amount of the outstanding shares of our common stock through Albertsons Investor and Kimco, the Cerberus-led Consortium will continue to be able to strongly influence or effectively control our decisions, including potential mergers or acquisitions, asset sales and other significant corporate transactions.

We will incur increased costs as a result of being a publicly traded company.

After the completion of this offering, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Sarbanes-Oxley Act of 2002, as amended (the “Sarbanes-Oxley Act”), the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and the rules and regulations of the stock market on which our common stock is traded. Being subject to these rules and regulations will result in additional legal, accounting and financial compliance costs, will make some activities more difficult, time-consuming and costly and may also place significant strain on management, systems and resources.

 

41


Table of Contents

These laws and regulations also could make it more difficult or costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. These laws and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as our executive officers. Furthermore, if we are unable to satisfy our obligations as a public company, we could be subject to delisting of our common stock, fines, sanctions and other regulatory action and potentially civil litigation.

We are a “controlled company” within the meaning of the NYSE rules and, as a result, will qualify for, and intend to rely on, exemptions from certain corporate governance requirements. You will not have the same protections afforded to stockholders of companies that are subject to such requirements.

Upon completion of this offering, Albertsons Investor, Kimco and Management Holdco, as a group, will control a majority of our outstanding common stock. As a result, we are a “controlled company” within the meaning of the NYSE rules. Under the NYSE rules, a company of which more than 50% of the voting power is held by an individual, group or another company is a “controlled company” and may elect not to comply with certain corporate governance requirements, including:

 

    the requirement that a majority of the board of directors consist of independent directors;

 

    the requirement that we have a nominating and corporate governance committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities;

 

    the requirement that we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and

 

    the requirement for an annual performance evaluation of the nominating and corporate governance and compensation committees.

Following this offering, we intend to utilize these exemptions. As a result, we will not have a majority of independent directors nor will our nominating and corporate governance and compensation committees consist entirely of independent directors. Accordingly, you will not have the same protections afforded to stockholders of companies that are subject to all of the NYSE corporate governance requirements.

We are currently not required to meet the standards required by Section 404 of the Sarbanes-Oxley Act (“Section 404”), and failure to meet and maintain effective internal control over financial reporting in accordance with Section 404 could have a material adverse effect on our business, financial condition and results of operations.

As a privately held company, we are not currently required to document or test our compliance with internal controls over financial reporting on a periodic basis in accordance with Section 404. We are in the process of addressing our internal control procedures to satisfy the requirements of Section 404, which requires an annual management assessment of the effectiveness of our internal control over financial reporting. If we are not able to implement the requirements of Section 404 in a timely manner or with adequate compliance, our independent registered public accounting firm may not be able to attest to the effectiveness of our internal control over financial reporting. If we are unable to maintain adequate internal control over financial reporting, we may be unable to report our financial information on a timely basis, may suffer adverse regulatory consequences or violations of applicable stock exchange listing rules and may breach the covenants under our credit facilities. We will be unable to issue securities in the public markets through the use of a shelf registration statement if we

 

42


Table of Contents

are not in compliance with the applicable provisions of Section 404. There could also be a negative reaction in the financial markets due to a loss of investor confidence in us and the reliability of our financial statements.

In addition, we may incur additional costs in order to improve our internal control over financial reporting and comply with Section 404, including increased auditing and legal fees and costs associated with hiring additional accounting and administrative staff.

Provisions in our charter documents, certain agreements governing our indebtedness, the Stockholders’ Agreement (as defined herein) and Delaware law could make an acquisition of us more difficult and may prevent attempts by our stockholders to replace or remove our current management, even if beneficial to our stockholders.

Provisions in our certificate of incorporation and, upon the completion of the IPO-Related Transactions, our bylaws, may discourage, delay or prevent a merger, acquisition or other change in control that some stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares of our common stock. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock, possibly depressing the market price of our common stock.

In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace members of our board of directors. Because our board of directors is responsible for appointing the members of our management team, these provisions could in turn affect any attempt by our stockholders to replace members of our management team. Examples of such provisions are as follows:

 

    from and after such date that Albertsons Investor, Kimco, Management Holdco and their respective Affiliates (as defined in Rule 12b-2 of the Exchange Act), or any person who is an express assignee or designee of Albertsons Investor, Kimco or Management Holdco’s respective rights under our certificate of incorporation (and such assignee’s or designee’s Affiliates) (of these entities, the entity that is the beneficial owner of the largest number of shares is referred to as the “Designated Controlling Stockholder”) ceases to own, in the aggregate, at least 50% of the then-outstanding shares of our common stock (the “50% Trigger Date”), the authorized number of our directors may be increased or decreased only by the affirmative vote of two-thirds of the then-outstanding shares of our common stock or by resolution of our board of directors;

 

    prior to the 50% Trigger Date, only our board of directors and the Designated Controlling Stockholder are expressly authorized to make, alter or repeal our bylaws and, from and after the 50% Trigger Date, our stockholders may only amend our bylaws with the approval of at least two-thirds of all of the outstanding shares of our capital stock entitled to vote;

 

    from and after the 50% Trigger Date, the manner in which stockholders can remove directors from the board will be limited;

 

    from and after the 50% Trigger Date, stockholder actions must be effected at a duly called stockholder meeting and actions by our stockholders by written consent will be prohibited;

 

    from and after such date that Albertsons Investor, Kimco, Management Holdco and their respective Affiliates (or any person who is an express assignee or designee of Albertsons Investor, Kimco or Management Holdco’s respective rights under our certificate of incorporation (and such assignee’s or designee’s Affiliates)) ceases to own, in the aggregate, at least 35% of the then-outstanding shares of our common stock (the “35% Trigger Date”), advance notice requirements for stockholder proposals that can be acted on at stockholder meetings and nominations to our board of directors will be established;

 

43


Table of Contents
    limits on who may call stockholder meetings;

 

    requirements on any stockholder (or group of stockholders acting in concert), other than, prior to the 35% Trigger Date, the Designated Controlling Stockholder, who seeks to transact business at a meeting or nominate directors for election to submit a list of derivative interests in any of our company’s securities, including any short interests and synthetic equity interests held by such proposing stockholder;

 

    requirements on any stockholder (or group of stockholders acting in concert) who seeks to nominate directors for election to submit a list of “related party transactions” with the proposed nominee(s) (as if such nominating person were a registrant pursuant to Item 404 of Regulation S-K, and the proposed nominee was an executive officer or director of the “registrant”); and

 

    our board of directors is authorized to issue preferred stock without stockholder approval, which could be used to institute a “poison pill” that would work to dilute the stock ownership of a potential hostile acquiror, effectively preventing acquisitions that have not been approved by our board of directors.

Our certificate of incorporation authorizes our board of directors to issue up to 30,000,000 shares of preferred stock. The preferred stock may be issued in one or more series, the terms of which may be determined by our board of directors at the time of issuance or fixed by resolution without further action by the stockholders. These terms may include voting rights, preferences as to dividends and liquidation, conversion rights, redemption rights, and sinking fund provisions. The issuance of preferred stock could diminish the rights of holders of our common stock, and therefore could reduce the value of our common stock. In addition, specific rights granted to holders of preferred stock could be used to restrict our ability to merge with, or sell assets to, a third party. The ability of our board of directors to issue preferred stock could delay, discourage, prevent, or make it more difficult or costly to acquire or effect a change in control, thereby preserving the current stockholders’ control.

In addition, under the credit agreements governing our Senior Secured Credit Facilities, a change in control may lead the lenders to exercise remedies such as acceleration of the loan, termination of their obligations to fund additional advances and collection against the collateral securing such loans. Also, under the indentures governing the CoC Notes, a change of control may require us to offer to repurchase all of the CoC Notes for cash at a premium to the principal amount of the CoC Notes.

Furthermore, in connection with this offering, Albertsons Companies, Inc. will enter into the Stockholders’ Agreement with Albertsons Investor, Kimco and Management Holdco. Pursuant to the Stockholders’ Agreement, we will be required to appoint to our Board of Directors individuals designated by Albertsons Investor upon the closing of the IPO-Related Transactions. Pursuant to a limited liability company agreement entered into by the Cerberus-led Consortium, other than Kimco, and certain other individuals who agreed to co-invest with them through Albertsons Investor (the “Albertsons Investor LLC Agreement”), such appointees shall be selected by Albertsons Investor’s board of managers so long as Albertsons Companies, Inc. is a controlled company under the applicable rules of the NYSE. See “Certain Relationships and Related Party Transactions—Albertsons Investor Limited Liability Company Agreement.”

The Stockholders’ Agreement will provide that, except as otherwise required by applicable law, from the date on which (a) Albertsons Companies, Inc. is no longer a controlled company under the applicable rules of the NYSE but prior to the 35% Trigger Date, Albertsons Investor will have the right to designate a number of individuals who satisfy the Director Requirements (as defined herein) equal to one director fewer than 50% of our board of directors at any time and shall cause its directors appointed to our board of directors to vote in favor of maintaining a 13-person board of directors unless the management board

 

44


Table of Contents

of Albertsons Investor otherwise agrees by the affirmative vote of 80% of the management board of Albertsons Investor; (b) a Holder (as defined herein) has beneficial ownership of at least 20% but less than 35% of our outstanding common stock, the Holder will have the right to designate a number of individuals who satisfy the Director Requirements equal to the greater of three or 25% of the size of our board of directors at any time (rounded up to the next whole number); (c) a Holder has beneficial ownership of at least 15% but less than 20% of our outstanding common stock, the Holder will have the right to designate the greater of two or 15% of the size of our board of directors at any time (rounded up to the next whole number); and (d) a Holder has beneficial ownership of at least 10% but less than 15% of our outstanding common stock, it will have the right to designate one individual who satisfies the Director Requirements. The ability of Albertsons Investor or a Holder to appoint one or more directors could make an acquisition of us more difficult and may prevent attempts by our stockholders to replace or remove our current management, even if beneficial to our stockholders.

Our certificate of incorporation designates the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or other employees.

Our certificate of incorporation provides that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will be the exclusive forum for: (a) any derivative action or proceeding brought on our behalf; (b) any action asserting a claim for breach of a fiduciary duty owed by any of our directors, officers, employees or agents to us or our stockholders; (c) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law (the “DGCL”), our certificate of incorporation or our bylaws; or (d) any action asserting a claim governed by the internal affairs doctrine. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock is deemed to have received notice of and consented to the foregoing provisions. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds more favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and employees. Alternatively, if a court were to find this choice of forum provision inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business, financial condition or results of operations.

If a substantial number of shares becomes available for sale and are sold in a short period of time, the market price of our common stock could decline.

If our Existing Owners sell substantial amounts of our common stock in the public market following this offering, the market price of our common stock could decrease. The perception in the public market that our Existing Owners might sell shares of common stock could also create a perceived overhang and depress our market price. Upon completion of this offering, we will have 475,139,081 shares of common stock outstanding of which 409,832,959 shares will be held by our current stockholders. Prior to this offering, we and our Existing Owners will have agreed with the underwriters to a “lock-up” period, meaning that such parties may not, subject to certain exceptions, sell any of their existing shares of our common stock without the prior written consent of representatives of the underwriters for at least 180 days after the date of this prospectus. Pursuant to this agreement, among other exceptions, we may enter into an agreement providing for the issuance of our common stock in connection with the acquisition, merger or joint venture with another publicly traded entity during the 180-day restricted period after the date of this prospectus. In addition, all of our Existing Owners will be subject to the holding period requirement of Rule 144 (“Rule 144”) under the Securities Act, as described in “Shares Eligible for Future Sale.” When the lock-up agreements expire, these shares will become eligible for sale, in some cases subject to the requirements of Rule 144.

 

45


Table of Contents

In addition, the Cerberus-led Consortium, through Albertsons Investor, will have substantial demand and incidental registration rights, as described in “Certain Relationships and Related Party Transactions—Stockholders’ Agreement.” The market price for shares of our common stock may drop when the restrictions on resale by our Existing Owners lapse. We intend to file one or more registration statements on Form S-8 under the Securities Act to register shares of our common stock or securities convertible into or exchangeable for shares of our common stock issued pursuant to our 2015 Equity and Incentive Award Plan (the “2015 Incentive Plan”) and our Restricted Stock Unit Plan (the “Restricted Stock Unit Plan”). Any such Form S-8 registration statements will automatically become effective upon filing. Accordingly, shares registered under such registration statements will be available for sale in the open market. We expect that the initial registration statement on Form S-8 will cover 7.3% of the shares of our common stock. A decline in the market price of our common stock might impede our ability to raise capital through the issuance of additional shares of our common stock or other equity securities.

If equity research analysts do not publish research or reports about our business or if they issue unfavorable commentary or downgrade our common shares, the market price of our common stock could decline.

The trading market for our common shares likely will be influenced by the research and reports that equity and debt research analysts publish about the industry, us and our business. The market price of our common stock could decline if one or more securities analysts downgrade our shares or if those analysts issue a sell recommendation or other unfavorable commentary or cease publishing reports about us or our business. If one or more of the analysts who elect to cover us downgrade our shares, the market price of our common stock would likely decline.

Because we do not intend to pay dividends for the foreseeable future, you may not receive any return on investment unless you sell your common stock for a price greater than that which you paid for it.

We do not intend to pay dividends for the foreseeable future, and our stockholders will not be guaranteed, or have contractual or other rights, to receive dividends. Our board of directors may, in its discretion, modify or repeal our dividend policy. The declaration and payment of dividends depends on various factors, including: our net income, financial condition, cash requirements, future prospects and other factors deemed relevant by our board of directors.

In addition, we are a holding company that does not conduct any business operations of our own. As a result, we are dependent upon cash dividends and distributions and other transfers from our subsidiaries to make dividend payments. Our subsidiaries’ ability to pay dividends is restricted by agreements governing their debt instruments, and may be restricted by agreements governing any of our subsidiaries’ future indebtedness. Furthermore, our subsidiaries are permitted under the terms of their debt agreements to incur additional indebtedness that may severely restrict or prohibit the payment of dividends. See “Description of Indebtedness.”

Under the DGCL, our board of directors may not authorize payment of a dividend unless it is either paid out of our surplus, as calculated in accordance with the DGCL, or if we do not have a surplus, it is paid out of our net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year.

If you purchase shares of common stock sold in this offering, you will experience immediate and substantial dilution.

Our existing stockholders have paid substantially less than the initial public offering price of our common stock. The initial public offering price of our common stock will be substantially higher than the

 

46


Table of Contents

tangible book deficit per share of our outstanding common stock. Assuming an initial public offering price of $24.50 per share, the midpoint of the range on the cover of this prospectus, purchasers of our common stock will effectively incur dilution of $29.38 per share in the net tangible book value of their purchased shares. The shares of our common stock owned by existing stockholders will receive a material decrease in the net tangible book deficit per share. You may experience additional dilution if we issue common stock in the future. As a result of this dilution, you may receive significantly less than the full purchase price you paid for the shares in the event of a liquidation. See “Dilution.”

You may be diluted by the future issuance of additional common stock in connection with our equity incentive plans, acquisitions or otherwise.

After this offering, we will have 524,860,919 shares of common stock authorized but unissued under our certificate of incorporation. We will be authorized to issue these shares of common stock and options, rights, warrants and appreciation rights relating to common stock for consideration and on terms and conditions established by our board of directors in its sole discretion, whether in connection with acquisitions or otherwise. We have reserved up to 7.3% of the shares of our common stock that will be available as of the consummation of this offering for issuance under existing restricted stock unit awards (following the conversion of our outstanding Phantom Unit awards granted under our Phantom Unit Plan (as defined herein)) and for future awards that may be issued under our 2015 Incentive Plan. See “Executive Compensation—Incentive Plans” and “Shares Eligible for Future Sale—Incentive Plans.” Any common stock that we issue, including under our 2015 Incentive Plan or other equity incentive plans that we may adopt in the future, would dilute the percentage ownership held by the investors who purchase common stock in this offering.

In the future, we may also issue our securities, including shares of our common stock, in connection with investments or acquisitions. We regularly evaluate potential acquisition opportunities, including ones that would be significant to us, and we are currently participating in processes regarding several potential acquisition opportunities, including ones that would be significant to us. We cannot predict the timing of any contemplated transactions, and none are currently probable, but any pending transaction could be entered into as soon as shortly after the closing of this offering. The amount of shares of our common stock issued in connection with an investment or acquisition could constitute a material portion of our then-outstanding shares of common stock. Any issuance of additional securities in connection with investments or acquisitions may result in additional dilution to you.

 

47


Table of Contents

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements. All statements other than statements of historical facts contained in this prospectus, including statements regarding our future operating results and financial position, business strategy, and plans and objectives of management for future operations, are forward-looking statements. In many cases, you can identify forward-looking statements by terms such as “may,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential,” or “continue” or the negative of these terms or other similar expressions. Forward-looking statements contained in this prospectus include, but are not limited to, statements about:

 

    the competitive nature of the industry in which we conduct our business;

 

    general business and economic conditions, including the rate of inflation or deflation, consumer spending levels, population, employment and job growth and/or losses in our markets;

 

    failure to successfully integrate Safeway or achieve anticipated synergies from the acquisition and integration of Safeway;

 

    failure to successfully integrate the acquired A&P and Haggen stores or to achieve anticipated synergies from the integration of the acquired stores;

 

    failure to successfully integrate future acquisitions or to achieve anticipated synergies from the integration of future acquisitions;

 

    pricing pressures and competitive factors, which could include pricing strategies, store openings, remodels or acquisitions by our competitors;

 

    our ability to increase identical store sales, expand our own brands, maintain or improve operating margins, revenue and revenue growth rate, control or reduce costs, improve buying practices and control shrink;

 

    labor costs, including benefit plan costs and severance payments, or labor disputes that may arise from time to time and work stoppages that could occur in areas where certain collective bargaining agreements have expired or are on indefinite extensions or are scheduled to expire in the near future;

 

    disruptions in our manufacturing facilities’ or distribution centers’ operations, disruption of significant supplier relationships, or disruptions to our produce or product supply chains;

 

    results of any ongoing litigation in which we are involved or any litigation in which we may become involved;

 

    data security, or the failure of our (or through SuperValu) IT systems;

 

    increased costs as the result of being a public company;

 

    the effects of government regulation;

 

    our ability to raise additional capital to finance the growth of our business, including to fund acquisitions;

 

    our ability to service our debt obligations, and restrictions in our debt agreements;

 

    financing sources;

 

    dividends; and

 

    plans for future growth and other business development activities.

 

48


Table of Contents

We caution you that the foregoing list may not contain all of the forward-looking statements made in this prospectus.

You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this prospectus primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described in the section entitled “Risk Factors” and elsewhere in this prospectus. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this prospectus. We cannot assure you that the results, events and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements.

The forward-looking statements made in this prospectus relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this prospectus to reflect events or circumstances after the date of this prospectus or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make.

