GREENVILLE, S.C. — Bi-Lo is up for sale again.
Lone Star Funds, the Dallas-based private equity firm that acquired the chain from Ahold a little more than two years ago, last week said it had engaged Merrill Lynch and William Blair & Co. to explore the sale of Bi-Lo, which operates 230 stores in four Southeastern states.
While Lone Star said it intends to sell Bi-Lo as a single unit, sources told SN last week they expected strategic buyers would be more interested in a piecemeal sale. Another financial buyer could also be a possibility, sources added, noting that Bi-Lo still has significant progress to make on a turnaround.
The announcement follows a whirlwind of activity at Bi-Lo since Lone Star took control in early 2005. Initial changes included combining the Bi-Lo and Bruno's banners into a single entity and outsourcing distribution of the chains to C&S Wholesale Grocers. Bi-Lo later sold dozens of stores to C&S to operate as a separate entity in a move to rid itself of locations where it did not rank among the top two chains in local market share, and raised money through property sale-leasebacks. Lone Star also revealed a new store prototype and ramped up capital spending on technology and store renovations.
Most recently, Lone Star split the struggling Bruno's division back into a separate entity in a move that some sources said would improve the marketability of Bi-Lo.
Lone Star in a statement said it did not intend to disclose developments as to the progress of a sale, and a spokesman declined further comment.
A source close to Bi-Lo, who spoke to SN on the condition of anonymity, said Lone Star considers Bi-Lo to have been “a very good investment.”
“There's been money invested in it, there have been changes from a technology standpoint, and they've brought in consultants. In the past few years they have taken what's been a great brand and made it healthier,” the source said. “So it's the perfect time for Lone Star to try and get the best return on it.”
Burt P. Flickinger III, managing partner for Strategic Resource Group, New York, estimated Bi-Lo could sell in the range of $425 million to $550 million. Lone Star purchased Bi-Lo and Bruno's together for $560 million, though it said certain conditions could bump the price as high as $660 million.
Around half the sale price today would be “pure profit,” said Flickinger, noting that Lone Star monetized the chain's real estate and distribution assets early in its ownership.
Flickinger estimated that Bi-Lo as currently constituted generates around $2.35 billion in annual sales and annual EBITDA of between $75 million and $85 million. Officials of Bi-Lo and Lone Star would not disclose specific sales and earnings figures. Bi-Lo had 287 stores and sales of around $3.2 billion when it was acquired by Lone Star.
Those estimates indicate Bi-Lo may be positioned for a turnaround but is not performing at its peak, sources said. Brian Hotarek, the Ahold financial veteran who was recently named chief executive officer of Bi-Lo, told SN earlier this year that sales at the chain had been “softer than expected” over last year but that 2007 began with good momentum, which he expected would carry though the year.
According to one source, Bi-Lo has good facilities and good market share but needs better strategic positioning, which might well include retiring the Bi-Lo name.
“In a marketplace where Wal-Mart has had such a big impact, the name Bi-Lo doesn't mean what it used to,” the source said. “It's not about price leadership. I think it has to move more toward service, perishable presentation and variety.”
Bi-Lo's supplier, Keene, N.H.-based C&S Wholesale Grocers, would be obliged to take a look at acquiring the chain as a means of protecting its volume, according to Flickinger. C&S officials weren't immediately available for comment. Other strategic suitors would include Kroger Co., Cincinnati; Delhaize USA, Salisbury, N.C.; or Merchants Distributors Inc. and its Winston-Salem, N.C.-based Lowes Foods chain, sources said. Each of them, however, would have drawbacks to overcome, sources said.
“Kroger probably runs the most similar store to Bi-Lo of all its competitors, but Bi-Lo probably doesn't provide the synergy they would want,” said one source based in the South. “Delhaize might do the best job with those stores, but they would have concerns with the FTC.”
Standard & Poor's last week placed Bi-Lo's “B” corporate credit rating on CreditWatch with developing implications, noting the agency is awaiting word on a purchase price and other information regarding a deal.
