Taking Stock

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Yucaipa Ready To Say Sayonara To A&P?

Another “sales exploration,” another potential sale (or in this case, a possible asset dump for a continually eroding once iconic franchise). Yes, it appears that Yucaipa Cos.’ ownership of the (once) Great Atlantic & Pacific Tea Company may be extremely short-lived.

Sixteen months after the large California-based private equity firm took full control of A&P, the option of selling the company is indeed on the table as outlined in a memo by Tea Company chairman Greg Mays. According to the memo, “…future growth requires constant capital investment in our stores, our infrastructure and our people. Accordingly, having made significant progress in improving the financial foundation of the current business, A&P is now in a position to consider strategic future growth plans that will focus on raising new capital to meet those investment goals. Our goal is to ensure that the company is well-positioned for future success that will benefit A&P, our associates, partners, suppliers and customers – and we will ultimately pursue what is the best possible course for all constituents.” The memo continued, “Indeed, it is possible we will decide not to pursue any of these alternatives and will instead choose to simply capitalize our growth plan at a slower pace from internal free cash flow. While it’s premature to speculate on the exact outcome of the strategic review process, we want to be clear that this financial initiative is the first step toward building a stronger future for our business.”

My translation: the company no longer wants to self-feed its declining assets, would consider some outside financial aid, but most likely hopes to sell the company intact to a single buyer.

Mays’ comments cover Yucaipa’s “foundational” issues (leveraging better labor and distribution contracts as well as negotiating more flexible banking agreements), but curiously make no direct mention of what the trade and A&P’s declining consumer base experience on a daily basis: the stores still operate in below par fashion and A&P’s market share continues to dwindle on a quarterly basis.

Where was the investment in enhancing the physical plants, in improving the morale of the associates, and in upgrading its merchandising and marketing programs? Following its exit from Chapter 11 in March 2012, we heard the hoopla from Yucaipa about the capital they would spend to improve A&P – investing in its people and improving its physical plants – which would ultimately yield greater revenue and profits. The UFCW bought into the rhetoric, agreeing to major financial and benefit concessions so that A&P could be in a better situation to survive and ultimately prosper.

When the clerks and meatcutters went back to the table after a year to seek some givebacks, their requests fell upon deaf ears. And if you are going to detail the entire management turnover in the past eight months, you’d better get a big scorecard. On almost every visceral level, A&P has failed and continues to fail. Yes, it’s possible that Yucaipa could find another financial partner to fund A&P’s future, but to do so, it would certainly have to give up some real estate equity (which is what this deal was all about anyway). It’s even possible that, at a fair price, one outside buyer could acquire the entire organization from Yucaipa.

However, without control of A&P’s prized real estate, the value of the Tea Company is greatly diminished. Purely on store performance, who’s going to buy a retailer where more than 50 percent of its store base is considered non-competitive (on several levels – size, innovation, modernization, perishables, etc.)? A new buyer could upgrade A&P’s non-descript pricing image, its vanilla advertising and merchandising programs, while possibly improving morale if a more focused and passionate owner acquired the stores. But A&P has absorbed so many battle scars (many self-inflicted), that the stores by themselves have declining value.

Sure, sweet spots remain (particularly in Bergen County, NJ and the Lower Hudson Valley of New York) where ShopRite doesn’t have the same level of penetration it does in most of the other areas where A&P operates. But it’s not just ShopRite. Wegmans, Wal-Mart, club and drug operators are taking their share from the second tier operators and for the past 30 years it’s been a feeding frenzy at the expense of A&P, even more so since Yucaipa gained control.

We expect a prospectus to be issued in the next few weeks and then we should quickly learn the extent of the bidding process. My guess is that A&P is not saleable (if Yucaipa goes in that direction) as a single entity. So, the usual players are expected to get involved – Ahold USA and ShopRite, which because of store overlap issues would not be able to acquire the whole chain (nor do I suspect they’d want to). The recent speculation that Kroger would take a run at A&P just doesn’t sound logical, given its recent acquisition of Harris Teeter coupled with the less than stellar condition of A&P’s stores (not to mention the huge investment it would take to make them competitive) and the several underfunded pension plans that would have to be dealt with. This is shaping up as a combination multi-store sale (to several large players) and an auction in which smaller groups of units or even individual stores would be moved. The real world picture for Yucaipa currently is much different than its halcyon days when it sold Fred Meyer to Kroger for more than $13 billion in 1999 or even when it unloaded Pathmark (to – who else – A&P) at a tidy profit in 2007.

And one more thing to consider: about two years ago, we predicted that the Delaware Valley-Metro New York corridor would be facing significant reconfiguration, given shifting market conditions fueled by the poor economy combined with heightened and diverse competition. First to leave was Genuardi’s, which had a smaller store base (about 30 stores) and a non-union operation.

We’ve been told by several sources, per its banking agreements, that private equity firm Cerberus Capital Management, which owns struggling Acme Markets, can’t divest key assets for 18 months after its acquisition
of Supervalu (another real estate-driven deal that was separated into two pieces). If that’s the case, and Cerberus ultimately wants to sell operating divisions or large blocs of stores, A&P’s decision to potentially “get out of Dodge” before September 21, 2014, would be a prudent one.

Because, among weak sisters, being the last man standing ain’t such a good thing.