 

49


Table of Contents

USE OF PROCEEDS

We will receive net proceeds from the offering of approximately $1,531 million (or approximately $1,763 million if the underwriters exercise their option to purchase additional shares in full), assuming that the common stock is offered at $24.50 per share, the midpoint of the range set forth on the cover page of this prospectus, and after deducting the estimated underwriting discounts and commissions and approximately $13.0 million of our estimated expenses related to this offering. A $1.00 increase (decrease) in the assumed initial public offering price of $24.50 per share would increase (decrease) the net proceeds to us from this offering by approximately $63 million, after deducting the estimated underwriting discounts and commissions and estimated aggregate offering expenses payable by us and assuming no exercise of the underwriters’ option to purchase additional shares and no other change to the number of shares offered by us as set forth on the cover page of this prospectus.

We intend to use the net proceeds from this offering to repay $1,531 million of principal under the Term Loan Facilities.

The Term Loan Agreement was dated as of August 25, 2014 and made effective as of January 30, 2015. The proceeds from the New Term Loans under the Term Loan Agreement refinanced the term loans that were used to finance the Safeway acquisition and pay fees and expenses related to the foregoing. As of June 18, 2016, after giving pro forma effect to the Pre-IPO Refinancing Transactions, approximately $6.5 billion in aggregate principal amount was outstanding under the Term Loan Facilities, which currently bear interest, at our option, at a rate per annum equal to (i) the base rate plus a margin ranging from 2.50% to 2.75% (depending upon the tranche) or (ii) the LIBOR rate (subject to a 1.00% floor) plus a margin ranging from 3.50% to 3.75% (depending upon the tranche). The maturity dates for the Term Loan B-4, the Term Loan B-5 and the Term Loan B-6 (each as defined herein) are August 25, 2021, December 21, 2022 and June 22, 2023, respectively. For more information, see “Description of Indebtedness.”

One or more funds or accounts managed or advised by an investment management affiliate of Guggenheim Securities, LLC are lenders under the Term Loan Facilities and may receive 5% or more of the net proceeds of this offering. See “Underwriting (Conflict of Interest).” Affiliates of Goldman, Sachs & Co., Morgan Stanley & Co. LLC, Wells Fargo Securities, LLC and BMO Capital Markets Corp. are also lenders under the Term Loan Facilities and may receive a portion of the proceeds from this offering that are used to repay borrowings under such facilities.

 

50


Table of Contents

DIVIDEND POLICY

We do not intend to pay dividends for the foreseeable future. We are not required to pay dividends, and our stockholders will not be guaranteed, or have contractual or other rights to receive, dividends. The declaration and payment of any future dividends will be at the sole discretion of our board of directors and will depend upon, among other things, our earnings, financial condition, capital requirements, level of indebtedness, contractual restrictions with respect to the payment of dividends, and other considerations that our board of directors deems relevant. Our board of directors may decide, in its discretion, at any time, to modify or repeal the dividend policy or discontinue entirely the payment of dividends.

The ability of our board of directors to declare a dividend is also subject to limits imposed by Delaware corporate law. Under Delaware law, our board of directors and the boards of directors of our corporate subsidiaries incorporated in Delaware may declare dividends only to the extent of our “surplus,” which is defined as total assets at fair market value minus total liabilities, minus statutory capital, or if there is no surplus, out of net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. See “Risk Factors—Risks Related to This Offering and Owning Our Common Stock—Because we do not intend to pay dividends for the foreseeable future, you may not receive any return on investment unless you sell your common stock for a price greater than that which you paid for it.”

We are a holding company that does not conduct any business operations of our own. As a result, we are dependent upon cash dividends and distributions and other transfers from our subsidiaries to make dividend payments. Following the consummation of the IPO-Related Transactions, Albertsons Companies, Inc. will be subject to restrictions under agreements governing its debt instruments and it and its subsidiaries will be subject to general restrictions imposed on dividend payments under the laws of their jurisdictions of incorporation or organization. See “Risk Factors—Risks Related to Our Indebtedness—Our debt instruments limit our flexibility in operating our business.”

 

51


Table of Contents

IPO-RELATED TRANSACTIONS AND ORGANIZATIONAL STRUCTURE

Our business is currently conducted through our operating subsidiaries, which are wholly-owned by AB Acquisition. The equity interests of AB Acquisition immediately prior to the IPO-Related Transactions were owned (directly and indirectly) by our Existing Owners.

Albertsons Companies, Inc. is a newly formed entity, formed for the purpose of effecting the IPO-Related Transactions and this offering, and has engaged in no business or activities other than in connection with the IPO-Related Transactions and this offering.

In order to effectuate this offering, we expect to effect the following series of transactions prior to and/or concurrently with the closing of this offering, which will result in a reorganization of our business so that it is owned by Albertsons Companies, Inc. (the “IPO-Related Transactions”):

 

    our Existing Owners, other than Kimco and Management Holdco, will contribute all of their direct and indirect equity interests in AB Acquisition to Albertsons Investor, including their interests in NAI Group Holdings and Safeway Group Holdings;

 

    Albertsons Investor, Kimco and Management Holdco will contribute all of their equity interests in AB Acquisition to Albertsons Companies, Inc. in exchange for common stock of Albertsons Companies, Inc.;

 

    NAI Group Holdings, Safeway Group Holdings and other special purpose corporations owned by certain of the Sponsors through which they invested in AB Acquisition will be merged with and into Albertsons Companies, Inc., with Albertsons Companies, Inc. remaining as the surviving corporation in the mergers; and

 

    Certain stores owned by Albertson’s LLC will be contributed to a newly formed subsidiary, Albertson’s Stores Sub LLC, which subsidiary will be distributed to its ultimate owner AB Acquisition, AB Acquisition will transfer all of its equity interests in ACL to Albertsons Companies, Inc. and ACL will be merged with and into Albertsons Companies, Inc. with Albertsons Companies, Inc. remaining as the surviving corporation in the mergers.

As a result of the IPO-Related Transactions and this offering, (i) Albertsons Companies, Inc., the issuer of common stock in this offering, will be a holding company with no material assets other than its ownership of AB Acquisition and its subsidiaries, (ii) an aggregate of 349,832,761, 56,429,497 and 3,570,701 shares of our common stock will be owned by Albertsons Investor, Kimco and Management Holdco, respectively, and such parties will enter the Stockholders’ Agreement with Albertsons Companies, Inc., (iii) our Existing Owners, other than Kimco and Management Holdco, will become holders of equity interests in our controlling stockholder, Albertsons Investor and (iv) the capital stock of Albertsons Companies, Inc. will consist of (y) common stock, entitled to one vote per share on all matters submitted to a vote of stockholders and (z) undesignated and unissued preferred stock. See the section of this prospectus entitled “Description of Capital Stock” for additional information. Investors in this offering will only receive, and this prospectus only describes the offering of, shares of common stock of Albertsons Companies, Inc.

 

52


Table of Contents

The following charts summarize our ownership structure (i) prior to the IPO-Related Transactions and (ii) after giving effect to the IPO-Related Transactions and this offering (before giving effect to dilution from outstanding restricted stock units and assuming no exercise of the underwriters’ option to purchase additional shares).

Ownership Structure Prior to the IPO-Related Transactions

 

 

LOGO

Ownership Structure After Giving Effect to the IPO-Related Transactions

 

LOGO

 

53


Table of Contents

CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization as of June 18, 2016:

 

    on an actual basis; and

 

    on a pro forma basis to reflect the Pre-IPO Refinancing Transactions, the IPO-Related Transactions and the completion of this offering and the application of the estimated net proceeds from this offering, as described in “Use of Proceeds.”

The information below is illustrative only and our capitalization following this offering will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing. You should read this table together with “Selected Historical Financial Information of AB Acquisition” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations of AB Acquisition” and our consolidated financial statements and related notes included elsewhere in this prospectus.

 

     As of June 18, 2016  
     Actual      Pro Forma(7)  
     (dollars in millions)  

Cash and cash equivalents

   $ 1,476.2       $ 700.6   
  

 

 

    

 

 

 

Debt, including current maturities, net of debt discounts and deferred financing costs(1)

     

ABL Facility(2)

   $ 261.0       $ 561.0   

Term Loan Facilities

     6,616.3         4,765.0   

Secured Notes

     585.6        

  

2024 Notes

     1,235.8         1,235.8   

Safeway Notes(3)

     1,450.5         1,450.5   

NAI Notes(4)

     1,532.4         1,532.4   

Capital leases

     1,042.8         1,042.8   

Other notes payable, unsecured(5)

     165.5         165.5   

Other debt(6)

     23.0         23.0   
  

 

 

    

 

 

 

Total Debt

   $ 12,912.9       $ 10,776.0   
  

 

 

    

 

 

 

Stockholders’ equity:

     

Common stock, $0.01 par value; no shares authorized, no shares issued and outstanding on an actual basis; 1,000,000,000 shares authorized, 475,139,081 shares issued and outstanding on a pro forma basis

             4.8   

Additional paid-in capital

     

Members’ investment

     1,963.3         3,489.5   

Accumulated other comprehensive loss

     (134.5)         (134.5)   

Accumulated deficit

     (375.6)         (501.3)   
  

 

 

    

 

 

 

Total stockholders’ equity

   $ 1,453.2       $ 2,858.5   
  

 

 

    

 

 

 

Total capitalization

   $ 14,366.1       $ 13,634.5   
  

 

 

    

 

 

 

 

(1) Debt discounts and deferred financing costs totaled $331.4 million and $165.7 million, respectively, on an actual basis and $336.5 million and $164.5 million, respectively, on a pro forma basis as of June 18, 2016.
(2) As of June 18, 2016, on an actual basis, the ABL Facility provided for a $4,000.0 million revolving credit facility. As of June 18, 2016, on an actual basis, the aggregate borrowing base on the credit facility was approximately $3,655.1 million, which was reduced by (i) $617.7 million of outstanding standby letters of credit and (ii) a $261.0 million outstanding loan balance and $5.4 million of interest, resulting in a net borrowing base availability of approximately $2,771.0 million. See “Description of Indebtedness—ABL Facility.”

 

54


Table of Contents
(3) Consists of the 2016 Safeway Notes, 2017 Safeway Notes, 2019 Safeway Notes, 2020 Safeway Notes, 2021 Safeway Notes, 2027 Safeway Notes and 2031 Safeway Notes (each as defined herein).
(4) Consists of the NAI Medium-Term Notes, 2026 NAI Notes, 2029 NAI Notes, 2030 NAI Notes and 2031 NAI Notes (each as defined herein).
(5) Consists of unsecured build-to-suit PDC-related obligations and the ASC Notes (as defined herein).
(6) Consists of mortgage notes payable.
(7) A $1.00 increase (decrease) in the assumed initial public offering price of $24.50 per share (the midpoint of the price range set forth on the cover of this prospectus) would increase (decrease) additional paid-in capital by $63 million, increase (decrease) long-term debt by $63 million and increase (decrease) total stockholders’ equity by $63 million, assuming no exercise of the underwriters’ option to purchase additional shares and assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remained the same and after deducting the underwriting discount and estimated offering expenses payable by us. Similarly, a one million share increase (decrease) in the number of shares offered by us, as set forth on the cover of this prospectus, would increase (decrease) additional paid-in capital by $23 million, increase (decrease) long-term debt by $23 million and increase (decrease) total stockholders’ equity by $23 million, assuming no exercise of the underwriters’ option to purchase additional shares and assuming the initial public offering price of $24.50 per share (the midpoint of the price range set forth on the cover of this prospectus) remained the same and after deducting the underwriting discount and estimated offering expenses payable by us. The above assumes that any resulting change in net proceeds increases or decreases, as applicable, the amount used to repay indebtedness.

 

55


Table of Contents

DILUTION

Purchasers of the common stock in this offering will suffer an immediate dilution. Dilution is the amount by which the price paid by the purchasers of common stock in this offering will exceed the net tangible book deficit per share of common stock immediately after this offering.

Our historical net tangible book deficit at June 18, 2016 was $(3,725) million, or $(9.09) per share of common stock. Net tangible book deficit per share represents our total assets, excluding goodwill, intangibles, net, and deferred financing costs of $74 million included in other assets (related to our asset based loan facilities), less total liabilities, excluding deferred financing costs of $166 million included as a reduction of long term debt, divided by the number of shares of common stock outstanding as of June 18, 2016.

After giving effect to the Pre-IPO Refinancing Transactions, the IPO-Related Transactions and the completion of this offering, assuming an initial public offering price of $24.50 per share, the midpoint of the range on the cover of this prospectus, and the application of the net proceeds therefrom as described in this prospectus, our net tangible book deficit as of June 18, 2016 would have been $(2,318) million, or $(4.88) per share of common stock. This represents an immediate decrease in net tangible book deficit to existing stockholders of $4.21 per share of common stock and an immediate dilution to new investors of $29.38 per share of common stock. The following table illustrates this per share dilution:

 

Assumed initial public offering price per share

   $ 24.50  

Historical net tangible book deficit per share as of June 18, 2016(1)

   $ (9.09)   

Decrease in net tangible book deficit per share attributable to investors in this offering

   $ 4.21   

Pro forma net tangible book deficit per share after this offering

     $(4.88)   

Dilution per share to new investors

   $ 29.38   

 

(1) Based on the historical book deficit of the company as of June 18, 2016 divided by the number of shares of common stock expected to be issued in the IPO-Related Transactions but before giving effect to this offering.

A $1.00 increase or decrease in the assumed initial public offering price of $24.50 per share, the midpoint of the range on the cover of this prospectus, would increase or decrease our net tangible book deficit by $63 million, the net tangible book deficit per share of common stock after this offering by $0.13 per share of common stock, and the dilution per share of common stock to new investors by $0.87 per share of common stock, assuming that the number of shares offered by us, as set forth on the front cover of this prospectus (assuming that the IPO-Related Transactions had taken place), remains the same and after deducting the commissions and discounts and estimated offering expenses payable by us.

The following table summarizes, on the pro forma basis set forth above as of June 18, 2016, the difference between the total cash consideration paid and the average price per share paid by existing stockholders and the purchasers of common stock in this offering with respect to the number of shares of common stock purchased from us, before deducting estimated underwriting discounts, commissions and offering expenses payable by us.

 

     Shares Purchased     Total Consideration     Average Price
Per Share
 
     Number      Percent     Amount      Percent    

Existing stockholders

     409,832,959         86.3   $ 1,154,796,135         41.9   $ 2.82   

Purchasers of common stock in this offering

     65,306,122         13.7   $ 1,600,000,000         58.1   $ 24.50  
  

 

 

    

 

 

   

 

 

    

 

 

   

Total

     475,139,081         100.0   $ 2,754,796,135         100.0   $ 5.80  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

56


Table of Contents

A $1.00 increase or decrease in the assumed initial public offering price of $24.50 per share, the midpoint of the range on the cover of this prospectus, would increase or decrease total consideration paid by new investors and total consideration paid by all stockholders by $63 million, assuming that the number of shares offered by us, as set forth on the front cover of this prospectus (assuming that the IPO-Related Transactions had taken place), remains the same and after deducting the commissions and discounts and estimated offering expenses payable by us. An increase or decrease of 1.0 million shares in the number of shares offered by us from the number of shares set forth on the cover page of this prospectus would increase or decrease the total consideration paid to us by new investors and total consideration paid to us by all stockholders by $23 million, assuming the assumed initial public offering price of $24.50 per share, the midpoint of the range on the cover of this prospectus, remains the same and after deducting the commissions and discounts and estimated offering expenses payable by us.

The tables above are based on 475,139,081 shares of common stock outstanding as of June 18, 2016 (assuming that the IPO-Related Transactions had taken place) and assume an initial public offering price of $24.50 per share, the midpoint of the range on the cover of this prospectus.

The tables above do not give effect to our reservation of up to 7.3% of the shares of our common stock that will be available as of the consummation of this offering for issuance under existing restricted stock unit awards (following the conversion of our outstanding Phantom Unit awards granted under our Phantom Unit Plan) and for future awards that may be issued under our 2015 Incentive Plan. Any common stock that we issue, including under our 2015 Incentive Plan or other equity incentive plans that we may adopt in the future, would further dilute the percentage ownership held by the investors who purchase common stock in this offering.

If the underwriters exercise their option to purchase additional shares from us, the following will occur:

 

    the pro forma percentage of shares of our common stock held by existing stockholders will decrease to approximately 84.5% of the total number of pro forma shares of our common stock outstanding after this offering; and

 

    the pro forma number of shares of our common stock held by new public investors will increase to 75,102,040, or approximately 15.5% of the total pro forma number of shares of our common stock outstanding after this offering.

 

57


Table of Contents

SELECTED HISTORICAL FINANCIAL INFORMATION OF AB ACQUISITION

The information below should be read along with “Unaudited Pro Forma Condensed Consolidated Financial Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations of AB Acquisition,” “Business” and the historical financial statements and accompanying notes included elsewhere in this prospectus. Our historical results set forth below are not necessarily indicative of results to be expected for any future period.

The selected consolidated financial information set forth below is derived from AB Acquisition’s annual consolidated financial statements for the periods indicated below, including the consolidated balance sheets at February 27, 2016 and February 28, 2015 and the related consolidated statements of operations and comprehensive (loss) income and cash flows for the 53-week period ended February 28, 2015 and each of the 52-week periods ended February 27, 2016 and February 20, 2014 and notes thereto appearing elsewhere in this prospectus. The data for the first quarter of fiscal 2016 and the first quarter of fiscal 2015 is derived from our unaudited condensed consolidated financial statements included elsewhere in this prospectus and which, in the opinion of management, include all adjustments necessary for a fair statement of the results of the applicable interim periods.

 

    First Quarter                                

(in millions)

  Fiscal
2016
    Fiscal
2015
    Fiscal
2015
    Fiscal
2014(1)
    Fiscal
2013(2)
    Fiscal
2012
    Fiscal
2011
 

Results of Operations

             

Net sales and other revenue

  $ 18,391.7      $ 18,051.0      $ 58,734.0      $ 27,198.6      $ 20,054.7      $ 3,712.0      $ 3,746.4   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

  $ 5,121.0      $ 4,918.2      $ 16,061.7      $ 7,502.8      $ 5,399.0      $ 937.7      $ 890.1   

Selling and administrative expenses

    4,921.6        4,821.3        15,660.0        8,152.2        5,874.1        899.0        860.2   

Bargain purchase gain

                                (2,005.7              
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    199.4        96.9        401.7        (649.4     1,530.6        38.7        29.9   

Interest expense, net

    313.7        283.8        950.5        633.2        390.1        7.2        7.3   

Other (income) expense

    (4.8     (4.6     (7.0     96.0                        
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes

    (109.5     (182.3     (541.8     (1,378.6     1,140.5        31.5        22.6   

Income tax expense (benefit)

    24.1        (29.0     (39.6     (153.4     (572.6     1.7        1.5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations, net of tax

    (133.6     (153.3     (502.2     (1,225.2     1,713.1        29.8        21.1   

Income from discontinued operations, net of tax

                                19.5        49.2        51.3   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

  $ (133.6   $ (153.3   $ (502.2   $ (1,225.2   $ 1,732.6      $ 79.0      $ 72.4   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance Sheet Data (at end of period)

             

Cash and equivalents

  $ 1,476.2      $ 989.3      $ 579.7      $ 1,125.8      $ 307.0      $ 37.0      $ 61.3   

Total assets

    24,426.9        24,469.4        23,770.0        25,678.3        9,281.0        586.1        612.5   

Total members’ equity (deficit)

    1,453.2        2,064.0        1,613.2        2,168.5        1,759.6        (247.2     (276.1

Total debt, including capital leases

    12,912.9        12,145.3        12,226.3        12,569.0        3,694.2        120.2        136.7   

 

(1) Includes results from four weeks for the stores purchased in the Safeway acquisition on January 30, 2015.
(2) Includes results from 48 weeks for the stores purchased in the NAI acquisition on March 21, 2013 and eight weeks for the stores purchased in the United acquisition on December 29, 2013.

