After much pestering from investors, SuperValu is finally separating its Save-A-Lot business from the rest of the company in its financials. While the entire company as a whole is having trouble meeting expectations (earnings per share in its most recent operating period were just 19 cents against an estimate of 38 cents), there is a growing albeit small segment of the company that is quite profitable.

Save-A-Lot showed revenue growth of almost 10% on operating margins of 5.5% in its most recent fiscal year. These numbers compare favourably to even the strongest of Save-A-Lot's competition. Unfortunately, Save-A-Lot represents just 12% of SuperValu's total revenue.

But as we've seen before, a profitable segment offers options that otherwise aren't present. The most obvious option is a sale of this segment. Unfortunately, this would have the effect of robbing the company of its most profitable business, leaving the rest of the company with weak operations and likely still saddled with a bunch of debt.

But another option involves the possibility of spinning off Save-A-Lot's business, which would likely have a market value on its own that is much larger than that of the current combined businesses. (Save-A-Lot had operating earnings of $232 million last year, while SuperValu as a whole trades for just $470 million.) This would be a case of -2 + 2 = 2, because debts are not recourse to the stockholder, and therefore a debt-laden company can't be worth less than 0 (i.e. the -2 effectively equals 0 if separated out).

The question is whether this could be deemed legal. Surely debt holders would have a problem with this, but would they prevail? Management was recently asked about the feasibility of spinning off Albertson's along with its debt on the company's latest conference call, but management offered no hints as to the feasibility of such a plan.

Save-A-Lot may be shielded from some of SuperValu's debt. For example, the prospectus of the 7.5% notes due in 2014 stipulate that "Our subsidiaries are separate and distinct legal entities. Our subsidiaries have no obligation to pay any amounts due on the notes..."

Whether the above statement or others could be used to allow a spin-off of Albertson's or Save-A-Lot is an open question. Presumably, the board is considering this option as part of its strategic review. As a result, this segment could yet generate value for shareholders.

Disclosure: Author has a long position in shares of SVU

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