Exploring the Disruptive Force of Retail M&A Michael Johns BMO Managing Director Executive Summary “Traditional” Grocery Adaptation Current Industry Tailwinds Stronger Than Headwinds U.S. consumer is aging and becoming more diverse Only the strongest survive Health, wellness, and specialty trends Alternate channel competition Omni-channel consumer Structural resistance to online (so far) Improvements in the supply chain Near term deflation – long term inflation Capital markets disruption The Pace of Activity Has Picked Up The Future Is Uncertain Overall U.S. economic recovery Long term impact of online Lesser threat from Walmart “Fresh” supply chain and food safety Few scaled independents left Access to capital Low cost of capital Changing formats 1 Current Themes in Retail KEY FACTORS INFLUENCING RETAILERS The U.S. Consumer Real Estate Values Commodity Costs Increasing SG&A Strong Dollar Increasing Labor Costs Near-term Growth Outlook Shipping & Returns KEY TRENDS IN RETAIL Omni-channel is the winning strategy Changing consumer demographics Customer focus vs. channel focus “Loyalty” program transformation Brick & Mortar as a brand building experience Retailers re-evaluating supply chain Increasing use of technology and “big data” 2 Where Food Consumers Are Spending FOOD AWAY FROM HOME VS. FOOD AT HOME 60% At Home Away from Home 50% ` 40% 1986 1998 2010 2022P OVERALL SPENDING ON FOOD CONTINUES TO GROW 2014-2022P CAGR Overall Food Expenditures 3.9% At Home Away from Home Food At Home 3.2% 2022 $1,950 Food Away from Home 4.6% 2014 $1,047,700 $1,300 $731,300 $650 $950,600 $727,800 GrossSpending (in millions) $0 1986 1998 2010 2022P Source: Willard Bishop June 2015 and June 2010 - The Future of Food Retailing and USDA 3 Retailers Must Adapt to an Older and More Diverse American Consumer INCREASINGLY DIVERSE U.S. CUSTOMER BASE White Hispanic Asian Other 15.4% 15.7% 16.1% 16.4% 16.8% 17.2% 17.6% 18.1% 18.5% 18.9% 5.1% 5.5% 5.8% 6.2% 6.5% 6.8% 7.1% 7.4% 7.7% 7.9% 17.8% 19.1% 20.5% 21.9% 23.4% 25.0% 26.5% 28.0% 29.3% 30.6% 61.8% 59.7% 57.6% 55.5% 53.3% 51.0% 48.8% 46.6% 44.5% 42.6% 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060 AGING U.S. POPULATION Age 60+ Age 65+ Age 85+ 30% 25% 25.5% 20% 20.2% 15% 10% 5% 4.3% 0% 1980 1990 2000 2010 2020P 2030P 2040P 2050P Source: USDA, U.S. Administration on Aging 4 Conventional Grocers Have Adapted BIFURCATED SUPERMARKET LANDSCAPE SSSG – FY 2012 SSSG – LTM T ODAY Specialty -4.9% 3 YEARS AGO Conventional +1.0% -0.2% Value Source: Company filings 5 Note: SSSG % reflects average quarterly same-store sales growth Scarce Remaining Scaled, Independent Grocery Players GROCERY RETAIL HAS UNDERGONE SEVERAL WAVES OF CONSOLIDATION Apr-97 Jun-99 Jun-06 Mar-12 Mar-13 Jan-14 Jul-14 Oct-15 Safeway acquires Albertsons Supervalu BI-LO acquires Cerberus Kroger Kroger Fresh Market Vons acquires acquires Winn-Dixie acquires New acquires acquires explores sale American Stores Albertsons Albertsons Harris Teeter Vitacost 1996 1997 1998 1999 2006 2012 2013 2014 2015 2016+ Aug-96 Oct-98 Sep-99 Jun-06 Nov-13 Mar-14 Nov-15 Ahold Ahold Safeway Cerberus Sobey’s Cerberus/Albertsons Kroger acquires acquires acquires consortium acquires announces announces Stop & Shop Giant Food Randall’s acquires non- Safeway acquisition of acquisition of Food core Albertsons Canada Safeway Roundy’s Markets stores SELECTED EV/LTM EBITDA VALUATIONS HAVE TRENDED DOWN OVERALL, BUT STILL EXHIBIT PEAKS RELATED TO PERIODS OF HIGH M&A ACTIVITY Avg. Avg. (Excl. SVU) Albertson's American Stores Ahold Ingles Markets Kroger Safeway SuperValu ‘94-Today Average: 7.1x 7.3x Today Average: 7.3x 7.9x 18.0x 13.0x 8.0x 3.0x Jan-95 Jan-02 Jan-09 Jan-16 Source: Capital IQ 6 Specialty Grocery Valuations Have Fallen STOCK PRICE PERFORMANCE National Grocer Index Regional Grocer Index N&O / Specialty Grocer Index S&P 500 115 97 90 93 92 65 54 40 Mar-15 Jul-15 Nov-15 Mar-16 EV / NTM EBITDA National Grocer Index Regional Grocer Index N&O / Specialty Grocer Index 13.5x 11.0x 8.5x 8.5x 7.8x 7.0x 6.0x Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Source: Capital IQ; as of 3-Mar-2016 7 Note: National Grocers include Kroger, Ahold, and SuperValu, Regional Grocers include Ingles, SpartanNash, Smart & Final, and Weis Markets, N&O / Specialty include Fairway Group, Whole Foods, The Fresh Market, Natural Grocers, and Sprouts Farmers Market. Precedent Transactions Show Cyclical Upturn in Traditional