ACQUISITIONS

Supervalu Acquisition

On July 25, 2018, the Company entered into an agreement and plan of merger (the “Merger Agreement”) to acquire all of the outstanding equity securities of Supervalu, which was then the largest publicly traded food wholesaler in the United States. The acquisition of Supervalu diversifies the Company’s customer base, enables cross-selling opportunities, expands market reach and scale, enhances technology, capacity and systems, and is expected to deliver significant synergies and accelerate potential growth. The merger was completed on October 22, 2018. At the effective time of the acquisition, each share of Supervalu common stock, par value $0.01 per share, issued and outstanding, was canceled and converted into the right to receive a cash payment equal to $32.50 per share, without interest. Total consideration related to this acquisition was approximately $2.3 billion, $1.3 billion of which was paid in cash to Supervalu shareholders and $1.0 billion of which was used to satisfy Supervalu’s outstanding debt obligations.

The assets and liabilities of Supervalu were recorded in the Company’s consolidated financial statements on a provisional basis at their estimated fair values as of the acquisition date. In conjunction with the Supervalu acquisition, the Company announced its plan to sell the remaining acquired retail operations of Supervalu. Refer to Note 18. “Discontinued Operations” for more information.

The following table summarizes the consideration paid, preliminary fair values of the Supervalu assets acquired and liabilities assumed, and the resulting preliminary goodwill. Due to the recent closing of the transaction, management’s ongoing assessment of the fair values of acquired assets and liabilities, and its further review of certain disposal components being classified as held for sale, as of January 26, 2019, the purchase price allocation was preliminary and will be finalized when valuations are complete and final assessments of the fair value of other acquired assets and assumed liabilities are completed. There can be no assurance that such final assessments will not result in material changes from the preliminary purchase price allocations, and such changes may result in increases or decreases to the goodwill impairment charge recorded in the second quarter of fiscal 2019 due to changes in the opening balance sheet value of goodwill. The Company’s estimates and assumptions are subject to change during the measurement period (up to one year from the acquisition date), as the Company finalizes the valuations of certain tangible and intangible asset acquired and liabilities assumed.



	As of October 22, 2018
(in thousands)	Preliminary as of October 27, 2018			Preliminary as of January 26, 2019
Cash and cash equivalents	$	25,102		$	25,102
Accounts receivable	557,680			556,562
Inventories	1,162,360			1,162,360
Prepaid expenses and other current assets	66,440			70,440
Current assets of discontinued operations⁽¹⁾	196,615			196,615
Property, plant and equipment	1,148,001			1,221,925
Goodwill	347,485			491,695
Intangible assets⁽²⁾	1,077,541			885,658
Other assets⁽²⁾	109,445			80,105
Long-term assets of discontinued operations⁽¹⁾	404,301			442,701
Accounts payable	(967,429		)	(972,340		)
Other current liabilities	(282,692		)	(327,713		)
Current portion of long term debt and capital lease obligations	(579,677		)	(579,677		)
Current liabilities of discontinued operations⁽¹⁾	(150,611		)	(150,690		)
Long-term debt and capital lease obligations⁽³⁾	(179,262		)	(138,163		)
Pension and other postretirement benefit obligations	(234,324		)	(234,324		)
Deferred income taxes	(177,231		)	(100,612		)
Other long-term liabilities⁽³⁾	(200,913		)	(306,816		)
Long-term liabilities of discontinued operations⁽¹⁾	(1,401		)	(1,398		)
Total fair value of net assets acquired	2,321,430			2,321,430
Plus: noncontrolling interests	1,633			1,633
Less: cash and cash equivalents⁽⁴⁾	(30,596		)	(30,596		)
Less: assumed equity award liabilities	(18,638		)	(18,638		)
Plus: cash paid for equity awards	—			8,105
Total consideration paid in cash	2,273,829			2,281,934
Plus: unpaid assumed equity award liabilities⁽⁵⁾	18,638			10,533
Total consideration	$	2,292,467		$	2,292,467


(1)	Refer to Note 18. “Discontinued Operations” for additional Condensed Consolidated Balance Sheets information regarding the carrying value of discontinued operations at the end of the second quarter of fiscal 2019, subsequent to the acquisition date.


(2)	During the second quarter of fiscal 2019, the Company reclassified favorable operating lease intangible assets from Other assets to in Intangible assets within this table.