 

58


Table of Contents

SUPPLEMENTAL SELECTED HISTORICAL FINANCIAL INFORMATION OF SAFEWAY

You should read the information set forth below along with “Unaudited Pro Forma Condensed Consolidated Financial Information” and Safeway’s historical consolidated financial statements and related notes included elsewhere in this prospectus.

The supplemental selected historical financial information of Safeway set forth below has been derived from Safeway’s historical consolidated financial statements. Safeway’s historical consolidated financial statements as of January 3, 2015 and December 28, 2013 and for the fiscal years ended January 3, 2015, December 28, 2013 and December 29, 2012 have been included in this prospectus.

 

(in millions)

   Fiscal
2014
    Fiscal
2013
    Fiscal
2012
    Fiscal
2011
 

Results of Operations

        

Net sales and other revenue

   $ 36,330.2      $ 35,064.9      $ 35,161.5      $ 34,655.7   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

   $ 9,682.0      $ 9,231.5      $ 9,229.1      $ 9,277.7   

Operating & administrative expense

     (9,147.5     (8,680.0     (8,593.7     (8,628.8
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     534.5        551.5        635.4        648.9   

Interest expense

     (198.9     (273.0     (300.6     (268.1

Loss on extinguishment of debt

     (84.4     (10.1              

Loss on foreign currency translation

     (131.2     (57.4              

Other income, net

     45.0        40.6        27.4        17.2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     165.0        251.6        362.2        398.0   

Income taxes

     (61.8     (34.5     (113.0     (68.5
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations, net of tax

     103.2        217.1        249.2        329.5   

Income from discontinued operations, net of tax(1)

     9.3        3,305.1        348.9        188.7   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income before allocation to noncontrolling interests

     112.5        3,522.2        598.1        518.2   

Noncontrolling interests

     0.9        (14.7     (1.6     (1.5
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 113.4      $ 3,507.5      $ 596.5      $ 516.7   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) See Note B to Safeway’s historical consolidated financial statements included elsewhere in this prospectus.

 

59


Table of Contents

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION

The unaudited pro forma condensed consolidated financial information presents AB Acquisition’s unaudited pro forma condensed consolidated balance sheet as of June 18, 2016 and unaudited pro forma condensed consolidated statement of continuing operations for the 52 weeks ended February 27, 2016 (“fiscal 2015”) and the 16 weeks ended June 18, 2016 based upon the consolidated historical financial statements of AB Acquisition, after giving effect to the following transactions (collectively the “Transactions”):

 

    the divestiture of certain stores required by the FTC that was a condition of closing the Safeway acquisition;

 

    the Pre-IPO Refinancing Transactions;

 

    the IPO-Related Transactions; and

 

    the issuance of 65,306,122 shares of common stock in the initial public offering of Albertsons Companies, Inc. and the application of $1,531 million of the net proceeds from the sale of such shares (assuming the midpoint of the price range set forth on the cover page of this prospectus) to repay certain indebtedness as described in “Use of Proceeds” (the “IPO Transactions”).

The unaudited pro forma condensed consolidated balance sheet gives effect to the Transactions as if they had occurred on June 18, 2016. The unaudited pro forma condensed consolidated statement of continuing operations for fiscal 2015 and the 16 weeks ended June 18, 2016 gives effect to the Transactions as if they had been consummated on March 1, 2015, the first day of fiscal 2015.

AB Acquisition’s historical financial and operating data for fiscal 2015 and the 16 weeks ended June 18, 2016 is derived from its audited consolidated financial statements for fiscal 2015 and the unaudited condensed consolidated financial statements for the 16 weeks ended June 18, 2016, respectively.

The unaudited pro forma condensed consolidated financial information is prepared in accordance with Article 11 of Regulation S-X, using the assumptions set forth in the notes to the unaudited pro forma condensed consolidated financial information. The unaudited pro forma condensed consolidated financial information includes adjustments that give effect to events that are directly attributable to the transactions described above, are factually supportable and, with respect to our statement of operations, are expected to have a continuing impact.

The unaudited pro forma condensed consolidated financial information is provided for informational purposes only and is not necessarily indicative of the operating results that would have occurred if the Transactions had been completed as of the dates set forth above, nor is it indicative of the future results of the company.

The unaudited pro forma condensed consolidated financial information should be read in conjunction with the consolidated financial statements of AB Acquisition.

 

60


Table of Contents

AB ACQUISITION LLC AND SUBSIDIARIES

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF CONTINUING OPERATIONS

52 WEEKS ENDED FEBRUARY 27, 2016

(in millions except share and per share amounts)

 

     AB
Acquisition
LLC
    Pro Forma
Adjustments for
Safeway
Acquisition(2)
    Pro Forma
Adjustments
for Pre-IPO
Refinancing
Transactions(3)
    Pro Forma
Adjustments for
IPO-Related
Transactions(4)
    Pro Forma
Adjustments
for IPO
Transactions(5)
    AB
Acquisition
LLC Pro

Forma
 
     52 Weeks
Ended
February 27,
2016
                            52 Weeks
Ended
February 27,
2016
 

Net sales and other revenue

   $ 58,734.0      $ (444.5 )2(a)   

$

    —

  

  $      $      $ 58,289.5   

Cost of sales

     42,672.3        (310.5 )2(a)                           42,361.8   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     16,061.7        (134.0                          15,927.7   

Selling and administrative expenses

     15,660.0        (110.9 )2(a)                           15,549.1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     401.7        (23.1                          378.6   

Interest expense, net

     950.5               (53.5 )3(a)             (73.3 )5(a)      823.7   

Other income

     (7.0                                 (7.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations before income taxes

     (541.8     (23.1     53.5               73.3        (438.1

Income tax (benefit) expense

     (39.6     (3.2     8.0 3(b)      (163.3 )4(a)      28.4 5(c)      (169.7
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income from continuing operations

   $ (502.2   $ (19.9   $ 45.5      $ 163.3      $ 44.9      $ (268.4
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma loss per share, continuing operations Basic and diluted

             $ (0.56 )4(b) 

Pro forma weighted average shares outstanding Basic and diluted

               475,139,081 4(b) 

 

61


Table of Contents

AB ACQUISITION LLC AND SUBSIDIARIES

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED

STATEMENT OF CONTINUING OPERATIONS

16 WEEKS ENDED June 18, 2016

(in millions except share and per share amounts)

 

    AB
Acquisition
LLC
    Pro Forma
Adjustments for
Pre-IPO Refinancing
Transactions(3)
    Pro Forma
Adjustments for
IPO-Related
Transactions(4)
    Pro Forma
Adjustments

for IPO
Transactions(5)
    AB
Acquisition
LLC Pro
Forma
 
    16 Weeks
Ended
June 18,

2016
                      16 Weeks
Ended

June 18,
2016
 

Net sales and other revenue

  $ 18,391.7      $      $      $      $ 18,391.7   

Cost of sales

    13,270.7                             13,270.7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    5,121.0                             5,121.0   

Selling and administrative expenses

    4,921.6                             4,921.6   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    199.4                             199.4   

Interest expense, net

    313.7        (16.5 )3(a)             (22.6 )5(a)      274.6   

Other income

    (4.8                          (4.8
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations before income taxes

    (109.5     16.5               22.6        (70.4

Income tax expense (benefit)

    24.1        2.5 3(b)      (62.6 )4(a)      8.8 5(c)      (27.2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income from continuing operations

  $ (133.6   $ 14.0      $ 62.6      $ 13.8      $ (43.2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma loss per share, continuing operations

         

Basic and diluted

          $ (0.09 )5(b) 

Pro forma weighted average shares outstanding

         

Basic and diluted

            475,139,081 5(b) 

 

62


Table of Contents

AB ACQUISITION LLC AND SUBSIDIARIES

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET

AS OF JUNE 18, 2016

(in millions)

 

     AB Acquisition
LLC
     Pro Forma
Adjustments for
Pre-IPO
Refinancing
Transactions (3)
    Pro Forma
Adjustments for
IPO-Related
Transactions(4)
    Pro Forma
Adjustments for IPO
Transactions(5)
    AB
Acquisition
LLC
Pro Forma
 

Assets

           

Current assets

           

Cash and cash equivalents

   $ 1,476.2       $ (775.6 )3(c)    $      $      $ 700.6   

Receivables, net

     620.6                              620.6   

Inventories, net

     4,419.3                              4,419.3   

Other current assets

     351.7                              351.7   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

     6,867.8         (775.6                   6,092.2   

Property and equipment, net

     11,729.4                              11,729.4   

Intangible assets, net

     3,785.8                              3,785.8   

Goodwill

     1,152.3                              1,152.3   

Other assets

     891.6                              891.6   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL ASSETS

   $ 24,426.9       $ (775.6   $      $      $ 23,651.3   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities and Members’/Stockholders’ Equity

           

Current liabilities

           

Accounts payable and accrued liabilities

   $ 3,831.1       $ (44.0 )3(d)    $      $      $ 3,787.1   

Current maturities of long-term debt and capitalized lease obligations

     849.4         (585.6 )3(e)                    263.8   

Other current liabilities

     1,167.4                              1,167.4   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

     5,847.9         (629.6                   5,218.3   

Long-term debt and capitalized lease obligations

     12,063.5         (34.3 )3(f)             (1,517.0 )5(d)      10,512.2   
           

Deferred income taxes

     1,360.5                              1,360.5   

Other long-term liabilities

     3,701.8                              3,701.8   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL LIABILITIES

     22,973.7         (663.9            (1,517.0     20,792.8   

Commitments and contingencies

           

Members’ equity

     1,453.2                (1,453.2 )4(b)               

Stockholders’ equity

             (111.7 )3(g)      1,453.2 4(b)      1,531.0 5(e)      2,872.5   
            (14.0 )5(f)      (14.0
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL MEMBERS’ / STOCKHOLDERS’ EQUITY

     1,453.2         (111.7            1,517.0        2,858.5   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL LIABILITIES AND MEMBERS’/STOCKHOLDERS’ EQUITY

   $ 24,426.9       $ (775.6   $      $      $ 23,651.3   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

63


Table of Contents

1. Basis of Presentation

The historical financial information of AB Acquisition was derived from financial statements included elsewhere in this prospectus. The historical financial information has been adjusted to give pro forma effect to events that are (i) directly attributable to the transactions being reflected, (ii) factually supportable, and (iii) with respect to the unaudited pro forma condensed consolidated statements of continuing operations, expected to have a continuing impact on the consolidated results.

2. Pro Forma for the Safeway Acquisition

The Safeway acquisition was accounted for in accordance with Accounting Standards Codification 805, Business Combinations, with AB Acquisition considered the acquirer of Safeway for accounting purposes. The Safeway acquisition closed on January 30, 2015, and, therefore, the fair value of the assets acquired and liabilities assumed are already reflected in AB Acquisition’s historical condensed consolidated balance sheet as of June 18, 2016. Safeway is also included in the historical operating results for the 52 weeks ended February 27, 2016 and the 16 weeks ended June 18, 2016. The unaudited pro forma condensed consolidated statement of continuing operations for the 52 weeks ended February 27, 2016 reflects the adjustments as if the FTC divestiture occurred on March 1, 2015, the first day of fiscal 2015.

The pro forma adjustments in fiscal 2015 related to the FTC-mandated divestitures in connection with the Safeway acquisition consist of the following:

 

  (a) FTC divestiture

In connection with the Safeway acquisition, ACL (as successor to Albertson’s Holdings LLC), together with Safeway, announced that they entered into agreements to sell 111 Albertsons and 57 Safeway stores across eight states to four separate buyers. Divestiture of these stores was required by the FTC as a condition of closing the Safeway acquisition and was contingent on the completion of the Safeway acquisition. The divestitures were completed by the end of AB Acquisition’s fiscal 2015 first quarter ended June 20, 2015. The pro forma adjustments reflect:

Fiscal 2015:

 

  (i) a reduction in net sales and other revenue of $444.5 million and the related reductions in cost of sales of $310.5 million; and

 

  (ii) a decrease in selling and administrative expenses of $110.9 million.

3. Pro Forma Adjustments for Pre-IPO Refinancing Transactions

Unaudited Pro Forma Condensed Consolidated Statement of Continuing Operations

 

  (a) The net pro forma adjustment to interest expense related to the Pre-IPO Refinancing Transactions is driven by the lower average interest rates as a result of the Pre-IPO Refinancing Transactions, partially offset by higher average borrowings. The interest expense included in the unaudited pro forma condensed consolidated financial information reflects a weighted average interest rate of 7.3% (including amortization of debt discounts and deferred financing costs).

 

  (b) The net pro forma adjustment to income tax (benefit) expense reflects the tax effect of the pro forma adjustment to interest expense related to the debt that is attributable to Safeway by applying a blended federal and state statutory tax rate of 39.6%.

 

64


Table of Contents

Unaudited Pro Forma Condensed Consolidated Balance Sheet

 

  (c) The pro forma adjustment to cash and cash equivalents represents the net cash used to consummate the Pre-IPO Refinancing Transactions.

 

  (d) The pro forma adjustment to accounts payable and accrued liabilities represents the payment of accrued interest in connection with the Pre-IPO Refinancing Transactions.

 

  (e) The pro forma adjustment to current maturities of long-term debt and capitalized lease obligations represents repayment of the Secured Notes, net of $24.0 million of deferred finance and original issue discount costs that will be written off in connection with the Pre-IPO Refinancing Transactions.

 

  (f) The pro forma adjustment to long-term debt and capitalized lease obligations primarily represents payments of deferred finance costs and original issue discounts paid in connection with the Pre-IPO Refinancing Transactions.

 

  (g) The pro forma adjustment to stockholders’ equity represents the impact to retained earnings for the loss on early extinguishment of debt of $87.7 million and write-off of $24.0 million of deferred finance costs and original issue discount in connection with the Redemption.

4. Pro Forma Adjustments for IPO-Related Transactions

Unaudited Pro Forma Condensed Consolidated Statement of Continuing Operations

 

  (a) As part of the IPO-Related Transactions, all of our operating subsidiaries will become subsidiaries of Albertsons Companies, Inc., a Delaware corporation, and as a result all of our operations will be taxable as part of a consolidated group for federal income tax purposes. The pro forma adjustment to Income tax (benefit) expense is derived by applying a combined federal and state statutory tax rate of 38.7% to the pro forma pre-tax earnings of the company, which assumes that all of the AB Acquisition entities are taxable as a group for federal and state income tax purposes. The pro forma adjustment is effective March 1, 2015 for the unaudited pro forma condensed consolidated statements of continuing operations for fiscal 2015 and the 16 weeks ended June 18, 2016.

Unaudited Pro Forma Condensed Consolidated Balance Sheet

 

  (b) As part of the IPO-Related Transactions, all of our operating subsidiaries will become subsidiaries of Albertsons Companies, Inc., a Delaware corporation. The pro forma adjustments to members’ equity and stockholders’ equity represent the creation of share capital, paid in capital and retained earnings upon the corporate reorganization and the elimination of the historical membership equity. Upon the corporate reorganization, the outstanding units will be exchanged into 409,832,959 shares of common stock.

5. Pro Forma Adjustments for IPO Transactions

Unaudited Pro Forma Condensed Consolidated Statement of Continuing Operations

 

  (a)

The pro forma adjustment to interest expense, net represents the decrease to pro forma interest expense related to the application of $1,531.0 million of the net proceeds to us from the sale of such shares to repay certain indebtedness as described in “Use of Proceeds” as if these events had occurred on March 1, 2015, the first day of fiscal 2015, for the unaudited pro forma condensed consolidated statements of continuing operations. The interest expense included in the unaudited pro forma condensed consolidated financial information

 

65


Table of Contents
  reflects a weighted average interest rate of 7.3% (including amortization of debt discounts and deferred financing costs).

 

  (b) Pro forma and supplemental pro forma net loss per weighted average basic and diluted shares outstanding gives effect to the exchange of all our outstanding units into shares of our common stock as part of the IPO-Related Transactions and the issuance of 65,306,122 shares in this offering, based on an assumed initial public offering price of $24.50 per share (the midpoint of the price range set forth on the cover of this prospectus).

 

  (c) The pro forma adjustment to income tax (benefit) expense is derived by applying a combined federal and state statutory tax rate of 38.7% to the pro forma adjustment to interest expense.

No adjustment has been made to the unaudited pro forma condensed consolidated statement of continuing operations or the unaudited pro forma condensed consolidated balance sheet to reflect the $27.5 million in management fees to be paid in full upon the closing of this offering. See “Certain Relationships and Related Party Transactions—AB Acquisition LLC Agreement Management Fees.”

Unaudited Pro Forma Condensed Consolidated Balance Sheet

The unaudited pro forma condensed consolidated balance sheet of AB Acquisition as of June 18, 2016 reflects the Pre-IPO Refinancing Transactions, the IPO Transactions and the IPO-Related Transactions, including the pro forma effects of the issuance of shares of common stock and the application of $1,531.0 million of the net proceeds from the sale of such shares to repay certain indebtedness as described in “Use of Proceeds” as if these events had occurred on June 18, 2016, as follows:

 

  (d) The pro forma adjustment to long-term debt and capitalized lease obligations represents repayments of the long-term portion of certain debts outstanding with proceeds from this offering, net of the $14.0 million write off of deferred financing costs and debt discounts in connection with the repayment of indebtedness under the Term Loan Agreement.

 

  (e) The pro forma adjustments to stockholders’ equity represent (i) the issuance of shares of common stock in this offering to fund the debt repayments discussed above and (ii) the deduction of the estimated underwriting discounts and commissions and estimated offering expenses.

 

  (f) The pro forma adjustment to stockholders’ equity represents the impact to retained earnings for the write off of deferred financing costs and debt discounts incurred as a result of the debt repayments.

