CARTERET, N.J. -- C&S Wholesale Grocers may be the most logical buyer for Pathmark Stores here, but other strategic buyers may still be in the running, industry analysts told SN last week.
Delhaize Group and Albertsons were two possible alternatives mentioned. Even A&P was cited in one scenario as a possible buyer.
Executives at Pathmark declined comment last week on a report in the New York Post that the company was discussing a sale to C&S. Executives at C&S, Keene, N.H., could not be reached for comment.
Pathmark, which operates 143 stores in the New York-New Jersey and Philadelphia areas, said last December it had hired Dresdner Kleinwort Wasserstein, an investment banking firm, to explore strategic options -- including a potential sale.
Although Pathmark has reportedly been available for sale for several years, it has struggled financially over the last few months. This is due to aggressive competition in the Northeast. It's expected to report sales of $4.1 billion for the year ended Jan. 29, an increase of 2.5% over the $4 billion it reported a year ago.
Most analysts contacted by SN said Pathmark is likely to fetch a selling price of around $800 million, including close to $700 million in debt, with C&S emerging as the most likely buyer.
"Pathmark is one of C&S' largest customers. That alone is a primary reason for it to try to hold onto the Pathmark business," Bryan Hunt, an analyst with Wachovia Securities, Charlotte, N.C., told SN. "In addition, C&S is a strong generator of free cash flow, so it has the balance sheet to do an acquisition.
He said Pathmark would be a good property for anyone to own. "It's not a broken franchise -- just one that needs capital and some tender, loving care. The stores need better lighting, new coats of paint and some remodeling, which should cost around $100 million. C&S is capable of making that kind of investment, and it understands the market better than [other potential buyers.]"
Gary Giblen, senior vice president and director of research, C L King Associates, New York, said if C&S attempts to acquire Pathmark, it could spark antitrust concerns. Wakefern Corp., the Elizabeth, N.J.-based cooperative whose aggressive pricing is one of the reasons Pathmark has been struggling, "might go to court claiming antitrust violations" because of C&S' supply relationships with Ahold stores in New York and Genuardi's in Philadelphia, he said.
If C&S were successful in acquiring Pathmark, Giblen said, it could franchise the stores out to independents. C&S already franchises 36 former Grand Union stores it acquired several years ago in New England.
Jonathan Ziegler, principal in PUPS Investment Management, Santa Barbara, Calif., said it makes sense for a strategic buyer like C&S to acquire Pathmark, rather than a financial buyer, "because it's an attractive fill-in property with a high degree of immunity from the 800-pound gorilla, Wal-Mart, though it does go head-to-head with the 400-pound gorilla, Wakefern.
"For a financial buyer to acquire Pathmark would require it to sell off assets to pay down debt. There's not a lot to sell there because most of the Pathmark properties are already generating the strongest cash flows possible."
He said C&S could acquire Pathmark and try to expand the store base through additional purchases.
Another Wall Street analyst, who asked that his name not be used, said Pathmark's supply agreement with C&S could deter other bidders for the chain. The only other likely buyer, the analyst said, is Albertsons, the Boise, Idaho-based chain that acquired Shaw's Supermarkets in New England last year.
Giblen of C L King said he believes Pathmark will eventually be sold to Delhaize Group, the Belgium, Brussels-based retailer that operates Food Lion, Kash n' Karry and Hannaford Bros. along the East Coast. Delhaize had hoped to buy Pathmark in 1999, but was outbid by Ahold, which later opted out of the deal.
Another analyst, who asked not to be identified, posited a scenario in which A&P, Montvale, N.J., would sell its Canadian stores for approximately $800 million, and then use the cash to acquire Pathmark. This is "possibly a far-fetched scenario," he acknowledged, "but certainly an interesting one, even if A&P had to divest a lot of stores."
Chuck Cerankosky, an analyst with Key Banc Capital Markets, Cleveland, said he believes it makes sense for C&S to acquire a customer the size of Pathmark. "It's not unusual for a wholesaler trying to protect its source of revenue to purchase a retail customer. That's a particularly likely outcome when a chain has been on the market as long as Pathmark.
"If Pathmark was such a great buy, someone would have stepped up to the plate before now," he added. "If it was such an attractive customer, there would have been an attempt to bid up the price, but neither one of those scenarios has occurred."
