Associated Wholesalers, Inc. (AWI), the Robesonia, PA regional cooperative food distributor, announced on September 9 that it has entered into an asset purchase agreement with C&S Wholesale Grocers pursuant to which C&S will acquire substantially all of AWI’s assets, including its White Rose distribution business, three distribution centers that are operated by AWI and White Rose, and the leasehold equity AWI and White Rose maintain with certain retail customers. Under terms of the agreement, C&S will serve as the “stalking horse bidder” in a court-supervised auction process. Accordingly, the asset purchase agreement is subject to higher and otherwise better offers, among other conditions.
AWI said it made the filing in order to facilitate an orderly sale and obtain debtor-in-possession (DIP) financing that would allow it to continue operating until a court auction is held. AWI requested that the auction be held in Philadelphia on October 24 and that the sales hearing be scheduled on October 28. At presstime, the court had not yet specified a date.
In gaining “stalking horse” status, C&S will also participate in the DIP financing for AWI in the amount of $18 million.
According to the filing, C&S’s offer is for AWI’s debt to a bank group led by Bank of America and would fall in the $132-$152 million range (considering possible adjustments for various additional debts). The bankruptcy petition also noted that if C&S is not the successful bidder, it would be entitled to a break-up fee equal to $5.1 million with an additional allowance of up to $1.5 million to cover expenses.
In conjunction with C&S’s “stalking horse” bid and to facilitate the transaction process, AWI and its subsidiaries, including White Rose, filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the District of Delaware. This action is expected to provide for an orderly sale of the AWI businesses under Section 363 of the Bankruptcy Code which allows the debtor to sell its assets without filing a formal reorganization plan.
In the Chapter 11 filing, it was revealed that AWI received three bids from interested strategic buyers. Following negotiations and pending court approval, it entered into an agreement with C&S. Although the filing did not list the other bidders, many believe that Bozzuto’s and Supervalu maintained a high level of interest in the now bankrupt organization. A previous attempt to sell only White Rose did not generate sufficient interest, AWI said.
The company said AWI and White Rose are expected to continue operating in the normal course during the sale process. That would seemingly infer that all employees will be retained (according the filing, AWI employs 1,459 associates, 529 of whom are unionized, and White Rose employs 777 associates, 586 unionized).
“We believe that the asset purchase agreement with C&S is in the best interest of AWI and its stakeholders,” said Joyce Fasula and Mike Rothwell, chairman and vice-chairman of the AWI board of directors, respectively. “After conducting a thorough process, which included the exploration of a range of alternatives and reaching out to multiple interested parties, we determined the best course of action for AWI was to enter this agreement with C&S and to undertake the court-supervised sale process.”
Matt Saunders, president and chief executive of AWI said, “As we move through this transaction process, we will continue to focus on serving our customers. We also intend to work closely with our suppliers and the winning bidder to help ensure that our customers continue to receive the level of service they expect.”
“The addition of AWI and White Rose would expand C&S’s footprint and enhance our significant capabilities in servicing independent grocers,” said Rick Cohen, chairman and CEO of C&S. “AWI and White Rose have a terrific customer base, and their distribution capabilities are a natural complement to our existing portfolio. We believe we are strongly positioned to provide all of their customers with the goods and services they need to successfully run and even grow their businesses.”
AWI has filed a number of customary motions seeking court authorization to continue to support its business operations during the transaction process, including the continued payment of employee wages, salaries and health benefits without interruption. AWI has also asked for authority to continue existing customer programs and intends to pay suppliers in full under normal terms for goods and services provided after the filing date of September 9, 2014.
The proposed transaction with C&S is subject to, among other things, higher and otherwise better offers to purchase any or substantially all of AWI’s assets as well as court approval, antitrust approval, and any other such approvals as may be required by law, and other customary conditions. Given these conditions, there can be no assurance that the proposed transaction will be consummated.
C&S, based in Keene, NH, is the largest wholesale grocery supply company in the U.S., supplying independent supermarkets, chain stores, military bases, and other customers with more than 150,000 different products. C&S serves about 5,000 stores from more than 50 locations across the country.
The bankruptcy filing marks a key step in the process to sell or restructure a company that has been plagued by financial problems for nearly a year.
In fact, according to the Chapter 11 petition, AWI’s annual sales for the past three fiscal years (ended August 31) averaged about $1.1 billion annually, but its profit dropped from $22.5 million in 2011 to $19 million in 2013. At White Rose, where annual sales also averaged approximately $1.1 billion, earnings plummeted from $1.8 million in 2011 to a $2.6 million loss in 2013.