The following tables represent the long-term debt being repaid with the net proceeds from this offering and, on a pro forma basis, the amount of scheduled repayments remaining under the applicable debt instruments, including the scheduled maturities of such debt instruments and excluding deferred financing costs and debt discount of $14.0 million:

 

Debt Instrument

   Amount
(in millions)
 

Term Loan Facilities

   $ 1,531.0   
  

 

 

 

Total debt repayments

   $ 1,531.0   
  

 

 

 

 

Debt Instrument (in millions)

  2016     2017     2018     2019     2020     Thereafter     Total  

Long-term debt maturities, excluding capital lease obligations, deferred financing costs and debt discounts

  $ 122.7      $ 207.5      $ 80.2      $ 339.6      $ 769.1      $ 8,715.1      $ 10,234.2   

 

66


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF AB ACQUISITION

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with “Selected Historical Financial Information of AB Acquisition,” “Unaudited Pro Forma Condensed Consolidated Financial Information” and our consolidated financial statements and related notes included elsewhere in this prospectus. This discussion contains forward-looking statements based upon current expectations that involve numerous risks and uncertainties, including those described in the “Risk Factors” section of this prospectus. Our actual results may differ materially from those contained in any forward-looking statements.

Our last three fiscal years consisted of the 52-week period ended February 27, 2016, the 53-week period ended February 28, 2015 and the 52-week period ended February 20, 2014. Our fiscal 2014 results include four weeks of Safeway’s financial results from January 31, 2015 through February 28, 2015. Comparability is affected by income and expense items that vary significantly between and among the periods, including as a result of our acquisition of Safeway during the fourth quarter of fiscal 2014, the acquisition of NAI in fiscal 2013 and an extra week in fiscal 2014.

Business Overview

We are one of the largest food and drug retailers in the United States, with strong local presence and national scale. Over the past four years, we have completed a series of acquisitions that has significantly increased our portfolio of stores. We operated 2,311, 2,271, 2,382, 1,075 and 192 stores as of June 18, 2016, February 27, 2016, February 28, 2015, February 20, 2014 and February 21, 2013, respectively. In addition, as of June 18, 2016, we operated 380 adjacent fuel centers, 29 dedicated distribution centers and 18 manufacturing facilities. Our operations are predominantly located in the Western, Southern, Midwest, Northeast, and Mid-Atlantic regions of the United States under the banners Albertsons, Safeway, Jewel-Osco, Vons, Shaw’s, Star Market, Acme, Tom Thumb, Pavilions, Carrs, Randalls, United Supermarkets, Market Street, Amigos, United Express, Haggen and Sav-On and are reported in a single reportable segment.

Our operations and financial performance are affected by U.S. economic conditions such as macroeconomic conditions, credit market conditions and the level of consumer confidence. While the combination of improved economic conditions, the trend towards lower unemployment, higher wages and lower gasoline prices have contributed to improved consumer confidence, there is continued uncertainty about the strength of the economic recovery. If the current economic situation does not continue to improve or if it weakens, or if gasoline prices rebound, consumers may reduce spending, trade down to a less expensive mix of products or increasingly rely on food discounters, all of which could impact our sales growth. In addition, consumers’ perception or uncertainty related to the economic recovery and future fuel prices could also dampen overall consumer confidence and reduce demand for our product offerings. Both inflation and deflation affect our business. Food deflation could reduce sales growth and earnings, while food inflation could reduce earnings. Several food items and categories experienced price deflation in 2015, and several items, such as beef and eggs, are forecasted to experience price deflation in 2016. We are unable to predict if the economy will continue to improve or predict the rate at which the economy may improve or the direction of gasoline prices. If the economy does not continue to improve or if it weakens or fuel prices increase, our business and results of operations could be adversely affected.

We currently expect to achieve approximately $800 million of annual synergies by the end of fiscal 2018, with associated one-time costs of approximately $1.1 billion, or approximately $690 million, net of estimated synergy-related asset sale proceeds. Inclusion of the projected synergies in this

 

67


Table of Contents

prospectus should not be viewed as a representation that we in fact will achieve this annual synergy target by the end of fiscal 2018, or at all. In addition, although we achieved synergies from the Safeway acquisition of approximately $250 million during fiscal 2015, and we currently expect to achieve synergies of approximately $575 million during fiscal 2016, or approximately $650 million on an annual run-rate basis by the end of fiscal 2016, the inclusion of these expected synergy targets in this prospectus should not be viewed as a representation that we will in fact achieve these synergies by the end of fiscal 2016, or at all. To the extent we fail to achieve these synergies, our results of operations may be impacted, and any such impact may be material.

We have identified various synergies including corporate and division overhead savings, our own brands, vendor funds, the conversion of Albertsons and NAI onto Safeway’s IT systems, marketing and advertising cost reduction and operational efficiencies within our back office, distribution and manufacturing organizations. Actual synergies, the expenses and cash required to realize the synergies and the sources of the synergies could differ materially from these estimates, and we cannot assure you that we will achieve the full amount of synergies on the schedule anticipated, or at all, or that these synergy programs will not have other adverse effects on our business. In light of these significant uncertainties, you should not place undue reliance on our estimated synergies.

Total debt, including both the current and long-term portions of capital lease obligations, decreased by $342.7 million to $12.2 billion as of the end of fiscal 2015 as compared to $12.6 billion at the end of fiscal 2014. The decrease in fiscal 2015 was primarily due to payments on long-term borrowings of $903.4 million, partially offset by proceeds from the issuance of long-term debt of $453.5 million, the proceeds of which were used primarily to fund the A&P Transaction. Our substantial indebtedness could have important consequences for you. For example it could: adversely affect the market price of our common stock; increase our vulnerability to general adverse economic and industry conditions; require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes, including acquisitions; limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; place us at a competitive disadvantage compared to our competitors that have less debt; and limit our ability to borrow additional funds. See “—Debt Management.” For fiscal 2015, our interest expense was approximately $950.5 million. We have exposure to future interest rates based on the variable rate debt under our credit facilities and to the extent we raise additional debt in the capital markets to meet maturing debt obligations, to fund our capital expenditures and working capital needs and to finance future acquisitions. Daily working capital requirements are typically financed with cash flow from operations and through the use of various committed lines of credit. The interest rate on these borrowing arrangements is generally determined from the London Inter-Bank Offering Rate (“LIBOR”) at the borrowing date plus a pre-set margin. We manage our exposure to interest rate fluctuations through the use of interest rate swaps. Although we employ risk management techniques to hedge against interest rate volatility, significant and sustained increases in market interest rates could materially increase our financing costs and negatively impact our reported results. The interest rates we pay on borrowings under the Senior Secured Credit Facilities are dependent on LIBOR. We believe a 100 basis point increase on our variable interest rates would not have a material impact on our interest expense. We rely on access to bank and capital markets as sources of liquidity for cash requirements not satisfied by cash flows from operations. A downgrade in our credit ratings from the internationally recognized credit rating agencies could negatively affect our ability to access the bank and capital markets, especially in a time of uncertainty in either of those markets. A rating downgrade could also impact our ability to grow our business by substantially increasing the cost of, or limiting access to, capital.

In fiscal 2016, we expect to spend approximately $1,075 million for capital expenditures, or approximately 1.8% of our fiscal 2015 sales, including approximately 200 upgrade and remodel projects, 13 new stores and integration-related capital expenditures in connection with the A&P

 

68


Table of Contents

Transaction and the Haggen Transaction and excluding approximately $325 million of Safeway integration-related capital expenditures. For additional information on our capital expenditures, see the table under the caption “Projected Fiscal 2016 Capital Expenditures” contained in “Liquidity and Financial Resources.”

Reflecting consumer preferences, we have a significant focus on perishable products. Sales of perishable products accounted for approximately 40.3% of our total sales in fiscal 2015 and approximately 40.3% of our total sales in the first quarter of fiscal 2016. We could suffer significant perishable product inventory losses and significant lost revenue in the event of the loss of a major supplier or vendor, disruption of our distribution network, extended power outages, natural disasters or other catastrophic occurrences. See “Risks Related to Our Business and Industry—Our stores rely heavily on sales of perishable products, and product supply disruptions may have an adverse effect on our profitability and operating results.”

We employed a diverse workforce of approximately 282,000, 274,000, 265,000 and 123,000 associates as of June 18, 2016, February 27, 2016, February 28, 2015 and February 20, 2014, respectively. As of February 27, 2016, approximately 164,000 of our employees were covered by collective bargaining agreements. During fiscal 2016, collective bargaining agreements covering approximately 87,000 employees are scheduled to expire. If, upon the expiration of such collective bargaining agreements, we are unable to negotiate acceptable contracts with labor unions, it could increase our operating costs and disrupt our operations.

A considerable number of our employees are paid at rates related to the federal minimum wage. Additionally, many of our stores are located in states, including California, where the minimum wage is greater than the federal minimum wage and where a considerable number of employees receive compensation equal to the state’s minimum wage. For example, as of June 18, 2016, we employed approximately 71,000 associates in California, where the current minimum wage was recently increased to $10.00 per hour effective January 1, 2016 and will gradually increase to $15.00 per hour from January 1, 2017 to January 1, 2022. In Maryland, where we employed approximately 9,000 associates as of June 18, 2016, the minimum wage was recently increased to $8.25 per hour, and will gradually increase to $10.10 per hour by July 1, 2018. Moreover, municipalities may set minimum wages above the applicable state standards. For example, the minimum wage in Seattle, Washington, where we employed approximately 2,100 associates as of June 18, 2016, was recently increased to $11.00 per hour, and will increase to $15.00 per hour effective January 1, 2017 for employers with more than 500 employees nationwide. In Chicago, Illinois, where we employed approximately 5,800 associates as of June 18, 2016, the minimum wage was recently increased to $10.00 per hour, and will gradually increase to $13.00 per hour by July 1, 2019. Any further increases in the federal minimum wage or the enactment of state or local minimum wage increases could also increase our labor costs, which may adversely affect our results of operations and financial condition.

We participate in various multiemployer pension plans for substantially all employees represented by unions that require us to make contributions to these plans in amounts established under collective bargaining agreements. In fiscal 2015, we contributed $379.8 million to multiemployer pension plans, and in fiscal 2016, we expect to contribute approximately $400 million to multiemployer pension plans, subject to collective bargaining conditions. Based on an assessment of the most recent information available, the company believes that most of the multiemployer plans to which it contributes are underfunded. As of February 27, 2016, our estimate of the company’s share of the underfunding of multiemployer plans to which it contributes was approximately $3.2 billion. The company’s share of underfunding described above is an estimate and could change based on the results of collective bargaining efforts, investment returns on the assets held in the plans, actions taken by trustees who manage the plans’ benefit payments, interest rates, if the employers currently contributing to these plans cease participation, and requirements under the PPA, the Multiemployer Pension Reform Act of 2014 and applicable provisions of

 

69


Table of Contents

the Code. Additionally, underfunding of the multiemployer plans means that, in the event we were to exit certain markets or otherwise cease making contributions to these plans, we could trigger a substantial withdrawal liability. See “Risks Related to Our Business and Industry—Increased pension expenses, contributions and surcharges may have an adverse impact on our financial results.”

Acquisitions

Haggen Transaction

During the fourth quarter of fiscal 2014, in connection with the acquisition of Safeway, the company announced that it had entered into agreements to sell 168 stores as required by the FTC as a condition of closing the Safeway acquisition. The company sold 146 of these stores to Haggen. On September 8, 2015, Haggen commenced a case under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware. After receiving FTC and state attorneys general clearance, and Bankruptcy Court approval, during the fourth quarter of fiscal 2015, the company re-acquired 35 stores from Haggen for an aggregate purchase price of approximately $33 million.

Haggen also secured Bankruptcy Court approval for bidding procedures for the sale of 29 additional stores. On March 25, 2016, we entered into a purchase agreement to acquire the 29 additional stores, which included 15 stores originally sold to Haggen as part of the FTC divestitures, and certain trade names and other intellectual property, for an aggregate purchase price of approximately $114 million. The second phase of the Haggen Transaction was completed in fiscal 2016.

A&P Transaction

In the fourth quarter of fiscal 2015, our indirect wholly owned subsidiary, Acme Markets, completed its acquisition of 73 stores from A&P. The purchase price for the 73 stores, including the cost of acquired inventory, was $292.7 million. The acquired stores, which are principally located in the northern New York City suburbs, northern New Jersey and the greater Philadelphia area, are complementary to Acme Markets’ existing store and distribution base and were re-bannered as Acme stores. During the third quarter of fiscal 2015, NAI entered into an amendment to its pre-existing term loan agreement and borrowed an additional $300 million thereunder, the proceeds of which were used to fund the balance of the purchase price. We refer to this acquisition as the “A&P Transaction.”

Safeway Acquisition

On January 30, 2015, the company completed its acquisition of Safeway by acquiring all of the outstanding shares of Safeway for cash consideration of $34.92 per share or $8,263.5 million and issuing contingent value rights with an estimated fair value of $1.03 and $0.05 per share relating to Safeway’s 49% interest in Casa Ley and deferred consideration related to Safeway’s previous sale of the PDC assets, respectively, for an aggregate fair value of $270.9 million. At the time of the Safeway acquisition, Safeway operated 1,325 retail food stores under the banners Safeway, Vons, Tom Thumb, Pavilions, Randalls and Carrs located principally in California, Hawaii, Oregon, Washington, Alaska, Colorado, Arizona, Texas, and the Mid-Atlantic region. In addition, at the time of the Safeway acquisition, Safeway had 353 fuel centers, 15 distribution centers and 19 manufacturing facilities.

United Acquisition

On December 29, 2013, we acquired United Supermarkets for $362.1 million in cash, expanding our presence in North and West Texas, in a transaction that offered significant synergies and added a differentiated upscale store format, “Market Street,” to the Albertsons portfolio. At the time of the United acquisition, United operated 51 traditional, specialty and Hispanic retail food stores under its United

 

70


Table of Contents

Supermarkets, Market Street and Amigos banners, seven convenience stores and 26 fuel centers under its United Express banner and three distribution centers. United is located in 30 markets across North and West Texas.

NAI Acquisition

On March 21, 2013, the company acquired all of the issued and outstanding shares of NAI from SuperValu pursuant to a stock purchase agreement for a total purchase consideration of $253.6 million, including $69.9 million of working capital adjustments, and assumed debt and capital lease obligations with a carrying value prior to the acquisition date of $3.2 billion. The purchase consideration was primarily cash and a short-term payable that was fully paid as of February 20, 2014. At the time of the NAI acquisition, NAI operated 871 retail food stores under its Jewel-Osco, Acme, Shaw’s, Star Market and Albertsons banners, primarily located in the Northeast, Midwest, Mid-Atlantic and Western regions of the United States. In addition, we acquired NAI’s 10 distribution centers.

The following table shows stores operated, acquired, opened, divested and closed during the periods presented:

 

     First
Quarter
of
Fiscal
2016
  Fiscal
2015
    Fiscal
2014(2)
    Fiscal
2013(3)
 

Stores, beginning of period

     2,271        2,382        1,075        192   

Acquired(1)

     56        74        1,330        926   

Divested

            (153     (15       

Opened

     2        7        4        2   

Closed

     (18     (39     (12     (45
  

 

 

 

 

 

 

   

 

 

   

 

 

 

Stores, end of period

     2,311        2,271        2,382        1,075   
  

 

 

 

 

 

 

   

 

 

   

 

 

 

 

(1) Excludes acquired stores not yet re-opened as of the end of each respective period.
(2) Primarily includes the 1,325 stores acquired through the Safeway acquisition on January 30, 2015.
(3) Stores acquired during this period include 871 stores acquired through the NAI acquisition on March 21, 2013, four stores acquired from Vons REIT, Inc. on October 10, 2013, and 51 stores acquired through the United acquisition on December 29, 2013.

Our Strategy

Our operating philosophy is simple: we run great stores with a relentless focus on sales growth. We believe there are significant opportunities to grow sales and enhance profitability and free cash flow, through execution of the following strategies:

Continue to Drive Identical Store Sales Growth.    Consistent with our operating playbook, we plan to deliver identical store sales growth by implementing the following initiatives:

 

    Enhancing and Upgrading Our Fresh, Natural and Organic Offerings and Signature Products.    We continue to enhance and upgrade our fresh, natural and organic offerings across our meat, produce, service deli and bakery departments to meet the changing tastes and preferences of our customers. We also believe that continued innovation and expansion of our high-volume, high-quality and differentiated signature products will contribute to stronger sales growth.

 

71


Table of Contents
    Expanding Our Own Brand Offerings.    We continue to drive sales growth and profitability by extending our own brand offering across our banners, including high-quality and recognizable brands such as O Organics, Open Nature, Eating Right and Lucerne.

 

    Leveraging Our Effective and Scalable Loyalty Programs.    We believe we can grow basket size and improve the shopping experience for our customers by expanding our just for U, MyMixx and fuel-based loyalty programs. In addition, we believe we can further enhance our merchandising and marketing programs by utilizing our customer analytics capabilities, including advanced digital marketing and mobile applications, and through the expansion of our online and home delivery options.

 

    Capitalizing on Demand for Health and Wellness Services.    We intend to leverage our portfolio of 1,780 pharmacies and our growing network of wellness clinics to capitalize on increasing customer demand for health and wellness services. Pharmacy customers are among our most loyal, and their average weekly spend is over 2.5x that of our non-pharmacy customers. We plan to continue to grow our pharmacy script counts through new patient prescription transfer programs and initiatives such as clinic, hospital and preferred network partnerships, which we believe will expand our access to patients. We believe that these efforts will drive sales growth and generate customer loyalty.

 

    Continuously Evaluating and Upgrading Our Store Portfolio.    We plan to pursue a disciplined capital allocation strategy to upgrade, remodel and relocate stores to attract customers to our stores and to increase store volumes. We believe that our store base is in excellent condition, and we have developed a remodel strategy that is both cost-efficient and effective.

 

    Driving Innovation.    We intend to drive traffic and sales growth through constant innovation. We will remain focused on identifying emerging trends in food and sourcing new and innovative products. We will also seek to build new, and enhance existing, customer relationships through our digital capabilities.

 

    Sharing Best Practices Across Divisions.    Our division leaders collaborate closely to ensure the rapid sharing of best practices. Recent examples include the expansion of our O Organics offering across banners, the accelerated roll-out of signature products such as Albertsons’ fresh fruit and vegetables cut in-store as well as a broader assortment and new fixtures for our wine and floral shops, implementing Safeway’s successful strategy across many of our banners.

We believe the combination of these actions and initiatives, together with the attractive industry trends described in more detail under “Business—Our Industry,” will continue to drive identical store sales growth. At Safeway, prior to our acquisition, the rate of identical store sales growth was 3.0% in fiscal 2014 and, following our acquisition, accelerated in fiscal 2015 and the first quarter of fiscal 2016 to 5.0% and 3.9%, respectively.