Grocery Valuations PERIOD: 2005 – 2007 PERIOD: 2008 – 2011 PERIOD: 2012 – 2015 Mean: 9.3x Mean: 6.4x Mean: 7.2x Median: 10.0x Median: 6.7x Median: 7.0x 12.8x 11.3x 10.7x 10.7x 10.1x 9.9x 9.2x 7.6x 7.8x 7.5x 7.2x 6.8x 6.7x 6.8x 5.7x 5.7x 5.5x 5.0x 5.2x 4.2x 3.6x VG's T&T New United A&P Smart & Wild Oats Pathmark Tops A&P Grocery Winn- Safeway Harris Nash Target Sobey's Food Super- Target A Target B Albert- Super- Gelson's Safeway Roundy's Canada Final Markets Stores Markets Canada Outlet Dixie (Canada) Teeter Finch Center market sons markets Great AB New Whole Atlantic & Morgan Spartan Berkshire Acquirer Acquirer Spartan Acquirer Metro Apollo Empire Loblaws Yucaipa BI-LO Acquisiti- Sobey's Kroger Albert- TPG Albertson's Kroger Foods Pacific Stanley Stores Partners A B Stores on son's Tea EV $1,524 $806 $664 $1,279 $1,060 $310 $102 $225 $400 $400 NA $464 $300 $3,300 $5,800 $2,469 $771 $385 $369 $9,067 $823 Year 2005 2007 2007 2007 2007 2007 2008 2009 2009 2009 2011 2012 2012 2013 2013 2013 2013 2013 2013 2014 2015 Traditional Food Retail Mean: 7.3x Specialty Food Retail Mean: 10.0x Traditional Food Retail Median: 6.8x Specialty Food Retail Median: 10.1x Consolidation has driven up traditional grocery multiples in recent years; scarcity of scaled, independent assets likely to drive continuation of recent trends Source: BMO Capital Markets, Capital IQ, and Company filings and press releases 8 Note: Omitted information reflects proprietary BMO Capital Markets knowledge. Preparing for an Acquisition Diligence and Post-Integration Considerations Develop a clear M&A strategy Financial leverage Broad internal buy-in Owned vs. leased stores Human Resources Ability to capture “synergies” Optimize the Balance Sheet Unions / labor External Communications Executing a “go to market” strategy Supply Chain Management Systems integration Relationships with vendors Choosing a private label program Combining loyalty programs 9 Capital Markets Volatility Is a Near-Term Headwind Equity Capital Markets EQUITY MARKET VOLATILITY The VIX has subsided after hitting nearly 4 year CBOE Market Volatility Index (VIX) highs in late 2015 45 40 Debt Capital Markets Pricing, terms, and availability are being impacted 35 by: 30 – Global growth and geopolitical concerns 25 – Challenging commodity environment 20 – Overall investment sentiment (outflows) 15 – Sector specific issues (Retail, Energy, etc.) 10 – Robust M&A environment 5 Mar-14 Nov-14 Jul-15 Mar-16 LEVERAGED LOAN MARKET HIGH YIELD BOND MARKET Average Bid Price BB Index B Index 101.0 11% BB 10-Year Average B 10-Year Average 10% 99.0 97.0 9% (46) 8% bps 97.0 Yield 7% 87 95.0 6% bps Average Price Bid Average 5% 93.0 4% Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Source: FactSet, AMG Data, Bloomberg, High Yield Prospect News, Standard & Poor’s Leveraged Commentary and Data, AdvantageData 10 Volatility in the Capital Markets Is Impacting Retail Balance Sheets ALBERTSONS’ IPO POSTPONED NEIMAN MARCUS IPO POSTPONED ~$2 billion October 2015 IPO delayed following disappointing Delayed due to “jitters in the stock market” Walmart outlook Bond prices have declined by over 30% Not expected to price until markets improve BELK OFFERS SIGNIFICANT TLB DISCOUNT KKR SELF-ISSUES FOR RETAIL DEAL Widened discount to 89 cents on proposed $1.5 billion first- KKR unable to find bank financing for LBO of Mills Fleet Farm lien term loan to finance Sycamore’s ~$3 billion buyout Issued and underwrote over $700 million of debt, and used its own capital markets desk to syndicate the debt One of the biggest discounts of the year Source: Public websites 11 The Debt of Major Grocers Has Traded Down TLB TRADING PRICES – LAST 2 YEARS SVU TL 2019 ABS TL due 2019 ABS TL due 2019 ABS TL due 2021 ABS TL due 2022 104 102 100 Bid Price 98 96 94 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 HIGH YIELD BOND TRADING YIELDS – LAST 2 YEARS SVU 6.75% due 2021 SVU 7.75% due 2022 ABS 7.75% due 2022 ABS 7.75% due 2026 ABS 6.625% due 2028 ABS 7.45% due 2029 ABS 8.70% due 2030 ABS 8.00% due 2031 15.0% 13.0% 11.0% Worst - To - 9.0% Yield 7.0% 5.0% Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Source: Bloomberg, AdvantageData 12 APPENDIX Appendix 13 APPENDIX Grocery Retail – Trading Performance Grocery Retail – Multiples and Trading Performance National Grocers EV / 2016E EBITDA EV / 2017P EBITDA 8.5x 8.1x 7.8x 7.4x 5.0x 4.8x 8.2x Regional Grocers 7.3x 6.9x 6.8x 6.6x 6.4x n.a.