LOS ANGELES -- Yucaipa Cos., which has been in and out of the food industry as an investor, is in again.
Within hours of disclosing it had acquired a 9.2% stake in Wild Oats, the investment group here said late last week it plans to buy a 40% interest in Pathmark Stores through an investment of $150 million that will be used in an effort to reposition the financially strapped company for improved sales and profitability.
In an interview with SN, Ron Burkle, Yucaipa's managing general partner, said he may try to consolidate companies in the Northeast once Pathmark is back on its feet financially.
"What we do is buy companies and execute a simple business plan with low risk," he explained. "At Pathmark, we think we can get cash flow from $140 million to $150 million a year back up to $200 million, with the stock rising to $20 a share. With that as a base, we would hope we could acquire other companies and lead consolidation in that part of the country.
"We've done add-ons everywhere else we've invested, and we love doing that. But we don't control when companies become available for consolidation."
Yucaipa was a major industry consolidator during the 1990s, combining a handful of Southern California chains into a holding company that ultimately acquired Smith's Food & Drug Centers and Ralphs Grocery, then sold them to Fred Meyer, before selling Fred Meyer to Kroger in 1999. Yucaipa also acquired Dominick's in 1995 and sold it to Safeway in 1998.
To regain its sales momentum, Pathmark needs "capital to invest in remodels and the freedom to operate without being capital-constrained, plus a lot of better blocking and tackling," Burkle said.
He said his role under a five-year management agreement will be to advise the company where he sees a need. Yet Burkle said he does not expect to get involved in day-to-day operations "as long as things are going well. I believe you have to let the management team run the company, while my role is to take a big-picture view and help plot out strategy."
Burkle said he's had his eye on Pathmark as a potential investment since the late 1980s, "and we've gone back to look it several times over the years. It still has one of the highest volumes per store of any company we've encountered and the highest sales per square foot. It's protected from dramatic changes in the competitive environment."
His interest in Wild Oats stems from his preoccupation with the natural foods space, Burkle told SN. "We've gone all over and looked at buying other companies in that space, but most are five- to 10-store operators. Wild Oats has management issues, focus issues and integration issues, but we like the fact that Bob Miller [former chairman and chief executive officer] is there [as non-executive chairman]."
He said Yucaipa has invested approximately $25 million in Wild Oats, "and it can have more if it wants it, though we don't think it needs the money at this time."
Although Burkle's role in the industry has been less visible in the last few years, he said he's continued to invest in retail food stocks and remains one of the largest single shareholders in Kroger. He said most of the money he invests is his own.
With regard to its Pathmark investment, Burkle said Yucaipa sees "significant opportunity in the Northeast. Pathmark's prime locations, high store volumes, talented associates and loyal customer base make it a key asset in that market and a viable platform for future consolidation."
"We believe a de-levered Pathmark, with increased resources to invest in existing and new stores, will have a significant competitive advantage. With our capital and guidance and the efforts of its 26,000 associates, I am confident Pathmark will realize its full potential."
James L. Moody, Pathmark's non-executive chairman, said the Yucaipa transaction "represents an exciting opportunity to partner with one of the most successful investors in the supermarket industry, improve our financial flexibility, and increase the level of investment in our stores. We believe Yucaipa's financial and managerial contributions to Pathmark have tremendous potential to unlock shareholder value."
The transaction, which was unanimously approved by Pathmark's directors, is still subject to customary closing conditions and approval by Pathmark stockholders. A vote by shareholders is expected later this year. The deal is expected to close this summer.
Pathmark, Carteret, N.J., operates 142 supermarkets, primarily in the New York, New Jersey and Philadelphia areas, with 2004 sales of approximately $4.1 billion. It has seen financial results slip over the past couple of years, which it has attributed to a sluggish economy combined with intensive competitive pressures in the Northeast.
Wild Oats, based in Boulder, Colo., operates 110 natural foods supermarkets in 24 states and British Columbia., with 2004 sales of just under $1 billion. Its financial position has been eroding, observers said, because of a weak store base, competitive challenges, and a lack of a consistent strategy.
Opportunities for Growth
Yucaipa acquired 2.6 million Wild Oats shares over the last month on the open market because it believes the company "should have substantial opportunities for future growth due to the fact that recent developments in the supermarket and general retail sectors are likely to create attractive opportunities for the company to acquire new stores and expand into new geographic locations," the investment firm said in a filing with the Securities and Exchange Commission. Yucaipa said in the filing it will hold the Wild Oats shares for investment purposes only, but "intends to closely monitor [Wild Oats'] performance and may modify [its] plans in the future" by discussing its concerns with the company's directors and management, and with "other shareholders, industry participants and other interested parties."
It may also buy additional shares on the open market or through privately negotiated transactions with third parties, the filing noted.
With regard to Yucaipa's investment in Pathmark, Jonathan Ziegler, a Santa Barbara, Calif.-based analyst with J.M. Dutton & Associates, El Dorado Hills, Calif., said he's been surprised no one has stepped forward to acquire Pathmark in the six months or more it's been on the market, "given its great store locations, the fact it doesn't compete with Wal-Mart, and the density of mouths to feed in the areas it serves. So to have someone like Ron Burkle step up redeems my faith in the company."
While some investors may be disappointed that the entire company was not sold outright, Ziegler added, Yucaipa's investment may make it possible for the company to be sold at a higher price sometime in the future. "Rather than selling the company at a fixer-upper price, the investments Pathmark can make in the store base should enable it to be sold down the road at a fully remodeled price," he said.
Andrew Wolf, an analyst with BB&T Capital Markets, Richmond, Va., said the Pathmark transaction could lead to the kind of industry consolidation in the Northeast that Yucaipa accomplished in the West. Yet the current value of supermarket stocks makes that strategy questionable, he added.
"Burkle said Pathmark will be 'a viable platform for future consolidation,' which implies he may try to buy other companies. But the mergers and acquisitions environment today is pretty much depressed, compared to the frothy environment when he was doing all those deals in the West, which makes me question the viability of a future exit strategy," Wolf said.
In regard to Wild Oats, Wolf commented on Yucaipa's statement that it had an interest in acquiring new stores for the chain. "On the face of it, there aren't a lot of opportunities left in the natural foods field to acquire, though the ongoing consolidation of the industry could provide opportunities for the company to acquire conventional stores and convert them to natural food stores," he said.
Scott Van Winkle, an analyst with Adams Harkness, Boston, said Wild Oats will benefit from the involvement of "a large, dedicated investor who's willing to give it access to capital that didn't look like it would be available just a couple of days ago.
"Wild Oats has been in a continual turnaround where it's needed an aggressive new-store rollout that required capital. The only advantage of Yucaipa's involvement is the company's improved access to capital from an investor willing to make an investment."
Jay Whitmer, an analyst with Midwest Research, Cleveland, said Burkle's investment in Wild Oats means "he sees the upside potential for the company if it can get its house in order in terms of management execution or strategic investments."
With just 10% of the stock, Burkle is not at a point where he could take a role in running Wild Oats, Whitmer pointed out. "However, the overall management perspective needed a boost. Miller and Burkle can help in that area," he said.