Enhance Our Operating Margin.    Our focus on identical store sales growth provides an opportunity to enhance our operating margin by leveraging our fixed costs. We plan to realize further margin benefit through added scale from partnering with vendors and by achieving efficiencies in manufacturing and distribution. In addition, we maintain a disciplined approach to expense management and budgeting.

Implement Our Synergy Realization Plan.    We are currently executing on an annual synergy plan of approximately $800 million from the acquisition of Safeway, which we expect to achieve by the end of fiscal 2018, with associated one-time costs of approximately $1.1 billion, or approximately $690 million (net of estimated synergy-related asset sale proceeds). During fiscal 2015, we achieved synergies from the Safeway acquisition of approximately $250 million. Achieved synergies required approximately $175 million of one-time integration-related capital expenditures in fiscal 2015, and

 

72


Table of Contents

anticipated synergies will require approximately $325 million in additional capital expenditures in fiscal 2016. Our detailed synergy plan was developed on a bottom-up, function-by-function basis by combined Albertsons and Safeway teams. The plan includes capturing opportunities from corporate and division cost savings, simplifying business processes and rationalizing headcount. Over time, Safeway’s information technology systems will support all of our stores, distribution centers and systems, including financial reporting and payroll processing, as we wind down our transition services agreement for our Albertsons, Acme, Jewel-Osco, Shaw’s and Star Market stores with SuperValu on a store-by-store basis. We are extending the expansive and high-quality own brand program developed at Safeway across all of our banners. We believe our increased scale will optimize and improve our vendor relationships. We also plan to achieve marketing and advertising savings from lower print, production and broadcast rates in overlapping regions and reduced agency spend. Finally, we intend to consolidate managed care provider reimbursement programs and leverage our combined scale for volume discounts on branded and generic drugs. We expect to achieve synergies from the Safeway acquisition of approximately $575 million in fiscal 2016, or approximately $650 million on an annual run rate basis by the end of fiscal 2016, principally from corporate and division overhead savings, our own brands, vendor funds and marketing and advertising cost reductions. Approximately 80% of our $800 million annual synergy target is independent of sales growth, which we believe significantly reduces the risk of achieving our target.

Selectively Grow Our Store Base Organically and Through Acquisition.    We intend to grow our store base organically through disciplined investment in new stores. We opened seven new stores in fiscal 2015 and expect to open 13 new stores in fiscal 2016. We acquired 73 stores from A&P for our Acme banner and 35 stores from Haggen for our Albertsons banner in fiscal 2015, and we acquired an additional 29 stores from Haggen in fiscal 2016, including 15 stores that operate under the Haggen banner. We evaluate acquisition opportunities on an ongoing basis as we seek to strengthen our competitive position in existing markets or expand our footprint into new markets. We believe our healthy balance sheet and decentralized structure provide us with strategic flexibility and a strong platform to make acquisitions. We believe that our successful track record of integration and synergy delivery provides us with an opportunity to further enhance sales growth, leverage our cost structure and increase profitability and free cash flow through selected acquisitions. Consistent with this strategy, we regularly evaluate potential acquisition opportunities, including ones that would be significant to us, and we are currently participating in processes regarding several potential acquisition opportunities, including ones that would be significant to us. Certain of our acquisitions may involve the issuance of shares of our common stock. We cannot predict the timing of any contemplated transactions, and none are currently probable, but any pending transaction could be entered into as soon as shortly after closing this offering.

 

73


Table of Contents

Results of Operations

The following discussion sets forth certain information and comparisons regarding the components of our consolidated statements of operations for the 16 weeks ended June 18, 2016, the 16 weeks ended June 20, 2015, fiscal 2015, fiscal 2014 and fiscal 2013.

Comparison of 16 Weeks Ended June 18, 2016 to 16 Weeks Ended June 20, 2015:

The following table and related discussion set forth certain information and comparisons regarding the components of our condensed consolidated statements of operations for the 16 weeks ended June 18, 2016 (“first quarter of fiscal 2016”) and June 20, 2015 (“first quarter of fiscal 2015”). As of the end of the first quarter of fiscal 2016 and the first quarter of fiscal 2015, we operated 2,311 and 2,205 stores, respectively.

 

     16 weeks ended
     (Dollars in millions)
     June 18, 2016   % of Sales      June 20, 2015   % of Sales  

Net sales and other revenue

   $ 18,391.7        100.0%       $ 18,051.0        100.0%   

Cost of sales

     13,270.7        72.2%         13,132.8        72.8%   
  

 

 

 

 

 

 

    

 

 

 

 

 

 

 

Gross profit

     5,121.0        27.8%         4,918.2        27.2%   

Selling and administrative expenses

     4,921.6        26.7%         4,821.3        26.7%   
  

 

 

 

 

 

 

    

 

 

 

 

 

 

 

Operating income

     199.4        1.1%         96.9        0.5%   

Interest expense, net

     313.7        1.7%         283.8        1.6%   

Other income

     (4.8     —%         (4.6     (0.1)%   
  

 

 

 

 

 

 

    

 

 

 

 

 

 

 

Loss before income taxes

     (109.5     (0.6)%         (182.3     (1.0)%   

Income tax expense (benefit)

     24.1        0.1%         (29.0     (0.2)%   
  

 

 

 

 

 

 

    

 

 

 

 

 

 

 

Net loss

   $ (133.6     (0.7)%       $ (153.3     (0.8)%   
  

 

 

 

 

 

 

    

 

 

 

 

 

 

 

Identical Store Sales, Excluding Fuel

Identical store sales are defined as stores operating during the same period in both the current year and the prior year, comparing sales on a daily basis, excluding fuel. Acquired stores become identical on the one-year anniversary date of the acquisition. Identical store sales for the 16 weeks ended June 18, 2016 are based on the same 16 weeks ended June 20, 2015 in the current quarter and prior quarter. The stores sold during the first quarter of fiscal 2015 as part of the FTC divestiture process are excluded from identical store sales for the entire first quarter’s 16-week period. Identical store sales increases for the 16 weeks ended June 18, 2016 and the 16 weeks ended June 20, 2015, respectively, were:

 

     16 weeks ended
     June 18,
2016
  June 20,
2015

Identical store sales, excluding fuel(1)

   2.9%   5.1%

 

(1) The acquired Safeway stores became identical on January 30, 2016. The acquired A&P and Haggen stores are not considered identical for any periods presented above.

Our identical stores sales increases were driven by an increase of 0.9% in customer traffic and an increase of 2.0% in average ticket size. We believe the increase in identical store sales was driven by, among other factors, the deployment of the Safeway own brands into our Albertsons and NAI stores. In

 

74


Table of Contents

addition, during the 16 weeks ended June 18, 2016, we experienced food price deflation in certain categories, primarily in proteins, but also in high volume categories including dairy categories, together with competitive pressure to lower prices in response. We believe these deflationary pressures negatively impacted identical store sales during the first quarter of fiscal 2016 and have continued into the second quarter of fiscal 2016. As a result, we currently expect our identical store sales increases for the second quarter of fiscal 2016 to be less than our identical store sales increases for the first quarter of fiscal 2016.

Net Sales and Other Revenue

Net sales and other revenue increased 1.9% to $18.4 billion for the first quarter of fiscal 2016 from $18.1 billion for the first quarter of fiscal 2015. The increase in sales was driven by increases of $569.6 million from the acquired A&P and Haggen stores and $464.5 million from our 2.9% growth in identical store sales, partially offset by a decline of $444.5 million in sales related to stores sold as part of the FTC divestiture process, $197.5 million in lower fuel sales driven by lower average retail prices, and reduced sales and other revenue primarily related to the closure of 18 stores.

Gross Profit

Gross profit represents the portion of sales and other revenue remaining after deducting the cost of goods sold during the period, including purchase and distribution costs. These costs include inbound freight charges, purchasing and receiving costs, warehouse inspection costs, warehousing costs and other costs associated with our distribution network. Advertising, promotional expenses and vendor allowances are also components of cost of goods sold.

For the first quarter of fiscal 2016, the gross profit margin increased to 27.8% compared to 27.2% for the first quarter of fiscal 2015. Excluding the impact of fuel, the gross profit margin increased 40 basis points. The increase is primarily attributable to synergies achieved as part of the Safeway integration related to the deployment of our own brand products across our Albertsons and NAI stores and improved vendor allowances in the first quarter of fiscal 2016 compared to the first quarter of fiscal 2015. These improvements were partially offset by increases in shrink expense as a percent of sales.

Selling and Administrative Expenses

Selling and administrative expenses consist primarily of store level costs, including wages, employee benefits, rent, depreciation and utilities, in addition to certain back-office expenses related to our corporate and division offices.

Selling and administrative expenses as a percentage of sales was 26.7% for the first quarter of both fiscal 2016 and fiscal 2015. Excluding the impact of fuel, selling and administrative expense decreased 30 basis points as a percent of sales during the first quarter of fiscal 2016 compared to the first quarter of fiscal 2015. The decrease in selling and administrative expense was primarily attributable to lower equity based compensation expense and an increase in gains on property dispositions, partially offset by increased pension and employee benefit costs in addition to higher depreciation and amortization expense. The decrease in equity based compensation expense during the first quarter of fiscal 2016 compared to the first quarter of fiscal 2015 is driven by a charge of $37.6 million during the first quarter of fiscal 2015 related to the modification of an equity award. The increase in pension and employee benefit costs is primarily driven by the $78.9 million settlement charge to net pension expense related to the acquisition of Collington Services, LLC (“Collington”) from C&S Wholesale Grocers, Inc. during the first quarter of fiscal 2016. The increase in depreciation and amortization expense is primarily driven by increases in our gross property and equipment and intangible balances in the first quarter of fiscal 2016 compared to the first quarter of fiscal 2015 related to the acquired A&P and Haggen stores.

 

75


Table of Contents

Interest Expense, Net

Interest expense, net was $313.7 million for the first quarter of fiscal 2016 compared to $283.8 million for the first quarter of fiscal 2015. The increase in interest expense, net was primarily due to higher average borrowings and interest rates during the first quarter of fiscal 2016 compared to the first quarter of fiscal 2015. Interest expense in the first quarter of fiscal 2016 also includes a $15.0 million write off of deferred financing costs and debt discount related to the refinancing transactions described in “Net Cash Provided By (Used In) Financing Activities” below.

Other Income, Net

For the first quarter of fiscal 2016, other income, net was $4.8 million compared to other income, net of $4.6 million for the first quarter of fiscal 2015. Other income, net during the first quarter of fiscal 2016 and the first quarter of fiscal 2015 is primarily driven by changes in the fair value of Casa Ley CVRs, equity in earnings of Casa Ley, and foreign currency translation gains.

Income Taxes

Income tax was an expense of $24.1 million in the first quarter of fiscal 2016 and a benefit of $29.0 million in the first quarter of fiscal 2015, representing effective tax rates of (22.0)% and 15.9%, respectively. The increase in income tax expense for the first quarter of fiscal 2016 as compared to the first quarter of fiscal 2015 reflects a change in the mix of our income (loss) between companies within our affiliated group. We are organized as a partnership, which generally is not subject to entity level tax, and conduct our operations primarily through limited liability companies and Subchapter C corporations. We provide for federal and state income taxes on our Subchapter C corporations, which are subject to entity level tax, and state income taxes on our limited liability companies, where applicable. As such, our effective tax rate can fluctuate from period to period depending on the mix of pre-tax income or loss between our limited liability companies and Subchapter C corporations.

Comparison of Fiscal Year 2015 to Fiscal Year 2014

 

     52 weeks ended
February 27, 2016
    53 weeks ended
February 28, 2015
    52 weeks ended
February 20, 2014
 
     (Dollars
in millions)
    % of Sales     (Dollars
in millions)
    % of Sales     (Dollars
in millions)
    % of Sales  

Net sales and other revenue

   $ 58,734.0        $ 27,198.6        $ 20,054.7     

Cost of sales

     42,672.3        72.7     19,695.8        72.4     14,655.7        73.1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     16,061.7        27.3        7,502.8        27.6        5,399.0        26.9   

Selling and administrative expenses

     15,660.0        26.7        8,152.2        30.0        5,874.1        29.3   

Bargain purchase gain

                                 (2,005.7     (10.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     401.7        0.6        (649.4     (2.4     1,530.6        7.6   

Interest expense, net

     950.5        1.6        633.2        2.3        390.1        1.9   

Other (income) expense

     (7.0            96.0        0.4                 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations before income taxes

     (541.8     (1.0     (1,378.6     (5.1     1,140.5        5.7   

Income tax benefit

     (39.6            (153.4     (0.6     (572.6     (2.8
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations

   $ (502.2     (1.0 )%    $ (1,225.2     (4.5 )%    $ 1,713.1        8.5
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

76


Table of Contents

Identical Store Sales, Excluding Fuel

Identical store sales, on an actual basis, is defined as stores operating during the same period in both the current year and the prior year, comparing sales on a daily basis. Fuel sales are excluded from identical store sales. Acquired stores become identical on the one-year anniversary date of their acquisition. Stores that are open during remodeling are included in identical store sales. Identical store sales results, on an actual basis, for the past three fiscal years were as follows:

 

     Fiscal 2015     Fiscal 2014     Fiscal 2013  

Identical store sales, excluding fuel(1)

     4.4     7.2     1.6
  

 

 

   

 

 

   

 

 

 
(1) The SVU Albertsons Stores and the acquired NAI Stores became identical on March 21, 2014, and the acquired United stores became identical on December 29, 2014. The Safeway stores became identical on January 30, 2016. The stores acquired as part of the A&P Transaction and the Haggen Transaction are not considered identical stores for any periods presented above.

The increase in our fiscal 2015 identical store sales was driven by increases of 2.6% in customer traffic and 1.8% in average ticket size. After adjusting for the positive sales impact in one of our divisions within NAI during the second quarter of fiscal 2014 resulting from a labor dispute at a competitor that caused a temporary closure of its stores, our estimated identical store sales growth for fiscal 2015 would have been 4.8%. We believe the increase in identical store sales was driven by, among other factors, the deployment of the Safeway own brands into our Albertsons and NAI stores and strong increases in growth in our perishable departments.

Operating Results Overview

Loss from continuing operations was $502.2 million in fiscal 2015 and $1,225.2 million in fiscal 2014, an improvement of $723.0 million. This improvement was primarily attributable to an increase in operating income of $1,051.1 million and an increase in other income of $103.0 million partially offset by an increase in interest expense of $317.3 million and a lower income tax benefit of $113.8 million in fiscal 2015 compared to fiscal 2014, as previously described. The improvements in operating income are primarily attributable to the acquired Safeway stores and improved Albertsons and NAI Store operations. In addition, equity-based compensation cost, loss on property dispositions, asset impairments and lease exit costs and the termination of the long-term incentive plans in fiscal 2014 drove reductions in selling and administrative expenses of $246.3 million, $124.4 million and $78.0 million, respectively, in fiscal 2015 compared to fiscal 2014.

Loss from continuing operations was $1,225.2 million in fiscal 2014, and income from continuing operations was $1,713.1 million in fiscal 2013, a decrease of $2,938.3 million. The decrease from fiscal 2013 was primarily attributable to the favorable impact of a bargain purchase gain of $2,005.7 million recognized in fiscal 2013 resulting from the NAI acquisition, the net decrease in fiscal 2014 in our income tax benefit over fiscal 2013 of $419.2 million and increased interest expense in fiscal 2014 of $243.1 million over fiscal 2013. Fiscal 2014 also included the impact of charges relating to equity-based compensation of $344.1 million, an increase in the net loss on property dispositions, asset impairment and lease exit costs of $230.1 million principally as a result of FTC-mandated divestitures in connection with the Safeway acquisition, a net loss on interest rate and commodity hedges of $98.2 million, a net increase from fiscal 2013 in acquisition and integration related costs of $178.5 million and a $78.0 million charge associated with the termination of the company’s long-term incentive plans.

 

77


Table of Contents

Net Sales and Other Revenue

Net sales and other revenue increased $31,535.4 million, or 115.9%, from $27,198.6 million in fiscal 2014 to $58,734.0 million in fiscal 2015. The components of the change in net sales and other revenue for fiscal 2015 were as follows (in millions):

 

     Fiscal 2015  

Net sales and other revenue for fiscal 2014

   $ 27,198.6   

Additional sales due to Safeway acquisition

     32,484.2   

Identical store sales increase of 4.4%

     1,049.3   

Additional sales due to A&P Transaction

     436.3   

Decline in sales from FTC-mandated divestitures of Albertsons stores

     (1,771.3

53rd-week impact

     (443.5

Other(1)

     (219.6
  

 

 

 

Net sales and other revenue for fiscal 2015

   $ 58,734.0   
  

 

 

 

 

(1) Primarily relates to changes in non-identical store sales and other revenue.

The primary increase in sales and other revenue was driven by the stores acquired in the Safeway acquisition for the 48 week period ended January 30, 2016 that were not considered identical on an actual basis. Identical store sales of 4.4% also drove an increase of $1,049.3 million, due to a 2.6% increase in customer traffic and a 1.8% increase in average ticket size during fiscal 2015, as our stores continued to benefit from the implementation of our operating playbook, including the expansion of our own brands and continued enhancement of fresh, natural and organic offerings.

Net sales and other revenue increased $7,143.9 million, or 35.6%, from $20,054.7 million in fiscal 2013 to $27,198.6 million in fiscal 2014. The components of the change in net sales and other revenue for fiscal 2014 were as follows (in millions):

 

     Fiscal 2014  

Net sales and other revenue for fiscal 2013

   $ 20,054.7   

Additional sales due to Safeway acquisition

     2,696.0   

Additional sales due to United acquisition

     1,439.9   

Identical store sales increase of 7.2%

     1,410.7   

Additional sales due to NAI acquisition

     1,357.0   

53rd-week impact

     443.5   

Other(1)

     (203.2
  

 

 

 

Net sales and other revenue for fiscal 2014

   $ 27,198.6   
  

 

 

 

 

(1) Primarily relates to changes in non-identical store sales and other revenue.

Identical store sales of 7.2% increased $1,410.7 million, primarily due to a 6.5% increase in customer traffic during fiscal 2014, as the stores we acquired in the NAI acquisition benefited from the implementation of our operating playbook including improving store layout and conditions, enhanced fresh, natural and organic offerings, improved levels of customer service and selected investment in price.

Gross Profit

Gross profit represents the portion of sales and other revenue remaining after deducting the cost of goods sold during the period, including purchase and distribution costs. These costs include inbound freight charges, purchasing and receiving costs, warehouse inspection costs, warehousing costs and other costs associated with our distribution network. Advertising and promotional expenses are also a component of cost of goods sold. Vendor allowances are classified as a reduction of cost of goods sold.

 

78


Table of Contents

Our gross profit margin decreased 30 basis points to 27.3% in fiscal 2015 compared to 27.6% in fiscal 2014. The decrease was primarily the result of the increase in low-margin fuel sales from the acquired Safeway fuel centers in fiscal 2015 in addition to increased shrink expense as we increased in-stock positions at acquired Safeway and A&P stores. These decreases were partially offset by improved product mix in fiscal 2015 compared to fiscal 2014 which includes the higher overall margins in certain acquired Safeway stores across several of our divisions and lower LIFO expense as a percent of sales in fiscal 2015 compared to fiscal 2014.