While the news of the Chapter 11 filing was not surprising, C&S’s role as a “stalking horse” certainly was. Since June 13, AWI has been seeking a solution to its financial problems, which many observers believe were exacerbated by the company’s 2006 acquisition of White Rose. The two separate wholesale businesses (AWI is a co-op, White Rose is a voluntary) were never able to be successfully integrated and over the years, the loss of significant accounts (Foodtown, King Kullen) and key personnel began to affect the company’s bottom line.
On June 13, AWI announced its intention to sell its White Rose unit. On that same date, the co-op announced that veteran CEO Chris Michael had “retired” and that wholesale industry veteran Saunders, who had been with AWI for two years, would become chief executive of the company. It also named Lazard Middle Market to serve as its financial advisor, and Carl Marks Advisors to oversee restructuring activity. In fact, Doug Booth, a partner at Carl Marks Advisors, is serving as de facto chief restructuring officer. Additionally, Saul Ewing LLP and Rhoads and Simon LLP are serving as legal advisors.
Less than a month into the process, sources told us that the sales process had been expanded and that the entire AWI enterprise was now being considered for sale, which would include three distribution facilities – the White Rose depot in Carteret and two AWI warehouses in Robesonia and York, PA. Then in early August, Joe Fantozzi, the popular president of White Rose and a 33-year veteran of the firm, was forced out, leaving more questions about the future direction of the company.
Then, about three weeks ago, AWI acknowledged it had received, and was currently analyzing offers from potential buyers to acquire the assets of AWI and White Rose, adding that it would also evaluate with its financial and legal advisors any additional offers received.
At that time, AWI also noted that it would make no assurances that these discussions would result in any transaction or on what terms any transaction might occur, adding that it did not intend to comment unless and until an agreement had been reached, noting, “As it moves through this process, AWI remains focused on running its business efficiently and providing its customers the competitive pricing and outstanding service and support they expect from AWI.”
However, it became clearer that the pressure to find a solution was increasing for AWI. During the past eight weeks, approximately a dozen suppliers acknowledged they had placed AWI on a “credit hold” basis and then last week several vendors told us they had received “stopped payment” notices on checks they had received.
On September 5, Western Family Foods, private label distributor to AWI and White Rose, sent an email message to all its vendors calling for an immediate suspension of all purchase orders and a “stop deliveries in transit” notice for product that is or was scheduled to be shipped to one of the three AWI/White Rose warehouses.
In fact, Western Family was listed as AWI’s biggest creditor. It is owed $4.55 million according to the Chapter 11 petition. Other major creditors include Tyson Fresh Meats, which is owned $2.9 million, Kellogg’s ($2.7 million), General Mills ($2.44 million) and ConAgra Foods ($2.25 million). The petition stated that the wholesaler owed approximately $72 million in overall trade debts.
While some trade observers will point to the dysfunctional relationship between AWI and White Rose as the primary reason for the company’s problems, the depth of its financial concerns began to surface late last year when AWI was unable to maintain its liquidity level as determined by its banks. As such, earlier this year AWI paid its members only 50 percent of their annual patronage (rebate) for fiscal 2013, which the company stated was $10 million. To account for the other half of that annual payment to the member/owners, AWI issued new Class “B” stock. That new stock can ultimately be converted to Class “A,” but only if approved by AWI’s board as part of the redemption process.
Additionally, in a letter from Michael to AWI’s members earlier this year, he stated, “…the Class ‘B’ shares have no maturity and will be redeemed by a majority vote of the board of directors from time to time after a minimum period of one year….the modifications were immediately necessary to maintain our financing facility, minimize our interest expense and provide the necessary liquidity to maximize the annual patronage dividend payment.”
That dividend shortfall created a ripple effect from some of the AWI member-owners whose equity was tied into the value of the co-op. Members openly wondered if the value of their investment would disappear if AWI couldn’t meet its fiduciary obligations to its banks. In many cases, that equity would serve as their retirement funds and now they faced the possibility that their nest egg could turn into future debt.
The White Rose customers were not bound by the same restrictions of the co-op member-owners, and several retailers made future contingency plans to leave White Rose. One customer, Krasdale Foods, the White Plains, NY-based wholesaler to which White Rose supplied dairy and frozens, announced that it would switch to Bozzuto’s to supply those items on October 13.
As the process has now reached another critical point, many more questions remain. Some of those include: will there be others bidder at the auction? Will the company, now with C&S at its side to help, be able to retain most of its White Rose customers, and will the AWI member-owners ultimately stay together as a unit, or will they be able to pursue new supplier opportunities? And when all is said and done, will the new organization remain as a co-op?
Correction: An earlier version of this story incorrectly reported that individual members of the AWI co-op could be liable for any debts incurred by the wholesaler. They are in fact protected through the process of the Chapter 11 filing and would not be liable for any debts.