(3)

During the second quarter of fiscal 2019, the Company reclassified residual financing obligations associated with build-to-suit properties for which the Company is not obligated to fund unless it is obligated under a future extension of a lease agreement. This reclassification resulted in a reduction of Long-term debt and capital lease obligations of $23.8 million, with an offsetting increase in Other long-term liabilities assumed within this table. If the terms of the respective leases are extended and a cash obligation for a portion of this residual value balance exists, the Company will present these contractual obligations within Long-term capital lease obligations within the Condensed Consolidated Balance Sheets.


(4)	Includes cash and cash equivalents acquired attributable to discontinued operations.


(5)	Includes equity consideration for share-based awards that have not yet been paid, which reflects non-cash consideration for the second quarter of fiscal 2019 that will become cash consideration in subsequent periods.

Preliminary goodwill represents the future economic benefits arising largely from the synergies expected from combining the operations of the Company and Supervalu that could not be individually identified and separately recognized. The Company is currently evaluating the tax deductibility of the provisional goodwill amount, however it currently expects a substantial portion of its goodwill to be deductible for income tax purposes. Based on the preliminary valuation, goodwill resulting from the acquisition was primarily attributed to the Company’s wholesale segment, which is presented in Goodwill in the table above. In addition, $201 thousand of preliminary goodwill was attributed to the retail reporting unit within discontinued operations. Refer to Note 7. “Goodwill and Intangible Assets” for additional information regarding the assignment of goodwill to the Company’s reporting units.

During the second quarter of fiscal 2019, the Company updated its preliminary fair value estimates of its net assets primarily due to a review of the cash flows used to measure fair value of intangible assets, updated estimates of expected fair value, less costs to sell, of its retail disposal groups based on indications of value, and updates to estimated carrying values of other assets and liabilities based on an ongoing review of their fair values.

The following table summarizes the identifiable intangible assets recorded based on provisional valuations. The identifiable intangible assets are expected to be amortized on a straight-line basis over the estimated useful lives indicated. The preliminary fair value of identifiable intangible assets acquired was determined using income approaches. Significant assumptions utilized in the income approach were based on Company-specific information and projections, which are not observable in the market and are thus considered Level 3 measurements as defined by authoritative guidance.



		As of October 22, 2018
(in thousands)	Estimated Useful Life	Continuing Operations			Discontinued Operations
Customer relationship assets	11–19 years	$	785,000		$	—
Favorable operating leases	3–25 years	23,658			—
Tradenames	2-9 years	66,000			17,000
Pharmacy prescription files	5–7 years	—			41,100
Non-compete agreement	2 years	11,000			—
Unfavorable operating leases	2 years	(20,777		)	—
Total Supervalu finite-lived intangibles acquired		$	864,881		$	58,100

In addition to the acquisition of assets and assumption of liabilities above, the Company also began a restructuring plan which resulted in additional costs and expenses recorded in its Condensed Consolidated Statements of Income for the 13-week period and 26-week period ended January 26, 2019. Refer to Note 5. “Restructuring, Acquisition, and Integration Related Expenses” and Note 13. “Share-Based Awards” for further information.

The accompanying Condensed Consolidated Statements of Income include the results of operations of Supervalu since the October 22, 2018 acquisition date through January 26, 2019, which consisted of net sales from continuing operations of $3.70 billion, of which $3.47 billion was recorded in the 13-week period ended January 26, 2019. Supervalu’s net sales from discontinued operations for this time period are reported in Note 18. “Discontinued Operations”.

The following table presents unaudited supplemental pro forma consolidated Net sales and Net income from continuing operations based on Supervalu’s historical reporting periods as if the acquisition had occurred as of July 30, 2017:



	13-Week Period Ended			26-Week Period Ended
(in thousands, except per share data)	January 27, 2018⁽²⁾			January 26, 2019⁽¹⁾			January 27, 2018⁽²⁾
Net sales	$	6,159,106		$	12,134,176		$	12,056,161
Net loss from continuing operations	$	(25,388	)	$	(411,196	)	$	(34,349	)
Basic net loss from continuing operations per share	$	(0.50	)	$	(8.11	)	$	(0.68	)
Diluted net loss from continuing operations per share	$	(0.50	)	$	(8.11	)	$	(0.68	)


(1)	These pro forma results reflect an additional 12 weeks from Supervalu for the period ended, September 8, 2018.


(2)	These pro forma results reflect Supervalu’s and Associated Grocers of Florida, Inc.’s, which was acquired by Supervalu on December 8, 2017, 13-week and 26-week periods ended December 2, 2017, respectively.

These unaudited pro forma results are presented for informational purposes only and are not necessarily indicative of what the actual results of operations of the combined companies would have been had the acquisitions occurred at the beginning of the periods being presented, nor are they indicative of future results of operations.