 

Fiscal 2015 vs. Fiscal 2014

   Basis point
increase

(decrease)
 

Improved product mix

     33   

Lower LIFO expense

     11   

Impact of fuel

     (57

Higher shrink expense

     (15

Other

     (2
  

 

 

 

Total

     (30
  

 

 

 

Our gross profit margin increased 70 basis points to 27.6% in fiscal 2014 from 26.9% in fiscal 2013, primarily driven by improvements in shrink and improved leverage of fixed warehouse cost over a larger store base. During fiscal 2013, we increased in-stock positions in fresh product to fully stock the stores we acquired from SuperValu to improve customer perception of the acquired stores in advance of increased customer traffic, resulting in higher shrink levels throughout fiscal 2013, especially in the first and second quarters of fiscal 2013.

During fiscal 2014, customer traffic to our acquired stores increased resulting in reduced shrink levels as a result of increased turnover of products.

 

Fiscal 2014 vs. Fiscal 2013

   Basis point
increase
(decrease)
 

Improvements in shrink

     46   

Warehouse cost

     33   

Lower advertising expense

     8   

Increased LIFO expense

     (10

Other

     (7
  

 

 

 

Total

     70   
  

 

 

 

Selling and Administrative Expenses

Selling and administrative expenses consist primarily of store level costs, including wages, employee benefits, rent, depreciation and utilities, in addition to certain back-office expenses related to our corporate and division offices.

 

79


Table of Contents

Selling and administrative expenses decreased 330 basis points to 26.7% of net sales and other revenue in fiscal 2015 from 30.0% in fiscal 2014.

 

Fiscal 2015 vs. Fiscal 2014

   Basis point
increase

(decrease)
 

Equity-based compensation

     (111

Acquisition and integration costs, including the charge to terminate the long-term incentive plans

     (100

Impact of fuel

     (78

Property dispositions, asset impairment and lease exit costs

     (66

Legal and professional fees

     (23

Depreciation and amortization

     14   

Debit and credit card fees

     14   

Other

     20   
  

 

 

 

Total

     (330
  

 

 

 

Fiscal 2014 results included only four weeks of Safeway results. The company incurred significant equity-based compensation and acquisition and integration costs in fiscal 2014, improving the basis point comparison between fiscal 2015 and fiscal 2014. The increase in low-margin fuel sales from the acquired Safeway fuel centers also reduced the selling and administrative expenses as a percentage of sales in fiscal 2015 compared to fiscal 2014. In addition, the FTC-mandated divestitures in fiscal 2014 resulted in increased impairment charges. These reductions in selling and administrative expense margin in fiscal 2015 were partially offset by higher depreciation and amortization expense as a result of the application of acquisition accounting and increased debit and credit card fees as a result of chargebacks from EMV chip card transactions following the EMV Liability Shift.

Selling and administrative expenses increased 70 basis points to 30.0% of net sales and other revenue in fiscal 2014 from 29.3% in fiscal 2013:

 

Fiscal 2014 vs. Fiscal 2013

   Basispoint
increase
(decrease)
 

Equity-based compensation

     123   

Acquisition and integration costs, including the charge to terminate the long-term incentive plans

     89   

Property dispositions, asset impairment and lease exit costs

     78   

Employee-related costs

     (88

Depreciation and amortization

     (68

Rent and occupancy

     (29

Legal and professional fees

     (18

Other

     (17
  

 

 

 

Total

     70   
  

 

 

 

The Safeway acquisition resulted in additional equity-based compensation and increased acquisition and integration costs. In addition, the FTC-mandated divestitures resulted in increased impairment charges. These increases were offset by reductions in selling and administrative expense as a percentage of sales that were largely driven by increased sales from acquired stores and strong identical store sales.

 

80


Table of Contents

Interest Expense, Net

Interest expense was $950.5 million in fiscal 2015, $633.2 million in fiscal 2014 and $390.1 million in fiscal 2013. Interest expense in fiscal 2015 increased, reflecting the full fiscal year impact of increased borrowings to finance the Safeway acquisition.

The following details our components of interest expense for the respective fiscal years (in millions):

 

     Fiscal 2015     Fiscal 2014      Fiscal 2013  

ABL facility, senior secured notes, term loans, notes and debentures

   $ 777.0      $ 454.1       $ 246.0   

Capital lease obligations

     97.0        77.5         63.3   

Loss on extinguishment of debt

                    49.1   

Amortization and write off of deferred financing costs

     69.3        65.3         25.1   

Amortization and write off of debt discount

     12.9        6.8         1.3   

Other interest (income) expense

     (5.7     29.5         5.3   
  

 

 

   

 

 

    

 

 

 

Total interest expense, net

   $ 950.5      $ 633.2       $ 390.1   
  

 

 

   

 

 

    

 

 

 

At February 27, 2016, the company had total debt, including capital lease obligations, outstanding of $12.2 billion. The weighted average interest rate during the year was 7.4%, including amortization of debt discounts and deferred financing costs. The weighted average interest rate during 2014 and 2013 was 7.3% and 8.4%, respectively.

Other (Income) Expense

For fiscal 2015, other income, net was $7.0 million in income, primarily driven by equity in the earnings of our unconsolidated affiliate, Casa Ley. For fiscal 2014, Other expense, net was $96.0 million, driven by the loss on our deal-contingent interest rate swap. In April 2014, we entered into a deal-contingent interest rate swap to hedge against adverse fluctuations in the interest rate on anticipated variable rate debt planned to be incurred to finance the Safeway acquisition. Prior to the Safeway acquisition, the swap was treated as an economic hedge with changes in fair value recorded through earnings. Upon closing of the Safeway acquisition, the interest rate swap was designated as a cash flow hedge, with any subsequent changes in fair value being recorded through accumulated other comprehensive income. We did not have other income or expense in fiscal 2013.

Income Taxes

Income tax was a benefit of $39.6 million in fiscal 2015, $153.4 million in fiscal 2014 and $572.6 million in fiscal 2013. A substantial portion of the businesses and assets were held and operated by limited liability companies during these periods, which generally are not subject to entity-level federal or state income taxation. The decrease in the tax benefit is primarily the result of lower pre-tax loss in fiscal 2015 as compared to fiscal 2014. The income tax benefit of $39.6 million in fiscal 2015 is primarily driven by tax benefit from operating results of Safeway and NAI, both of which are subject to federal and state income taxes, reduced by a valuation allowance established against current losses of NAI. The income tax benefit of $153.4 million in fiscal 2014 is primarily driven by the tax benefits from the operating results of Safeway and NAI, reduced by nondeductible acquisition-related transaction costs and equity-based compensation. The income tax benefit of $572.6 million in fiscal 2013 is the result of the bargain purchase gain related to the NAI acquisition not being subject to income taxes; the effects of the accounting for income taxes related to the intercompany sale of the Albertsons banners from NAI to Albertson’s LLC immediately after the NAI acquisition; and the operating loss of NAI.

 

81


Table of Contents

As part of the IPO-Related Transactions, all of our operating subsidiaries will become subsidiaries of Albertsons Companies, Inc., a Delaware corporation, and, as a result, all of our operations will be taxable as part of a consolidated group for federal and state income tax purposes. The consolidation of our operations will result in higher income taxes and an increase in income taxes paid. Pro forma income for fiscal 2015 reflects a combined federal and state statutory tax rate of 38.7%. See Note 4(a) to the “Unaudited Pro Forma Condensed Consolidated Financial Information.”

 

Adjusted EBITDA

Adjusted EBITDA is a non-GAAP operating financial measure that we define as earnings (net income (loss)) before interest, income taxes, depreciation and amortization, as further adjusted to eliminate the effects of items management does not consider in assessing ongoing performance. We believe that Adjusted EBITDA provides a meaningful representation of operating performance because it excludes the impact of items that could be considered “non-core” in nature. We use Adjusted EBITDA to measure overall performance and assess performance against peers. Adjusted EBITDA also provides useful information for our investors, securities analysts and other interested parties. Adjusted EBITDA is not a measure of performance under GAAP and should not be considered as a substitute for net earnings, cash flows from operating activities and other income or cash flow statement data. Our definition of Adjusted EBITDA may not be identical to similarly titled measures reported by other companies.

For the first 16 weeks of fiscal 2016, Adjusted EBITDA was $881.5 million, or 4.8% of sales, an increase of 21.1% compared to $727.8 million, or 4.0% of sales, for the first 16 weeks of fiscal 2015. The increase in Adjusted EBITDA for the first 16 weeks of fiscal 2016 reflects improved operating performance of our Safeway, Albertsons and NAI stores.

Following is a reconciliation of GAAP Net loss to Adjusted EBITDA (in millions) for each of the 16 weeks ended June 18, 2016 and the 16 weeks ended June 20, 2015:

 

     16 weeks ended  
     June 18, 2016     June 20, 2015  

Net loss

   $ (133.6   $ (153.3

Depreciation and amortization

     531.8        478.0   

Interest expense, net

     313.7        283.8   

Income tax expense (benefit)

     24.1        (29.0
  

 

 

   

 

 

 

EBITDA

     736.0        579.5   

Gain on interest rate and commodity hedges, net

     (8.7     (0.8

Acquisition and integration costs(1)

     73.7        73.3   

Equity-based compensation expense

     15.8        55.5   

Net gain on property dispositions, asset impairment and lease exit costs

     (43.5     (5.9

LIFO expense

     13.5        6.2   

Pension and postretirement expense, net of cash contributions(2)

     79.6        5.0   

Facility closures and related transition costs(3)

     11.5        9.5   

Other(4)

     3.6        5.5   
  

 

 

   

 

 

 

Adjusted EBITDA

   $ 881.5      $ 727.8   
  

 

 

   

 

 

 

 

(1) Primarily includes costs related to acquisitions, integration of acquired businesses, expenses related to management fees paid in connection with acquisitions and financing activities.
(2) First quarter of fiscal 2016 includes a $78.9 million settlement charge to pension expense, net related to the settlement of a pre-existing contractual relationship and assumption of the pension plan related to the Collington acquisition.

 

82


Table of Contents
(3) Includes costs related to facility closures and the transition to our decentralized operating model.
(4) Primarily includes lease adjustments related to deferred rents and deferred gains on leases. Also includes amortization of unfavorable leases on acquired Safeway surplus properties, charges related to changes in the fair value of our Casa Ley CVRs, earnings from Casa Ley, and foreign currency translation gains.

For fiscal 2015, Adjusted EBITDA was $2.7 billion, or 4.6% of sales, an increase of 144% compared to $1.1 billion, or 4.0% of sales, for fiscal 2014. The increase in Adjusted EBITDA for fiscal 2015 reflects contributions from the Safeway acquisition as well as our improved operating performance.

Following is a reconciliation of GAAP Net (loss) income to Adjusted EBITDA (in millions) for each of fiscal 2015, fiscal 2014 and fiscal 2013:

 

     Fiscal 2015(1)     Fiscal 2014(2)     Fiscal 2013(3)  

Net (loss) income

   $ (502.2   $ (1,225.2   $ 1,732.6   

Depreciation and amortization

     1,613.7        718.1        676.4   

Interest expense, net—continued operations

     950.5        633.2        390.1   

Income tax benefit

     (39.6     (153.4     (572.6

Interest expense—discontinued operations

                   3.9   
  

 

 

   

 

 

   

 

 

 

EBITDA

   $ 2,022.4      $ (27.3   $ 2,230.4   

Bargain purchase gain

                   (2,005.7

Loss on interest rate and commodity hedges, net

     16.2        98.2          

Store transition and related costs(4)

                   166.5   

Acquisition and integration costs(5)

     342.0        352.0        173.5   

Termination of long-term incentive plans

            78.0          

Equity-based compensation expense

     97.8        344.1        6.2   

Net loss (gain) on property dispositions, asset impairment and lease exit costs(6)

     103.3        227.7        (2.4

LIFO expense

     29.7        43.1        11.6   

Facility closures and related transition costs(7)

     25.0                 

Pension and postretirement expense, net of cash contributions(8)

     6.7        (3.0     (7.6

Other(9)

     38.0        (14.1     13.4   
  

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 2,681.1      $ 1,098.7      $ 585.9   
  

 

 

   

 

 

   

 

 

 

 

(1) Includes results for the stores acquired in the Safeway acquisition on January 30, 2015.
(2) Includes results from four weeks for the stores acquired in the Safeway acquisition on January 30, 2015.
(3) Includes results from 48 weeks for the stores purchased in the NAI acquisition on March 21, 2013.
(4) Includes costs related to the transition of stores acquired in the NAI acquisition by improving store conditions and enhancing product offerings.
(5) Primarily includes costs related to acquisitions, integration of acquired businesses and adjustments to tax indemnification assets and liabilities and losses on acquired contingencies in connection with the Safeway acquisition.
(6) Fiscal 2015 includes losses of $30.6 million related to leases assigned to Haggen as part of the FTC-mandated divestitures that were subsequently rejected during the Haggen bankruptcy proceedings and additional losses of $41.1 million related to the Haggen divestitures and its related bankruptcy. Fiscal 2014 includes impairment charges of $233.4 million related to the stores sold in the FTC-mandated divestiture process.

 

83


Table of Contents
(7) Includes costs related to facility closures and the transition to our decentralized operating model.
(8) Excludes the company’s fiscal 2014 cash contribution of $260.0 million to the Safeway ERP under a settlement with the PBGC in connection with the closing of the Safeway acquisition.
(9) Primarily includes lease adjustments related to deferred rents and deferred gains on leases. Also includes amortization of unfavorable leases on acquired Safeway surplus properties and equity in the earnings of our unconsolidated affiliate.

The following is a reconciliation of Cash Flow from Operating Activities to Free Cash Flow (in millions):

 

     16 Weeks Ended    

 

   

 

   

 

 
     June 18,
2016
    June 20,
2015
    Fiscal
2015
    Fiscal
2014
    Fiscal
2013
 
            

Cash flow provided by (used in) operating activities

   $ 570.1      $ 196.1      $ 901.6      $ (165.1   $ 49.5   

Income tax (benefit) expense

     24.1        (29.0     (39.6     (153.4     (572.6

Deferred income taxes

     145.4        54.3        90.4        170.1        657.6   

Interest expense—continued operations

     313.7        283.8        950.5        633.2        390.1   

Interest expense—discontinued operations

                                 3.9   

Changes in operating assets and liabilities

     (214.6     163.4        466.5        39.3        (202.1

Amortization and write-off of deferred financing costs

     (25.8     (14.9     (69.3     (65.3     (25.1

Loss on debt extinguishment

                                 (49.1

Store transition and related costs

                                 166.5   

Acquisition and integration costs

     73.7        73.3        342.0        352.0        173.5   

Termination of long-term incentive plans

                          78.0          

Pension contribution in connection with Safeway acquisition

                          260.0          

Other adjustments

     (5.1     0.8        39.0        (50.1     (6.3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

     881.5        727.8        2,681.1        1,098.7        585.9   

Less: capital expenditures

     (397.8     (227.6     (960.0     (336.5     (128.4
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Free cash flow

   $ 483.7      $ 500.2      $ 1,721.1      $ 762.2      $ 457.5   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liquidity and Financial Resources

Net Cash Provided By (Used In) Operating Activities

Net cash provided by operating activities was $570.1 million for the first 16 weeks of fiscal 2016 compared to $196.1 million for the first 16 weeks of fiscal 2015. The increase in cash flow from operations for the first 16 weeks of fiscal 2016 compared to the first 16 weeks of fiscal 2015 was due primarily to an increase in operating income of $102.5 million, a $133.7 million payment in the first 16 weeks of fiscal 2015 related to the Safeway acquisition appraisal settlement, and improvements in working capital during fiscal 2016.

Net cash provided by operating activities was $901.6 million during fiscal 2015 compared to net cash used in operating activities of $165.1 million during fiscal 2014 and net cash provided by operating activities of $49.5 million in fiscal 2013. The $1,066.7 million increase in net cash flow from operating activities during fiscal 2015 compared to fiscal 2014 was primarily related to additional contributions from the acquired Safeway stores and improvement in operations of our Albertsons and NAI stores, partially offset by an increase of $382.9 million in interest paid due to borrowings used to fund the Safeway acquisition and the $260.0 million contribution to the Safeway ERP in fiscal 2014.

 

84


Table of Contents

Net cash flow used in operating activities increased by $214.6 million in fiscal 2014 compared to fiscal 2013. The increase was due to (i) our higher cash contributions to our pension and post-retirement benefits plans in fiscal 2014, primarily as a result of a $260.0 million contribution to the Safeway ERP under a settlement with the PBGC related to the Safeway acquisition, (ii) an increase in interest payments of $298.4 million due to the increased borrowings for acquisitions and (iii) an increase in payments for acquisition and integration costs related to the Safeway acquisition, offset by cash inflows related to improved operations and the additional Safeway operations. As a result of the $260.0 million cash contribution to the Safeway ERP, we do not expect to make additional contributions to the Safeway ERP until 2018.

Net Cash (Used In) Provided By Investing Activities

Net cash used in investing activities was $235.5 million for the first 16 weeks of fiscal 2016 compared to net cash provided by investing activities of $144.6 million for the first 16 weeks of fiscal 2015.

For the first 16 weeks of fiscal 2016, payments for property and equipment, including lease buyouts, of $397.8 million, payments for business acquisitions, consisting primarily of 29 stores from Haggen, of $146.6 million and an increase in restricted cash of $90.8 million were partially offset by proceeds from the sale of assets of $336.2 million. Asset sale proceeds were primarily from the sale and subsequent leaseback of two distribution centers in Southern California and the sale of a portfolio of surplus properties.

For the first 16 weeks of fiscal 2015, proceeds from the sale of assets and divestitures of $478.4 million and a decrease in restricted cash of $254.4 million were offset by $387.2 million related to the merger consideration paid related to the Safeway acquisition appraisal settlement and $227.6 million of payments for property and equipment, including lease buyouts.

Net cash used in investing activities during fiscal 2015 was $811.8 million primarily due to the merger consideration paid in connection with the Safeway acquisition appraisal settlement, purchase consideration paid for the A&P Transaction and the Haggen Transaction and cash paid for capital expenditures, partially offset by proceeds from the sale of our FTC-mandated divestitures in connection with the Safeway acquisition and a decrease in restricted cash due to the elimination of certain collateral requirements.

Net cash used in investing activities was $5,945.0 million in fiscal 2014, consisting primarily of cash paid for the Safeway acquisition, net of cash acquired, of $5,673.4 million and cash paid for property additions of $336.5 million.

