He may not be much of a merchant, but in a high stakes poker game Ron Burkle, managing partner of private equity firm Yucaipa Cos., will always be the house favorite.
With an impressive track record of acquiring and then flipping such retailers as Fred Meyer, Boys Markets, Dominicks and Pathmark, Burkle is simply the best margin player in the history of the grocery business.
His proposed takeover of A&P (along with other investment firms Goldman Sachs and Mount Kellett Capital) for $490 million would give him the flexibility and control he needs to operate, liquidate or sell large blocs of stores. At the end of the day, there’s another big payday coming his way if he can close the deal.
Burkle et al took a big first step towards that goal on November 14 when A&P won U.S. Bankruptcy Court allowance of Burkle’s offer. “Without this capital infusion there is no viable reorganization,” said Ray Schrock, an attorney representing A&P. “It’s absolutely critical.”
Bankruptcy Court Judge Robert Drain approved the financing commitment in White Plains, NY, saying A&P was locking in financing now while keeping the ability to consider other offers that may come along. A&P will return to court for approval of the bankruptcy plan. It has said it expects to emerge from bankruptcy early next year.
“Both noteholder investors and Yucaipa are well established and well-regarded investors,” Drain said.
If Burkle and his new alliance can settle A&P’s contractual issues with its unions (still a big if, but his track record in union negotiations has been traditionally very good), then he stands to earn his biggest payday since Kroger acquired Fred Meyer from Yucaipa in 1998 for $8 billion.
Yucaipa’s link to A&P actually began with its $150 million investment in Pathmark in 2005. When A&P acquired Pathmark in 2007 for $1.3 billion (including $600 million in debt), Burkle was already playing with house money. Over the past four years, he upped his equity in A&P with a $115 million cash infusion in 2009. Yucaipa reportedly was also part of the financial group (along with JP Morgan Chase) that provided A&P with $800 million in Debtor-In-Possession (DIP) financing when it filed for Chapter 11 protection 11 months ago.
There are obviously several hurdles that Burkle and his group must clear before taking control of the Tea Company.
The union issue is a critical one because it is the most important potential player for A&P ownership going forward. However, unless the UFCW wants to up Yucaipa’s offer (doubtful) and acquire the beleaguered chain itself, don’t expect any serious counter-offers.
Under the new financing plan, the investors will purchase new notes and shares and will receive all the equity in the reorganized company, according to court papers. Secured creditors will be paid in full and a $40 million cash pool will be available for general unsecured creditors, according to the court filing. That number is incredibly low when you consider that there are $2.5 billion in outstanding unsecured claims. Expect the thousands of unsecured creditors to fight this proposed meager payment vigorously.
So, do many believe that Yucaipa will invest the tens of millions of dollars needed to get A&P even back up to “sea level?” And even if that investment is made, does A&P have the mojo to compete with the likes of ShopRite, Stop & Shop, Wegmans, Fairway and other retailers that have demonstrated operational, marketing and merchandising superiority for many years?
In my opinion, this is ultimately a “sale of assets” deal. First, look for them to sell off the non-core pieces of A&P’s current business (some of its Delaware Valley stores and perhaps Food Emporium for its real estate value).
I would expect Burkle and the gang to hang on to most of the stores in the metro New York market, spruce them up a bit and then eventually sell those as well.
Actually, the new A&P management team led by CEO Sam Martin has done a significantly better job than former chairman Christian Haub (whose reign at A&P seemed to last longer than the Ming Dynasty – but that’s what happens when your daddy controls the company). However, the numbers remain poor (as of September 10, the retailer reported total assets of $2.34 billion and liabilities of $3.58 billion). A&P also has those costly legacy union contracts (and potential pension fund issues), and the metro NY-Philly corridor remains painfully overstored with many diverse retailing styles, most of which are non-union.
The handwriting is pretty clear: A&P, despite some improvement, has shown no inclination to make money for more than a decade. Burkle believes that Yucaipa’s the most qualified buyer in this modified rummage sale and he has put himself in the best position to take advantage of this opportunity.
I wonder how much the Super Fresh store in Gladwyne, PA is worth? How much can the Pathmark on Aramingo Avenue in Philadelphia fetch? What will somebody pay for the Food Emporium on East 59th Street and 1st Avenue. in Manhattan?