WAYNE, N.J. -- Grand Union Co. here set the stage last week for major longterm changes, including the possibility of an outright sale.
The 206-store chain said it will explore "various strategic alternatives" to improve its financial performance, including asset sales, store closings or a sale of the company.
However, a sale involving the entire company is not a foregone conclusion, Jeffrey P. Freimark, executive vice president and chief financial officer, told SN. "With the proper strategy going forward, and the proper execution and implementation of that strategy, Grand Union should have a future," he said.
"And after negotiating [an amendment to the chain's credit agreement] with our bank group, I believe they would have pushed hard for an immediate liquidation if they felt it was not in their best interest to continue or if they felt they were being exposed without hope."
The amendment to the credit agreement -- the chain's third since it emerged from a financial reorganization in August 1998 -- includes the following requirements:
Hiring an investment banker to develop a strategic financial plan. Grand Union hired Merrill Lynch & Co., New York.
Hiring an outside consultant to assist in developing a strategic business plan. The company hired Alvarez & Marsal, a New York-based distressed-business consulting firm.
Making adjustments in its financial covenants, including computing covenants, except for capital spending, in each of the company's 13 fiscal reporting periods rather than quarterly, and increasing the portion of proceeds from potential asset sales the company can retain instead of using the proceeds to pay down debt.
Sales for the year ended April 1 fell 3.6% to $2.2 billion, and operating cash flow declined 28.9% to $84.3 million.
According to Freimark, "As we looked out into the next year, it was clear we needed to amend elements of our credit agreement because the company has underperformed relative to the reorganization plan of a couple of years ago, and we needed the bank group to provide covenant relief.
"As part of those negotiations, the bank group felt we needed to retain Merrill Lynch to pursue strategic options and Alvarez & Marsal to facilitate that effort on the business planning front."
Asked why Grand Union has encountered problems despite its 1998 reorganization plan, Freimark said, "It's safe to say there was some deviation from the plan in terms of allocating capital dollars to new stores, renovations and remodeling. We did not renovate or remodel the core infrastructure but instead spent money on new stores, which are more costly, which is one reason for the shortfall in operating cash flow performance."
He also said Grand Union bought heavily on promotional merchandise, leaving it with large inventories. Grand Union has had to set up reserve funds to deal with those inventories, he added.
In response to a question, Freimark said the company's focus on new store construction and inventory increases were elements that led to the resignation last February of Wayne Harris as chairman and chief executive officer of Grand Union.
One industry analyst told SN it would be difficult to determine at this time what either Alvarez & Marsal or Merrill Lynch will ultimately recommend to Grand Union "because the industry is in so much flux right now. And with supermarket investments in general beginning to recover nicely, I think we're about to enter the second leg of consolidation, so the company's options today may not be the same as its options in three months."
Another industry analyst said it's possible the company is already talking with potential buyers about selling some specific locations. "But Grand Union needs to act sooner rather than later because with Stop & Shop coming into the New York metropolitan area, a deleveraged Pathmark increasing its strength and A&P spending money on remodeling, Grand Union doesn't have much time to play with," he said.
"However, maybe someone will buy enough stores to enable Grand Union to keep going."
In disclosing the hiring of Alvarez & Marsal, the company said the business plan it develops is expected to address all its store locations and to assist in the creation of strategies to assess both longterm and shortterm objectives and goals. The report for fiscal 2001, which began April 2, must be presented to the creditors by Sept. 1, the company said.
Alvarez & Marsal has worked with at least three other distressed supermarkets over the years: Homeland Stores, Oklahoma City, which emerged from Chapter 11 bankruptcy in 1996; Harvest Foods, a Little Rock, Ark.-based chain that evolved from a former Safeway division in the late 1980s and subsequently went out of business; and Almacs Supermarkets, East Providence, R.I., which emerged from bankruptcy in 1994 and was subsequently sold.
David Walsh, the Alvarez & Marsal executive working with Grand Union, declined to discuss specifics when contacted by SN last week.
According to a distressed-company securities analyst, who declined to be quoted by name, Alvarez & Marsal is likely to provide a business plan to Grand Union "with targeted programs for sales and operating margins.
"It will refocus and rediscipline Grand Union's merchandising strategies and cost-reduction initiatives that were moving reasonably well before the company got off track and over-invested in vendor deals and promotions, which tripped up the capital-development program," the analyst told SN. "It will also help the current management team in its ongoing efforts to get the business stabilized."
One of the chain's problems, the analyst said, stems from efforts by previous management to give margins a temporary boost by arranging promotional deals "that may have been a destructive force that increased inventory levels.
"That money has already been spent, and the company must now determine which investments are generating adequate returns and be sure it commits to projects that will produce the best returns in the shortest time. For example, it could spend money making a few changes at some of its best-performing stores, rather than focusing on opening new stores at exorbitant costs with slow returns, as previous management did."
While Alvarez & Marsal focuses on day-to-day operations, Merrill Lynch is expected to work on finding ways to maximize shareholder value, including making an assessment of the chain's longterm viability and suggesting an exit strategy that could involve selling some or all of the stores, the analyst said.
"Grand Union's options include closing underperforming stores or investing money in them; selling off unprofitable stores that might be valuable to competitors; or selling a larger group of stores and paring down the business to raise sufficient money to reduce Grand Union's debt levels," he explained.
Another high-yield analyst, who also spoke on a not-for-attribution basis, told SN Grand Union had to hire the consultant and the investment banking firm "because its year-end results were miserable, and things don't seem to be improving, with the company being outmuscled by a lot of larger, better-financed operators in a very competitive market -- at a time Grand Union is still dealing with the fact that part of its store base is undersized and/or in poor locations.
"So something had to happen because the results have not been particularly good, with operating cash flow, excluding capital expenditures, not covering the company's interest expenses -- at a time the company really needs to spend money to improve its store base."
The analyst said it's unlikely all Grand Union stores will be put up for sale "because it's not that attractive a target. But parts of the company are attractive and with more consolidation taking place in the Northeast, we'll be seeing more outsiders moving in."
He said some of the company's stores in Vermont and New Hampshire, although small, have value "because it's so hard to find any real estate in those areas or to get zoning approvals."
