Taking Stock

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‘Round The Trade 

Just before presstime, Safeway announced that it plans to exit the Chicago market where currently it operates 72 Dominick’s stores early next year. Much like the company’s withdrawal from the Delaware Valley market 18 months ago when it sold what stores remained from its failed Genuardi’s purchase (mainly to Ahold USA’s Giant/Carlisle unit), the real question that should be asked is: why did either of these decisions take more than 10 years to make? Part of the answer could lie in the fact that new Safeway CEO Robert Edwards’ signature was on neither deal (both deals were made by former chief executive Steve Burd) and based on the declining numbers, Edwards was more than ready to cut bait. The Pleasanton, CA based retailer originally acquired Dominick’s 116 stores in 1998 for $1.2 billion plus debt. Sales at the time were approximately $2.6 billion. According to Safeway, Dominick’s incurred a loss of $8.4 million in its third quarter (ended September 7), compared with a loss of $6.2 million a year ago; and a loss of $21.5 million for the year to date, compared with a loss of $16.8 million for the 36-week period a year ago. For fiscal 2012 Dominick’s had a net loss of $31.5 million. The big retailer said it has already seen significant interest in Dominick’s assets and, much like it did with Genuardi’s, plans to sell as many stores as it can. Cerberus/New Albertsons’ Jewel-Osco unit has agreed to acquire four of the stores. Clearly, Edwards isn’t wasting anytime in dumping unproductive or non-aligned assets, having also sold its Canadian operation to Sobeys (the deal is slated to close next quarter). After “vanilla-izing” two once-dominant regional chains in Dominick’s and Genuardi’s, can we expect Safeway to also consider selling off another less than stellar acquisition it made in the same era – Randall’s in Texas?…well as it turns out, the Delhaize Group is actually looking for a U.S. CEO to replace Roland Smith who resigned last month after Frans Muller was named group chief executive. Also resigning, effective October 31, is Stefan Descheemaeker who presided over Delhaize’s European operation. As for the currently vacant Delhaize America (DA) job, whoever gets that post will certainly earn whatever compensation they agree to. With its core Food Lion unit still struggling (yes, there’s been some improvement, but not enough to make a discernible difference) and its Bottom Dollar Foods discount banner still posting red ink, you have to wonder how much shelf life remains at its U.S. stores. One of the better moves that DA made under the short reign of Smith was dumping its Sweetbay, Harveys and Reid’s banners to Bi-Lo Holdings (165 units were sold at the ridiculously discounted price of $265,000). Now Bi-Lo’s parent firm, run by veteran grocery executive Randall Onstead and part of private equity firm Lone Star Funds (which got into the supermarket acquisition game in 2005 with the purchase of Bi-Lo and Bruno’s from Ahold, also acquired Winn-Dixie in 2011 and recently bought 22 Piggly Wiggly units ), has filed with the SEC to go the IPO route (not surprising, based on Lone Star’s history and the increasingly obvious fact that most these PE-driven deals are primarily about sucking out the real estate value of their assets while offering little improvement in the overall shopping experience). The name of the new entity will be Southeastern Grocers and it is looking to raise $500 million for the public offering. Separate, but related to this news is that Bi-Lo will retire the Sweetbay and Reid’s names and convert the former chain to the Winn-Dixie banner and the latter group to the Bi-Lo banner. Harveys Supermarkets, with 73 stores in Georgia, Florida and South Carolina, will retain its name…Harris Teeter’s deal to be acquired by Kroger was overwhelmingly approved by HT’s shareholders. Approximately 98.6 percent of the votes cast at the October 3 meeting were in favor of the agreement. Harris Teeter expects to close the transaction in Q4 of this year when the waiting period for the Hart-Scott-Rodino Act is completed. The FTC most likely will have some input concerning possible store overlaps, particularly in the Tidewater VA, Charlottesville VA and Raleigh-Durham, NC markets…a federal grand jury has named nine Baltimore food retailers, indicting them on charges of stealing nearly $7 million from food assistance programs in a scam known as “food trafficking.” Those retailers are accused of agreeing to debit cash for beneficiaries without selling food and then retaining a cut of the proceeds. Specifically, the indictment alleges that the retailers allowed customers to convert their SNAP debit cards into cash, typically splitting the proceeds. Federal prosecutors allege that, to avoid being detected, the store owners debited the funds from the cards in multiple transactions over a period of hours or days. According the U.S. Department of Agriculture, c-stores and small grocery stores account for 15 percent of all redemptions, but 85 percent of all trafficking, and violations are more likely to occur in higher-poverty neighborhoods. Among those indicted was Abdullah Aljaradi, 51, who prosecutors say owns the Second Obama Express (interesting name) in Charm City. He is accused of defrauding the government of $2 million in benefits over a three-year period. Eight other merchants are charged with bilking the SNAP program of between $348,000 and $1.4 million. Prosecutors say those charged face a maximum sentence of 20 years in prison for each count of wire fraud, and others face additional charges of food stamp fraud…update on the proposed acquisition of most of Tesco’s Fresh & Easy Stores by private equity firm Yucaipa. While Yucaipa remains the clear frontrunner, F&E filed for bankruptcy protection, which certainly will delay the proposed acquisition while, among other things, giving the West Coast retailer some relief from its store leases. (A&P also sought the Chapter 11 route prior to completing its deal with Yucaipa in 2012.) As part of the bankruptcy filing, a Tesco subsidiary would loan a Yucaipa affiliate $120 million to help fund the takeover. Tesco would then be granted warrants to acquire as much as 10 percent of the reorganized company. If pre-bankruptcy highest bidder Yucaipa ultimately wins a court authorized auction, that Tesco subsidiary would retain an equity stake of 22.5 percent of the reorganized chain. If Yucaipa gains control of the majority of the F&E units, we continue to believe that managing partner Ron Burkle will convert those 150 F&E units to the Wild Oats banner, a company in which he was heavily invested until the natural and organics retailer was sold to Whole Foods in 2007…. moving north apiece, the titanic intra-family battle between the two Demoulas families (Market Basket) continues as the company’s board, led by Arthur S. Demoulas, attempts to oust current company CEO Arthur T. Demoulas (they are first cousins). Most recently, a Massachusetts Superior Court Judge Judith Fabricant allowed a $300 million distribution payment to shareholders which Arthur T. Demoulas had sought to block, arguing that the disbursement “a money grab by some of the shareholders and is the very definition of irreparable harm from a business perspective” that would “break Market Basket’s proven business model and forever change how the company operates and grows.” He’s probably right, and while he’s in the midst of a board battle which seeks his ouster, the truth of the matter is that Arthur T. is not only unusually popular with Demoulas’ associates, he has led the company to significant growth over a 15 year period and has helped his company earn the reputation that Market Basket is one of the best regional food chains in America. And just before presstime, one of Market Basket’s three independent directors has resigned effective immediately. Former Harvard Business School faculty member Nabil el-Hage, who was part of the total seven member board at the high-powered Tewksbury, MA regional chain, wrote that his board seat “had evolved into a very difficult and time-consuming assignment.” He cited 28 board and committee meetings in two-and-a-half months. “The position had grown to require far more time than I had available to devote to it.” What a mess! Sadly, this is another family battle centered on greed.