MONTVALE, N.J. -- A&P here said last week that it would seek to sell its lucrative Canadian division, as well as its Farmer Jack units in the Midwest, in an attempt to retire debt and focus its efforts almost exclusively in the Northeast and Mid-Atlantic divisions.
The moves, which were the subject of industry speculation for months, amount to what one analyst called "doubling down" on A&P's fresh merchandising strategy under way in the Northeast and will transform the company from a 650-store retailer with $11.9 billion in annual sales to a 353-store operator with around $5.8 billion in revenues, executives said. A&P also said it would seek $50 million to $75 million in additional cost savings through labor and supply chain initiatives as it attempts to start over again and regain profitability as a deleveraged regional operator with a fleet of revamped fresh and discount stores.
"The progress we've made in the core Northeast business has been the driving force to announcing the restructuring of the company," Christian Haub, A&P's chairman and chief executive officer, told SN in an interview last week. "Without that, we would have been faced with the same question -- you can divest a business [to raise money], but what are you going to do with what's left over? Having the confidence we have today to make dramatic changes is really going to help us accelerate progress in the U.S. and achieve greater shareholder value and profitability."
Industry observers and Wall Street investors were largely approving of A&P's plans, which promise not only to remix the competitive balance in the Northeast but also in Ontario and Detroit. A&P stock rocketed by more than 23% to a new 52-week high on the announcement, following a 9% rise on market anticipation.
Analysts told SN they anticipate A&P could receive anywhere from $750 million to $1.3 billion from the sale of its 235 stores in Canada -- a division that in recent years has kept the money-losing company afloat. The sacrifice of Canada, however, should be sufficient for A&P to retire net debt of $921 million, which includes nearly $700 million in bank debt and capital leases, they said. While the Canada sale is the vital component to A&P's strategy, the company may not sell if the price is not right, said Mitch Goldstein, A&P's executive vice president and chief financial officer.
"We doubt that A&P's directors would settle on a deal in Canada that delivers anything less than $900 million," said Perry Caicco, an analyst for CIBC World Markets, Toronto, in a research note.
The Canadian stores should be coveted by strategic buyers, analysts told SN. The division, where A&P developed its current U.S. strategy of operating fresh or discount boxes exclusively, accounted for $3.5 billion in sales, showed an annual comparable-store sales gain of 2.3% and accounted for $147 million in earnings before interest, taxes, depreciation and amortization (EBITDA) during fiscal 2004, Haub said.
Moreover, the stores represent a rare opportunity to enter into metro Toronto for competitors Sobeys, based in Stellarton, Nova Scotia; and Metro, Montreal.
"What makes [Canada] so desirable from the other players' standpoint is that the only way they can gain market share is to build organically or to buy a big chunk of market share," Bryan Hunt, analyst, Wachovia Securities, Charlotte, N.C., told SN. "This is the biggest chunk there is."
According to Caicco, the sale "will be the most important transaction of the decade in the Canadian grocery business," and one that Sobeys cannot afford to lose: "If they miss this opportunity they are doomed to permanent No. 3 status in Ontario."
That A&P would eventually sell Canada to save the U.S. has been a topic of industry speculation for years, but, according to Haub, it's a commitment the company could not make until now.
"Canada has been a well-performing asset of the business for many years now, but we had some issues we need to resolve and opportunities to move it further in the last year. We had to position it better," he said, citing a lawsuit settlement and eventual acquisition of franchised Food Basics stores last year. "If you want to pursue any kind of transaction, you want to have a good story."
FARMER JACK LESS ATTRACTIVE
Analysts were considerably less confident that A&P's Farmer Jack stores would draw as much interest. The 101-store division located primarily in metro Detroit accounted for $1.5 billion in sales, but suffered a 5.3% same-store sales decline and lost $20 million in EBITDA during fiscal 2004, A&P said. "Those assets are not well-positioned, not performing strongly and have little scarcity value," said John Heinbockel, an analyst for Goldman Sachs, New York, said in a research note.
Karen Miller, high-yield analyst for Bear Sterns, New York, told SN she expected the sale would resemble A&P's 2003 divestiture of its Kohl's stores in Wisconsin, which were sold in small batches to several competitors for $1 million to $2 million a store, while many others closed. "But Michigan is even more competitive than Wisconsin, so it may be more difficult," she said.
Haub disagreed, telling SN that Farmer Jack has "a strong core of about 70 stores that are making money, have good locations and could be very viable as a business going forward.
"The underperforming stores that are not part of the core we will have to deal with one way or another, but we've made some good progress getting those out of the system," he continued.
Farmer Jack could be attractive to a company with existing infrastructure and presence in the area, such as Kroger, Cincinnati, according to David Maura, an analyst for First Albany Capital, New York. "I can't imagine A&P will get that much for a division that lost $20 million in EBITDA, but there is $1.5 billion in revenue there," Maura told SN. "If a prospective buyer could cherry-pick and end up with $1.2 billion in revenues and could scale down operation costs off a bigger balance sheet, maybe A&P could get $100 million or $125 million for the business."
Although Spartan Stores, Grand Rapids, Mich., had been said by some to be a potential buyer for the Farmer Jack banner, Craig Sturken, Spartan's chairman, president and chief executive officer -- who previously headed the Michigan division of A&P -- seemed to indicate in a recent conference call that Spartan would not be interested in acquiring the chain. (See Page 22.)
In financial results announced last week, A&P said it lost $5.7 million on sales of $2.56 billion, for its fiscal fourth quarter ending Feb. 26. Sales were down 5.9%, and comparable-store sales were flat, as compared to the same period a year ago, when it reported a loss of $60 million. For the fiscal year, A&P lost $188 million or $4.77 a share, on sales of $10.8 billion. Sales were down 0.4% for the year, and comps were up 0.1%, A&P said. The company lost $157 million in fiscal 2003.
