AWI Auction Set For October 24; C&S Break-Up Fee Reduced

U.S. Bankruptcy Judge Kevin J. Carey certified earlier this month that the auction to acquire AWI (and sister company White Rose) will take place on October 24 at the Philadelphia law offices of Saul Ewing LLP, which is serving as lead attorney for the Robesonia, PA-based wholesaler. As part of the process, all bids are due by October 22 and a sale hearing (in which the winning bidder is likely to be declared) will occur on October 29. Judge Carey made that ruling from his bench in Wilmington, DE.

That same day (October 3), Carey also authorized AWI’s $193 million debtor-in-possession (DIP) funding. In blessing the DIP financing package, the bankruptcy court judge also temporarily moved aside a motion made by an ad hoc group of trade creditors (vendors) who sought to be repaid under Section 503(b)(9) of the U.S. Bankruptcy code.

Section 503(b)(9) allows for vendors who provide goods to a company within 20 days of filing bankruptcy to make assets administrative expense claims. The creditors committee is comprised of nine members including such CPG heavyweights as Coca-Cola and Kellogg’s. According to the objection, AWI vendors are owed $23.1 million for such claims and the DIP budget makes no allowances for repayment, although it does include approximately $3.3 million in fees and expenses for bank lenders (primarily Bank of America). In its motion, the creditors’ group said that if the sale to C&S goes through, AWI will have at most $5 million to pay off vendors and other administrative claims. AWI total vendor debt is listed at $72.1 million in addition to the $131.9 million it owes its lenders.

“Administrative creditors are carrying the water at the end of the day,” attorney Ronald A. Clifford noted in his description of the vendors’ concerns.

However,  Judge Carey asserted there was a difference between a debtor failing to pay administrative charges going forward and failing to pay 503(b)(9) claims, and noted that trade creditors would not fare better if AWI lacked financing for a sale process. He indicated that the vendor-related financial issues could be addressed at the time of the sale (auction).

Additionally, Judge Carey, in response to a motion filed by Supervalu, agreed to reduce the break-up fee promised to C&S Wholesale Grocers from $5.1 million to $3.75 million. C&S has been granted stalking horse status and has agreed to purchase the assets of AWI for at least $132 million. The Keene, NH-based distributor is also contributing $18 million to the DIP financing package.

Meanwhile, back at street level, AWI and White Rose retail members and customers continue to express concerns over current diminished service levels at company-owned distribution centers in Robesonia, PA, Carteret, NJ (White Rose) and York, PA. Concurrently, other competing wholesalers – Bozzuto’s, C&S and Supervalu – continue to vie for parts of AWI/White Rose’s $2 billion wholesale business.

From the White Rose stable, key customers have opted to utilize the services of those other wholesalers (for some only on secondary supply basis thus far to protect themselves from the substandard service levels being provided by AWI).

At presstime, Krasdale will be switching to Bozzuto’s for its dairy and frozen needs later this month; RMG (Thriftway/Shop ‘n Bag) has also increased its business with Bozzuto’s; Kings/Balducci’s has been utilizing the services of Wakefern; Associated (including Met and Pioneer) has chosen C&S as its supplier as has Fairway Market on a secondary basis (sources have told us Supervalu is also in discussion with Fairway and the high-volume Manhattan-based merchant has also increased its business with one of its key perishable suppliers, J&J Farms Creamery). AWI members have also been utilizing those same wholesalers for secondary supply needs.

Once the auction is concluded and as the AWI/White Rose independent retailers progress through the busy holiday season, some of these moves will likely be firmed up further.

Clearly, C&S enjoys some significant advantages prior to the auction. The country’s largest wholesaler already has been given “favored nation” status by the court. In agreeing to purchase AWI’s assets, it also has partial control of those leases that AWI co-signed with its customers. Moreover, the front end systems of many members are tied in directly to AWI’s infrastructure. And with C&S currently helping to maintain the status quo in Robesonia and Carteret (jobs have been preserved and despite inventory challenges, the pace of business is nearly back to normal), these will be huge hurdles for competitive wholesalers to overcome.

Also potentially aiding C&S is its recent hire of Christopher Brown. The veteran wholesale executive who left Nash Finch as president and COO last year joined C&S last month as senior VP-independent sales. Brown knows the Mid-Atlantic market and quite a few of AWI/White Rose’s customers from his many years at Richfood (Supervalu) and essentially has spent his entire 30-year career dealing with independent retailers. Brown’s talents aside, he’s going to help C&S improve its perception that some in the industry have about the privately-held distributor: that it’s an excellent third part distributor to large chains, but has not met that same standard when serving smaller independent operators whose needs and priorities are different. Brown could prove to be a huge asset in closing that perceived credibility gap.

The head start that C&S currently enjoys hasn’t prevented other wholesalers from attempting to “poach” customers. Supervalu and Bozzuto’s have been banging on doors relentlessly, trying to convince members to “switch sides.”

And, AWI held a four day road show earlier this month visiting Delmont, PA, Scranton, PA, York, PA and Teaneck NJ, updating members and other independent retailers on current events. During those meetings, C&S, Bozzuto’s and Supervalu all made separate 90 minute presentations to AWI-supplied retailers. Additionally, smaller specialty distributors (produce, HBC/GM) have also met with many of these independents, trying to convince them that they’re the best fit for those specific needs.

There are several other issues to consider once the auction is completed.  Among them is the status of the corporately-owned Nell’s stores in southern Pennsylvania (there’s certainly a lot of interest in those four stores). Moreover, if C&S is declared the winner, will it keep the Robesonia and Carteret facilities open and the employee base stable in the long-term?