Net cash used in investing activities was $781.5 million in fiscal 2013, consisting primarily of cash paid for the acquisition of NAI and United, net of cash acquired, of $463.9 million, cash paid for property additions of $128.4 million and changes in restricted cash of $246.0 million related to collateralized surety bonds and letters of credit obtained during fiscal 2013.

 

85


Table of Contents

In fiscal 2016, the company expects to spend approximately $1,400 million in capital expenditures, including approximately $325 million of Safeway-related integration-related capital expenditures, as well as integration-related capital expenditures in connection with the A&P Transaction and the Haggen Transaction, as follows (in millions):

 

Projected Fiscal 2016 Capital Expenditures

  

Integration capital

   $ 325.0   

New stores and remodels

     450.0   

Maintenance

     250.0   

Supply chain

     100.0   

IT

     150.0   

Real estate and expansion capital

     125.0   
  

 

 

 

Total

   $ 1,400.0   
  

 

 

 

Net Cash Provided By (Used In) Financing Activities

Net cash provided by financing activities was $561.9 million for the first 16 weeks of fiscal 2016 consisting primarily of proceeds from the issuance of long-term debt of $1,300.0 million partly offset by payments of long-term debt of $648.7 million and payment of capital lease obligations of $34.1 million.

The proceeds from the issuance of long-term debt of $1,300.0 million consisted of $1,250.0 million of the 2024 Notes and $50.0 million of borrowings from the ABL Facility.

The $648.7 million payments on long-term borrowings consisted of $519.8 million of principal on the then existing B-3 tranche of term loans using proceeds from the 2024 Notes, $28.1 million of scheduled payments under the Term Loan Agreement and $100.0 million of payments under the ABL Facility. On June 24, 2016, subsequent to the end of the first quarter of fiscal 2016, a portion of the net proceeds from the 2024 Notes was used to fully redeem the Secured Notes, and to pay an associated make-whole premium of $87.7 million and accrued interest.

Net cash used in financing activities was $477.2 million for the first 16 weeks of fiscal 2015 and consisted primarily of net payments on debt from the proceeds of asset sales.

On June 22, 2016, subsequent to the end of the first quarter of fiscal 2016, the Company amended the Term Loan Agreement pursuant to which three new term loans tranches were established and certain provisions of such agreement were amended. The new tranches consisted of $3,280.0 million of new term B-4 loans, $1,145.0 million of new term B-5 loans and $2,100.0 million of new term B-6 loans. The net proceeds from these loans, together with $300.0 million of borrowings under the ABL Facility, were used to repay the term loans that were outstanding under the Term Loan Agreement as of June 22, 2016 and to pay related interest and fees. The new term B-4 loans mature on August 25, 2021, and have an interest rate of LIBOR, subject to a 1.0% floor, plus 3.50%. The new term B-5 loans mature on December 21, 2022, and have an interest rate of LIBOR, subject to a 1.0% floor, plus 3.75%. The new term B-6 loans mature on June 22, 2023, and have an interest rate of LIBOR, subject to a 1.0% floor, plus 3.75%. See “Description of Indebtedness.”

Net cash used in financing activities was $635.9 million in fiscal 2015 due primarily to payments on our ABL and term loan borrowings from the proceeds of FTC-mandated divestitures, partially offset by $300.0 million in borrowings under NAI’s pre-existing term loan facility to fund the A&P Transaction. Net cash provided by financing activities was $6,928.9 million in fiscal 2014 and $1,002.0 million in fiscal 2013. Net cash provided by financing activities increased in fiscal 2014 compared to fiscal 2013, primarily as a result of proceeds from the issuance of long-term debt and equity contributions used to finance the Safeway acquisition.

 

86


Table of Contents

Proceeds from the issuance of long-term debt were $453.5 million in fiscal 2015, $8,097.0 million in fiscal 2014 and $2,485.0 million in fiscal 2013. In fiscal 2015, cash payments on long-term borrowings were $903.4 million, cash payments for debt financing costs were $41.5 million and cash payments for obligations under capital leases were $120.0 million. In fiscal 2014, cash payments on long-term borrowings were $2,123.6 million, including $864.6 million of assumed debt that was immediately paid following the Safeway acquisition, cash payments for debt financing costs were $229.1 million and cash payments on obligations under capital leases were $64.1 million. In fiscal 2013, cash payments for long-term borrowings were $923.3 million, cash payments for debt financing costs were $121.0 million and cash payments for obligations under capital leases were $24.5 million. In addition, we repurchased $619.9 million of debt under tender offers in fiscal 2013.

Proceeds from equity contributions were $21.6 million in fiscal 2015, $1,283.2 million in fiscal 2014 and $250.0 million in fiscal 2013. In addition, we made no distributions to our equityholders in fiscal 2015, distributions of $34.5 million in fiscal 2014 and no distributions in fiscal 2013.

Debt Management

Total debt, including both the current and long-term portions of capital lease obligations, decreased by $342.7 million to $12.2 billion as of the end of fiscal 2015 compared to $12.6 billion as of the end of fiscal 2014. The decrease in fiscal 2015 was primarily due to payments on long-term borrowings of $903.4 million, partially offset by proceeds from the issuance of long-term debt of $453.5 million, which were primarily comprised of additional borrowings used to fund the A&P Transaction.

Outstanding debt, including current maturities and net of debt discounts and deferred financing costs, principally consisted of (in millions):

 

     February 27, 2016  

Term loans

   $ 7,136.6   

Notes and debentures

     3,564.5   

Capital leases

     1,042.2   

ABL borrowings

     311.0   

Other notes payable and mortgages

     172.0   
  

 

 

 

Total debt, including capital leases

   $ 12,226.3   
  

 

 

 

Total debt, including both the current and long-term portions of capital lease obligations, increased by $8.9 billion to $12.6 billion as of the end of fiscal 2014 compared to $3.7 billion as of the end of fiscal 2013. The increase in fiscal 2014 was primarily the result of the financing for the Safeway acquisition and the assumption of Safeway debt. In anticipation of the closing of the Safeway acquisition, we secured term-loan financing of $5.7 billion with interest rates ranging from 4.75% to 5.5% and completed the sale of $1,145.0 million of 7.750% second lien notes, of which $535.4 million was subsequently redeemed on February 9, 2015. We assumed notes and debentures with a fair value of $2.5 billion from Safeway and subsequently redeemed $864.6 million of the Safeway debt pursuant to change of control tender offers. We also increased the borrowings under our asset-based revolving credit agreements by approximately $800 million.

On June 22, 2016, we consummated the Pre-IPO Refinancing Transactions. See “Summary—Recent Developments—Pre-IPO Refinancing Transactions” and “Description of Indebtedness” for more information.

 

87


Table of Contents

See Note 8—Long-Term Debt in our consolidated financial statements, included elsewhere in this prospectus, for additional information related to our outstanding debt.

Liquidity and Factors Affecting Liquidity

We estimate our liquidity needs over the next fiscal year to be in the range of $4.0 billion to $4.5 billion, which includes anticipated requirements for working capital, capital expenditures, interest payments and scheduled principal payments of debt, operating leases, capital leases and our TSA agreements with SuperValu. Based on current operating trends, we believe that cash flows from operating activities and other sources of liquidity, including borrowings under our asset-based revolving credit facilities, will be adequate to meet our liquidity needs for the next 12 months and for the foreseeable future. We believe we have adequate cash flow to continue to maintain our current debt ratings and to respond effectively to competitive conditions. In addition, we may enter into refinancing transactions from time to time. There can be no assurance, however, that our business will continue to generate cash flow at or above current levels or that we will maintain our ability to borrow under our revolving credit facilities. See “—Contractual Obligations” for a more detailed description of our commitments as of the end of fiscal 2015.

As of June 18, 2016, we had approximately $261.0 million of borrowings outstanding under our ABL Facility and total availability of approximately $2.8 billion (net of letter of credit usage). As of February 27, 2016, we had approximately $311.0 million of borrowings outstanding under our ABL Facility and total availability of approximately $2.8 billion (net of letter of credit usage). As of February 28, 2015, we had approximately $980.0 million of borrowings outstanding under our asset-based revolving credit facilities and total availability of approximately $1.8 billion (net of letter of credit usage).

The ABL Facility contains no financial maintenance covenants unless and until (a) excess availability is less than (i) 10% of the lesser of the aggregate commitments and the then-current borrowing base at any time or (ii) $250 million at any time or (b) an event of default is continuing. If any such event occurs, we must maintain a fixed charge coverage ratio of 1.0:1.0 from the date such triggering event occurs until such event of default is cured or waived and/or the 30th day that all such triggers under clause (a) no longer exist.

During fiscal 2014, fiscal 2015 and the first quarter of fiscal 2016, there were no financial maintenance covenants in effect under our asset-based revolving credit facilities because the conditions listed above (and similar conditions in our refinanced asset-based revolving credit facilities) had not been met.

 

88


Table of Contents

Contractual Obligations

There have been no material changes to our contractual obligations during the 16 weeks ended June 18, 2016.

The table below presents our significant contractual obligations as of February 27, 2016 (in millions)(1):

 

     Payments Due Per Year(s)  
     Total      2016      2017-2018      2019-2020      Thereafter  

Long-term debt(2)

   $ 11,703.9       $ 214.3       $ 531.5       $ 2,817.5       $ 8,140.6   

Interest on long-term debt(3)

     5,100.5         681.8         1,323.1         1,084.1         2,011.5   

Operating leases(4)

     5,602.8         740.1         1,301.3         984.8         2,576.6   

Capital leases(4)

     1,695.5         209.3         379.6         306.8         799.8   

Other long-term liabilities(5)

     1,320.8         308.7         383.0         188.5         440.6   

SVU TSA(6)

     253.2         164.6         88.6                   

Purchase obligations(7)

     627.6         421.2         161.5         31.2         13.7   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total contractual obligations

   $ 26,304.3       $ 2,740.0       $ 4,168.6       $ 5,412.9       $ 13,982.8   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) The contractual obligations table excludes funding of pension and other postretirement benefit obligations, which totaled approximately $7.4 million in fiscal 2015 and is expected to total approximately $10.4 million in fiscal 2016. This table excludes contributions under various multi-employer pension plans, which totaled $379.8 million in fiscal 2015 and are expected to total approximately $400 million in fiscal 2016.
(2) Long-term debt amounts include asset-backed loans and exclude any original issue discount and deferred financing costs. See Note 8—Long-Term Debt in our consolidated financial statements, included elsewhere in this prospectus, for additional information.
(3) Amounts include contractual interest payments using the interest rate as of February 27, 2016 applicable to our variable interest term debt instruments and stated fixed rates for all other debt instruments, excluding interest rate swaps. See Note 8—Long-Term Debt in our consolidated financial statements, included elsewhere in this prospectus, for additional information.
(4) Represents the minimum rents payable under operating and capital leases, excluding common area maintenance, insurance or tax payments, for which the company is also obligated.
(5) Consists of self-insurance liabilities which have not been reduced by insurance-related receivables. Excludes the $202.7 million of assumed withdrawal liabilities related to Safeway’s previous closure of its Dominick’s division and excludes the unfunded pension and postretirement benefit obligation of $731.0 million. The amount of unrecognized tax benefits ($435.3 million as of February 27, 2016) has been excluded from the contractual obligations table because a reasonably reliable estimate of the timing of future tax settlements cannot be determined. Excludes Casa Ley CVR liability of $269.9 million because the timing of future settlement is uncertain. Also excludes certain deferred liabilities that will not be settled in cash and other lease-related liabilities already reflected as operating lease commitments.
(6) Represents minimum contractual commitments expected to be paid under the SVU TSAs and the wind-down agreement, executed on April 16, 2015. See Note 15—Related Parties in our consolidated financial statements, included elsewhere in this prospectus, for additional information.
(7) Purchase obligations include various obligations that have annual purchase commitments. As of February 27, 2016, future purchase obligations primarily relate to fixed asset, marketing and information technology commitments, including fixed price contracts. In addition, in the ordinary course of business, the company enters into supply contracts to purchase product for resale to consumers which are typically of a short-term nature with limited or no purchase commitments. The company also enters into supply contracts which typically include either volume commitments or fixed expiration dates, termination provisions and other customary contractual considerations. The supply contracts that are cancelable have not been included above.

 

89


Table of Contents

Off-Balance Sheet Arrangements

Guarantees

The company is party to a variety of contractual agreements pursuant to which it may be obligated to indemnify the other party for certain matters. These contracts primarily relate to the company’s commercial contracts, operating leases and other real estate contracts, trademarks, intellectual property, financial agreements and various other agreements. Under these agreements, the company may provide certain routine indemnifications relating to representations and warranties (for example, ownership of assets, environmental or tax indemnifications) or personal injury matters. The terms of these indemnifications range in duration and may not be explicitly defined. The company believes that if it were to incur a loss in any of these matters, the loss would not have a material effect on the company’s financial statements.

We are liable for certain operating leases that were assigned to third parties. If any of these third parties fail to perform their obligations under the leases, we could be responsible for the lease obligation, including the 11 store leases that Haggen rejected in its bankruptcy case. As a result, we have recorded a loss of $30.6 million during fiscal 2015 for this estimated liability. See Note 16—Commitments and contingencies and off balance sheet arrangements in the consolidated financial statements of AB Acquisition for additional information. Because of the wide dispersion among third parties and the variety of remedies available, we believe that if an assignee became insolvent it would not have a material effect on our financial condition, results of operations or cash flows. See “Risk Factors—Risks Related to Our Business and Industry—We may have liability under certain operating leases that were assigned to third parties.”

In the ordinary course of business, we enter into various supply contracts to purchase products for resale and purchase and service contracts for fixed asset and information technology commitments. These contracts typically include volume commitments or fixed expiration dates, termination provisions and other standard contractual considerations.

Letters of Credit

We had letters of credit of $617.7 million outstanding as of June 18, 2016. The letters of credit are maintained primarily to support our performance, payment, deposit or surety obligations. We pay bank fees ranging from 1.25% to 1.75% plus a fronting fee of 0.125% on the face amount of the letters of credit.

New Accounting Policies Not Yet Adopted

See Note 1—Description of Business, Basis of Presentation and Summary of Significant Accounting Policies in our consolidated financial statements, included elsewhere in this prospectus, for new accounting pronouncements which have not yet been adopted.

Critical Accounting Policies and Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

90


Table of Contents

We have chosen accounting policies that we believe are appropriate to report accurately and fairly our operating results and financial position, and we apply those accounting policies in a fair and consistent manner. See Note 1—Description of Business, Basis of Presentation and Summary of Significant Accounting Policies in our consolidated financial statements, included elsewhere in this prospectus, for a discussion of our significant accounting policies.

Management believes the following critical accounting policies reflect its more subjective or complex judgments and estimates used in the preparation of our consolidated financial statements.

Vendor Allowances

Consistent with standard practices in the retail industry, we receive allowances from many of the vendors whose products we buy for resale in our stores. These vendor allowances are provided to increase the sell-through of the related products. We receive vendor allowances for a variety of merchandising activities: placement of the vendors’ products in our advertising; display of the vendors’ products in prominent locations in our stores; supporting the introduction of new products into our retail stores and distribution systems; exclusivity rights in certain categories; and compensation for temporary price reductions offered to customers on products held for sale at retail stores. We also receive vendor allowances for buying activities such as volume commitment rebates, credits for purchasing products in advance of their need and cash discounts for the early payment of merchandise purchases. The majority of the vendor allowance contracts have terms of less than one year.

We recognize vendor allowances for merchandising activities as a reduction of cost of sales when the related products are sold. Vendor allowances that have been earned because of completing the required performance under the terms of the underlying agreements but for which the product has not yet been sold are recognized as reductions of inventory. The amount and timing of recognition of vendor allowances as well as the amount of vendor allowances to be recognized as a reduction of ending inventory require management judgment and estimates. We determine these amounts based on estimates of current year purchase volume using forecast and historical data and a review of average inventory turnover data. These judgments and estimates affect our reported gross profit, operating earnings (loss) and inventory amounts. Our historical estimates have been reliable in the past, and we believe the methodology will continue to be reliable in the future. Based on previous experience, we do not expect significant changes in the level of vendor support.

Self-Insurance Liabilities

We are primarily self-insured for workers’ compensation, healthcare and general and automobile liability. The self-insurance liability is undiscounted and determined actuarially, based on claims filed and an estimate of claims incurred but not yet reported. We have established stop-loss amounts that limit our further exposure after a claim reaches the designated stop-loss threshold. In determining our self-insurance liabilities, we perform a continuing review of our overall position and reserving techniques. Since recorded amounts are based on estimates, the ultimate cost of all incurred claims and related expenses may be more or less than the recorded liabilities.

Any actuarial projection of self-insured losses is subject to a high degree of variability. Litigation trends, legal interpretations, benefit level changes, claim settlement patterns and similar factors influenced historical development trends that were used to determine the current year expense and, therefore, contributed to the variability in the annual expense. However, these factors are not direct inputs into the actuarial projection, and thus their individual impact cannot be quantified.

 

91


Table of Contents

Long-Lived Asset Impairment

We regularly review our individual stores’ operating performance, together with current market conditions, for indications of impairment. When events or changes in circumstances indicate that the carrying value of an individual store’s assets may not be recoverable, its future undiscounted cash flows are compared to the carrying value. If the carrying value of store assets to be held and used is greater than the future undiscounted cash flows, an impairment loss is recognized to record the assets at fair value. For property and equipment held for sale, we recognize impairment charges for the excess of the carrying value plus estimated costs of disposal over the fair value. Fair values are based on discounted cash flows or current market rates. These estimates of fair value can be significantly impacted by factors such as changes in the current economic environment and real estate market conditions. Long-lived asset impairment charges were $40.2 million, $266.9 million and $2.0 million in fiscal 2015, 2014 and 2013, respectively.

On December 19, 2014, in connection with the Safeway acquisition, we, together with Safeway, announced that we had entered into agreements to sell 111 Albertsons and 57 Safeway stores across eight states to four separate buyers. The divestiture of these stores was required by the FTC as a condition of closing the Safeway acquisition and was contingent on the closing of the Safeway acquisition. The impairment charge in fiscal 2014 was primarily related to the divestiture of the Albertsons stores.

Business Combination Measurements

In accordance with applicable accounting standards, we estimate the fair value of acquired assets and assumed liabilities as of the acquisition date of business combinations. These fair value adjustments are input into the calculation of goodwill related to the excess of the purchase price over the fair value of the tangible and identifiable intangible assets acquired and liabilities assumed in the acquisition.

The fair value of assets acquired and liabilities assumed are determined using market, income and cost approaches from the perspective of a market participant. The fair value measurements can be based on significant inputs that are not readily observable in the market. The market approach indicates value for a subject asset based on available market pricing for comparable assets. The market approaches used includes prices and other relevant information generated by market transactions involving comparable assets, as well as pricing guides and other sources. The income approach indicates value for a subject asset based on the present value of cash flows projected to be generated by the asset. Projected cash flows are discounted at a required market rate of return that reflects the relative risk of achieving the cash flows and the time value of money. The cost approach, which estimates value by determining the current cost of replacing an asset with another of equivalent economic utility, was used, as appropriate, for certain assets for which the market and income approaches could not be applied due to the nature of the asset. The cost to replace a given asset reflects the estimated reproduction or replacement cost for the asset, adjusted for obsolescence, whether physical, functional or economic.

