MONTVALE, N.J. -- A&P here may be contemplating the sale of at least 30 of its stores in the Detroit area, including 20 units of Farmer Jack and all 10 Food Basics, plus all six stores in the Toledo, Ohio, market, according to reports.
Chain officials declined comment last week.
Newspapers in Detroit cited unnamed sources in reporting that A&P officials had met with store managers there to tell them of pending store closures, while reassuring them that not all stores would be sold.
Bryan Hunt, an analyst with Wachovia Securities, Charlotte, N.C., said he expects A&P to sell some assets in the next few months "because it has $229 million in debt coming due in 2007. It's already on record saying it wants to take that debt out this year. Although A&P has enough cash on its balance sheet and availability under its bank facility to eliminate the debt, such a move would not leave much liquidity to fund the business. So an asset sale is almost a certainty."
A&P's most valuable asset outside the Northeast is Canada, Hunt said, "but selling Canada would be a last-case scenario, which leaves 36 stores in New Orleans that A&P has been trying to sell for a while, without much success," and the 88 Farmer Jack stores and 10 Food Basics in Michigan and Ohio.
"Both New Orleans and Detroit are on the outskirts of A&P's store base," he pointed out. "They lack the critical mass necessary to advertise appropriately and the economies of scale to service the stores properly."
Selling the 30 stores in the Detroit area would make sense, Hunt added, since such a transaction could yield anywhere from $60 million to $70 million on the low end, up to $125 million, "depending on the store conditions and store volume."
Meredith Adler, an analyst with Lehman Brothers, New York, said in a written report in late March that she believes A&P will take "important steps to enhance shareholder value in the next 12-18 months," including the possibility of selling its Canadian business, eliminating underperforming assets like Farmer Jack, or monetizing non-core divisions like Baltimore.
Adler said the Farmer Jack and Food Basics stores are operating at a combined net loss of approximately $30 million. "Some stores are in good locations and could be sold. Other stores, however, will have to be closed outright. A&P will likely have to incur some cash costs to eliminate the ongoing lease liability, or pay for leases on a continuing basis. A&P could exit the region by selling 85% of its stores ... while closing the other 15%," Adler said.
Gary Giblen, senior vice president and director of research for C L King Associates, New York, told SN he believes an asset sale would be a positive step for the company. "A&P management has never done the economically rational thing, which would be to take steps toward a turnaround by breaking up the company. So if the reports [about selling stores in Detroit] are true, it could be a sign A&P is serious about making moves to maximize shareholder value," he said.
However, Giblen said he doubts A&P will be able to get the prices for its stores that it would like to get. "I think A&P will end up doing what Fleming did: selling off a few of the top stores for good money, and finding the rest are unsaleable. I'd guess they'd be lucky to get a maximum of $2 million apiece for most of the stores."
