(Recasts first paragraph, adds stock price, advisors)
Oct 17 (Reuters) - Food retailer and wholesaler Supervalu Inc said it will sell its Save-A-Lot business to Canadian private equity firm Onex Corp for $1.37 billion rather than spinning off the discount grocery chain as previously planned, the companies said on Monday.
Eden Prairie, Minnesota-based Supervalu had been looking to separate the more profitable division, which generates about a quarter of the company’s sales, from its slower-growing grocery wholesale and food retail businesses as bigger rivals such as Wal-Mart Stores Inc increase their focus on groceries.
Supervalu stock gained about 8 percent in Monday morning trading.
Supervalu said it will enter into a five-year agreement to provide Save-A-Lot with some services and support functions as part of the deal.
Save-A-Lot has a network of about 1,370 company-owned and licensed stores across 37 states in the United States, the Caribbean and Central America.
Onex made the best offer in an auction for Save-A-Lot, Reuters reported in September.
Supervalu decided to explore an outright sale of the discount grocery chain after receiving interest from several private equity firms, Reuters reported in December.
Supervalu said on Monday it expects to use the sale proceeds to prepay at least $750 million of its outstanding term loan.
The deal is expected to close by Jan. 31, the companies said.
Barclays Capital Inc and Greenhill & Co LLC were financial advisers to Supervalu, while Wachtell, Lipton, Rosen & Katz acted as legal adviser.
Citigroup was sole advisor to Onex and led the financing.
Reporting by Sruthi Ramakrishnan in Bengaluru and Lauren Hirsch in New York; Editing by Sriraj Kalluvila and Will Dunham