Goodwill

As of February 27, 2016, our goodwill totaled $1.1 billion, of which $942.4 million was recorded as part of our acquisition of Safeway. We review goodwill for impairment in the fourth quarter of each year, and also upon the occurrence of triggering events. We perform reviews of each of our reporting units that have goodwill balances. We review goodwill for impairment by initially assessing qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill, as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. If it is determined that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the two-step test is performed to identify potential

 

92


Table of Contents

goodwill impairment. If it is determined that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, it is unnecessary to perform the two-step goodwill impairment test. We may elect to bypass the qualitative assessment and proceed directly to performing the first step of the two-step goodwill impairment test. We recognize goodwill impairment for any excess of the carrying value of the reporting unit’s goodwill over the implied fair value. The impairment review requires the use of management judgment and financial estimates. Application of alternative estimates and assumptions, such as reviewing goodwill for impairment at a different level, could produce significantly different results. The cash flow projections embedded in our goodwill impairment reviews can be affected by several factors such as inflation, business valuations in the market, the economy and market competition.

The annual evaluation of goodwill performed for our reporting units during the fourth quarters of fiscal 2015, fiscal 2014 and fiscal 2013 did not result in impairment. Based on current and future expected cash flows, we believe goodwill impairments are not reasonably likely.

Equity-Based Compensation

We periodically grant membership interests to employees and non-employees in exchange for services. The membership interests we grant to employees are not traditional stock options or stock awards, but are equity interests in a privately held company that participate in earnings, subject to certain distribution thresholds. We account for these as equity-based awards in accordance with the applicable accounting guidance for equity awards issued to employees and non-employees, respectively. To value these awards, the company has determined that an option pricing model is the most appropriate method to measure the fair value of these awards.

In March 2013, we granted 103 Class C Units (2,641,428 Class C Units following a 25,598 for 1 split in January 2015) (the “Class C Units”) to certain key executives under the company’s Class C Incentive Unit Plan (the “Class C Plan”). Class C Units were accounted for as equity awards to employees in accordance with Accounting Standards Codification 718, Compensation—Stock Compensation (“ASC 718”). The fair value of these grants was based on the grant date fair value, which was based on the enterprise valuation at the date of grant and the residual cash flows distributed to Class C Unit holders after hurdles are met as defined in the limited liability company agreement of AB Acquisition. The fair value of the Class C Units was calculated using an assumed and expected term of three years and no forfeiture rate given the low likelihood that the recipients’ would discontinue working for the company.

The Class C Units granted were valued at $7.70 per unit with a $20.3 million aggregate fair value. Factors contributing to the March 2013 fair value included the acquisition of NAI, which significantly expanded the company’s operations, but whose store performance and expected synergies had not yet been proven.

In January 2015, we granted the following equity awards to employees and non-employees:

 

    3.3 million Series 1 Incentive Units (as defined herein) to a member of management under the Incentive Unit Plan. 50% of the Series 1 Incentive Units have a service vesting period of four years from the date awarded and vest 25% on each of the subsequent four anniversaries of such date. The remaining 50% have performance-based vesting terms, which vest 25% on the last day of the company’s fiscal year for each of the following four fiscal years, subject to specific performance targets. The units accelerate upon a qualifying change of control.

 

    3.3 million fully vested, non-forfeitable Investor Incentive Units in exchange for services. The units convert into an equal number of ABS Units, NAI Units and Safeway Units based on the fair value of the Investor Incentive Units on the conversion date after five years or upon a qualifying change of control.

 

93


Table of Contents
    11.6 million fully vested, non-forfeitable Investor Incentive Units to five institutional investors. The units granted and issued to our institutional investors were treated as non-employee compensation for merger consulting services and direct equity issuance costs related to the Safeway acquisition. The units vest immediately and convert into an equal number of ABS Units, NAI Units and Safeway Units based on the fair market value of the Investor Incentive Units on the conversion date after five years or upon a qualifying change of control.

In fiscal 2015, we issued the following equity awards to employees and non-employees:

 

    11.7 million Phantom Units (as defined herein) to employees and independent directors of the company with 6.7 million Phantom Units reserved for future issuance. Each Phantom Unit provides the participant with a contractual right to receive upon vesting one Series 2 Incentive Unit. Generally, 50% of the Phantom Units are Time-Based Units that will vest in four annual installments of 25% on the last day of the company’s fiscal year, commencing with the last day of the fiscal year in which the units are granted, subject to continued service through each vesting date. The remaining 50% of the Phantom Units are Performance-Based Units that will vest in four annual installments of 25% on the last day of the company’s fiscal year, commencing with the last day of the fiscal year in which the units are granted, subject to continued service through each vesting date, and will also be subject to the achievement of annual performance targets established for each such fiscal year. If the performance target for a fiscal year is not met, but is met in a subsequent fiscal year on a cumulative basis along with the applicable performance target for such subsequent fiscal year, the Performance-Based Units that did not vest with respect to the missed year will vest in such subsequent fiscal year. Upon the consummation of an initial public offering, the unvested Phantom Units that are Performance-Based Units (other than those with respect to a missed year) will convert into Phantom Units that are solely Time-Based Units. Following the consummation of the IPO-Related Transactions and this offering, all unvested Phantom Units will accelerate and become vested in the event of the termination of the participant’s employment due to death or disability or by the company without cause.

In the first quarter of fiscal 2016, we issued the following equity awards to employees and non-employees:

 

    1.0 million Phantom Units to employees of the company. Each Phantom Unit provides the participant with a contractual right to receive upon vesting one Series 2 Incentive Unit. Generally, 50% of the Phantom Units are Time-Based Units that will vest in four annual installments of 25% on the last day of the company’s fiscal year, commencing with the last day of the fiscal year in which the units are granted, subject to continued service through each vesting date. The remaining 50% of the Phantom Units are Performance-Based Units that will vest in four annual installments of 25% on the last day of the company’s fiscal year, commencing with the last day of the fiscal year in which the units are granted, subject to continued service through each vesting date, and will also be subject to the achievement of annual performance targets established for each such fiscal year. If the performance target for a fiscal year is not met, but is met in a subsequent fiscal year on a cumulative basis along with the applicable performance target for such subsequent fiscal year, the Performance-Based Units that did not vest with respect to the missed year will vest in such subsequent fiscal year. Upon the consummation of an initial public offering, the unvested Phantom Units that are Performance-Based Units (other than those with respect to a missed year) will convert into Phantom Units that are solely Time-Based Units. Following the consummation of the IPO-Related Transactions and this offering, all unvested Phantom Units will accelerate and become vested in the event of the termination of the participant’s employment due to death or disability or by the company without cause.

 

    23,392 Phantom Units to independent directors that will vest 100% on the last day of fiscal 2016 subject to the applicable independent director’s continued service through such date.

 

94


Table of Contents

We determine fair value of unvested and issued awards on the grant date using an option pricing model, adjusted for a lack of marketability and using an expected term or time to liquidity based on judgments made by management. We also consider forfeitures for equity-based grants which are not expected to vest. Expected volatility is calculated based upon historical volatility data from a group of comparable companies over a time frame consistent with the expected life of the awards. The expected risk-free rate is based on the U.S. Treasury yield curve rates in effect at the time of the grant using the term most consistent with the expected life of the award. Dividend yield was estimated at zero as we do not anticipate making regular future distributions to stockholders. Changes in these inputs and assumptions can materially affect the measurement of the estimated fair value of our equity-based compensation expense.

We are required to estimate the enterprise value underlying our equity-based awards when performing fair value calculations. Due to the prior absence of a market for our equity interests, enterprise value is determined by management with the assistance of valuation specialists. The most recent valuation was performed as of January 2015 and uses a “Market Approach” and “Income Approach” weighted at 50% each. The Market Approach uses the Guideline Public Company Method, which focuses on comparing the subject entity to selected reasonably similar (or guideline) publicly traded companies. Under this method, valuation multiples are: (i) derived from the operating data of selected guideline companies; (ii) evaluated and adjusted based on the strengths and weaknesses of the subject entity relative to the selected guideline companies; and (iii) applied to the operating data of the subject entity to arrive at an indication of value. The Income Approach utilized the Discounted Cash Flow (“DCF”) Method. The DCF Method measures the value of the enterprise by estimating the present worth of the net economic benefit (cash receipts less cash outlays) to be received over the life of the company. The steps followed in applying this approach include estimating the expected after-tax cash flows attributable to the company over its life and discounts the cash flows using a rate of return that accounts for both the time value of money and investment risk factors. Management utilized future projections discounted using a present value factor ranging from 9% to 10% and a long-term terminal growth rate of 2.4%. Grants subsequent to our initial public offering will be based on the trading value of our common stock.

The Series 1 Incentive Units and Investor Incentive Units granted in January 2015 were valued at $22.11 per unit with a $403.7 million aggregate fair value. Factors contributing to the January 2015 fair value included the significant improvement of the stores acquired as part of the NAI acquisition in 2013 and realization of operational synergies, the acquisition of United and the acquisition of Safeway, as well as market valuations of comparable publicly traded grocers, and general capital market conditions in the U.S.

The Phantom Units issued in fiscal 2015 were valued at a weighted average of $21.75 per unit with a $254.8 million aggregate fair value. The Phantom Units issued in the first quarter of fiscal 2016 were valued at a weighted average of $17.10 per unit with a $17.5 million aggregate fair value.

The following assumptions were used for the equity awards issued and granted:

 

     First Quarter 2016      Fiscal 2015  
     June 18, 2016      February 27, 2016  

Dividend yield

     —%         —%   

Expected volatility

     55.1%         41.7%   

Risk-free interest rate

     0.70%         0.61%   

Time to liquidity

     1.5 years         1.9 years   

Discount for lack of marketability

     19.0%         16.0%   

 

95


Table of Contents

Employee Benefit Plans and Collective Bargaining Agreements

Substantially all of our employees are covered by various contributory and non-contributory pension, profit sharing or 401(k) plans, in addition to a dedicated defined benefit plan for Safeway, a plan for NAI and a plan for United employees. Certain employees participate in a long-term retention incentive bonus plan. We also provide certain health and welfare benefits, including short-term and long-term disability benefits to inactive disabled employees prior to retirement. Most union employees participate in multiemployer retirement plans under collective bargaining agreements, unless the collective bargaining agreement provides for participation in plans sponsored by us.

We recognize a liability for the under-funded status of the defined benefit plans as a component of pension and post-retirement benefit obligations. Actuarial gains or losses and prior service costs or credits are recorded within other comprehensive (loss) income. The determination of our obligation and related expense for our sponsored pensions and other post-retirement benefits is dependent, in part, on management’s selection of certain actuarial assumptions in calculating these amounts. These assumptions include, among other things, the discount rate and expected long-term rate of return on plan assets.

The objective of our discount rate assumptions was intended to reflect the rates at which the pension benefits could be effectively settled. In making this determination, we take into account the timing and amount of benefits that would be available under the plans. As of February 27, 2016, we changed the method used to estimate the service and interest rate components of net periodic benefit cost for our defined benefit pension plans and other post-retirement benefit plans. Historically, the service and interest rate components were estimated using a single weighted average discount rate derived from the yield curve used to measure the benefit obligation at the beginning of the period. We have elected to use a full yield curve approach in the estimation of service and interest cost components of net pension and other post-retirement benefit plan expense by applying the specific spot rates along the yield curve used in the determination of the projected benefit obligation to the relevant projected cash flows. We utilized weighted discount rates of 3.92% and 3.75% for our pension plan expenses for fiscal 2015 and fiscal 2014, respectively. To determine the expected rate of return on pension plan assets held by us for fiscal 2014, we considered current and forecasted plan asset allocations as well as historical and forecasted rates of return on various asset categories. Our weighted assumed pension plan investment rate of return was 6.96% for fiscal 2015 and 6.97% for fiscal 2014. See Note 14—Employee Benefit Plans and Collective Bargaining Agreements in our consolidated financial statements, included elsewhere in this prospectus, for more information on the asset allocations of pension plan assets.

Sensitivity to changes in the major assumptions used in the calculation of our pension and other post-retirement plan liabilities is illustrated below (dollars in millions).

 

     Percentage
Point Change
    Projected Benefit Obligation
Decrease /(Increase)
   Expense
Decrease / (Increase)
 

Discount rate

     +/- 1.00   $293.2 / $(369.1)    $ 27.6 / $   0.5   

Expected return on assets

     +/- 1.00   — / —    $ 20.5 / $(20.5)   

In fiscal 2015, we contributed $7.4 million to our pension and post-retirement plans. In the fourth quarter of fiscal 2014, we contributed $260.0 million to the Safeway ERP under a settlement with the PBGC in connection with the Safeway acquisition closing. We expect to contribute approximately $11.8 million to our pension and post-retirement plans in fiscal 2016.

 

96


Table of Contents

Multiemployer Pension Plans

We contribute to various multiemployer pension plans. These multiemployer plans generally provide retirement benefits to participants based on their service to contributing employers. The benefits are paid from assets held in trust for that purpose. Plan trustees typically are responsible for determining the level of benefits to be provided to participants as well as the investment of the assets and plan administration. Expense is recognized in connection with these plans as contributions are funded. We made contributions to these plans of $379.8 million, $113.4 million and $74.2 million in fiscal 2015, fiscal 2014 and fiscal 2013, respectively. In fiscal 2016, we expect to contribute approximately $400 million to multiemployer pension plans, subject to collective bargaining conditions.

Additionally, in conjunction with the Safeway acquisition, we assumed withdrawal liabilities of $221.8 million related to Safeway’s previous closure of its Dominick’s division. The respective pension plans have asserted that we may become obligated to pay an estimated maximum withdrawal liability of approximately $510 million if one of the pension plans, the UFCW Midwest Plan, were to experience a mass withdrawal. A mass withdrawal would require monthly installment payments to be made by us in perpetuity. Our annual installment payments would be limited to 20 years if we are not part of, or the UFCW Midwest Plan does not experience, a mass withdrawal. Our estimate of the withdrawal liability is based on the fact that a mass withdrawal from the UFCW Midwest Plan has not occurred and our belief that a mass withdrawal liability is remote. We are also disputing in arbitration certain factors used to determine the allocation of the unfunded vested benefits and therefore the annual pension payment installments due to the UFCW Midwest Plan. Our estimated liability reflects our best estimate of the probable outcome of this arbitration. Based on the current facts and circumstances, we believe it is reasonably possible that the estimated liability could change from the amount currently recorded as a result of the arbitration, but because we believe that a mass withdrawal from the UFCW Midwest Plan is remote, we believe the payment of the maximum liability of approximately $510 million is also remote. The amount of the withdrawal liability as of February 27, 2016 with respect to the Dominick’s division was $202.7 million, which primarily reflects minimum required payments made subsequent to the date of the Safeway acquisition.

See Note 14—Employee Benefit Plans and Collective Bargaining Agreements in our consolidated financial statements, included elsewhere in this prospectus, for more information relating to our participation in these multiemployer pension plans.

Income Taxes and Uncertain Tax Positions

We review the tax positions taken or expected to be taken on tax returns to determine whether and to what extent a benefit can be recognized in our consolidated financial statements. See Note 13—Income Taxes in our consolidated financial statements, included elsewhere in this prospectus, for the amount of unrecognized tax benefits and other disclosures related to uncertain tax positions. Various taxing authorities periodically examine our income tax returns. These examinations include questions regarding our tax filing positions, including the timing and amount of deductions and the allocation of income to various tax jurisdictions. In evaluating these various tax filing positions, including state and local taxes, we assess our income tax positions and record tax benefits for all years subject to examination based upon management’s evaluation of the facts, circumstances and information available at the reporting date. For those tax positions where it is more likely than not that a tax benefit will be sustained, we have recorded the largest amount of tax benefit with a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit has been recognized in our financial statements. A number of years may elapse before an uncertain tax position is examined and fully resolved. As of February 27, 2016, we are no longer subject to federal income tax examinations for fiscal years prior to 2007 and in most states are no

 

97


Table of Contents

longer subject to state income tax examinations for fiscal years before 2007. Tax years 2007 through 2015 remain under examination. The assessment of our tax position relies on the judgment of management to estimate the exposures associated with our various filing positions.

Quantitative and Qualitative Disclosures about Market Risk

We are exposed to market risk from a variety of sources, including changes in interest rates, foreign currency exchange rates and commodity prices. We have from time to time selectively used derivative financial instruments to reduce these market risks. We do not utilize financial instruments for trading or other speculative purposes, nor do we utilize leveraged financial instruments. Our market risk exposures related to interest rates, foreign currency and commodity prices are discussed below and have not materially changed from the prior fiscal year. We use derivative financial instruments to reduce these market risks related to interest rates.

Interest Rate Risk and Long-Term Debt

We are exposed to market risk from fluctuations in interest rates. We manage our exposure to interest rate fluctuations through the use of interest rate swaps (“Cash Flow Hedges”). Our risk management objective and strategy is to utilize these interest rate swaps to protect the company against adverse fluctuations in interest rates by reducing its exposure to variability in cash flows relating to interest payments on a portion of its outstanding debt. We believe that we are meeting our objectives of hedging our risks in changes in cash flows that are attributable to changes in the LIBOR rate, which is the designated benchmark interest rate being hedged (the “hedged risk”), on an amount of the company’s debt principal equal to the then-outstanding swap notional amount.

Additionally, we had a Deal-Contingent Swap that was entered into on April 16, 2014 in order to reduce our exposure to anticipated variable rate debt issuances in connection with the Safeway acquisition. In accordance with the swap agreement, we receive a floating rate of interest and pay a fixed rate of interest over the life of the contract.

Interest rate volatility could also materially affect the interest rate we pay on future borrowings under the Senior Secured Credit Facilities. The interest rate we pay on future borrowings under the Senior Secured Credit Facilities are dependent on the LIBOR rate. We believe a 100 basis point increase or decrease on our variable interest rates would not be significant.

See Note 7—Derivative Financial Instruments in our consolidated financial statements, included elsewhere in this prospectus, for additional information.

The table below provides information about our interest rate derivatives classified as Cash Flow Hedges, deal-contingent swaps and underlying debt portfolio as of February 27, 2016 (dollars in millions).

 

    Pay Fixed/Receive Variable  
    Fiscal
2016
    Fiscal
2017
    Fiscal
2018
    Fiscal
2019
    Fiscal
2020
    Thereafter  

Cash Flow Hedges and Deal-Contingent Swap

           

Average notional amount outstanding

  $ 4,628      $ 3,807      $ 2,925      $ 1,921      $ 1,364      $ 1,060   

Average pay rate

    7.08     7.06     7.03     7.27     7.26     7.27

Average receive rate