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MILESTONE AT PATHMARK

Pathmark Stores took action last week to clean up its balance sheet under a plan it will later make official through the filing of a prepackaged Chapter 11 bankruptcy. At the end of the process, Pathmark -- long hobbled by debt -- will be in a position to move once again. But in what direction?You'll see further details of the plan in the news article on the front page, but the short version is that

Pathmark Stores took action last week to clean up its balance sheet under a plan it will later make official through the filing of a prepackaged Chapter 11 bankruptcy. At the end of the process, Pathmark -- long hobbled by debt -- will be in a position to move once again. But in what direction?

You'll see further details of the plan in the news article on the front page, but the short version is that Pathmark's bond indebtedness would be reduced from about $960 million to about $590 million.

Clearly, such a deleveraging would make Pathmark an even more attractive buyout candidate than it has been, and this would seem to be the direction in which Pathmark wishes to move.

There need be no question about whether Pathmark is for sale or not. After all, Pathmark agreed two years ago to be acquired by Ahold for $1.75 billion. (You can see for yourself what proportion of that would have been debt.) The proposed Pathmark buyout subsequently unravelled when the Federal Trade Commission pushed back against the deal. The FTC evidently feared that Ahold's current holdings in the region of New York City, added to Pathmark itself, would produce an anticompetitive situation. Actually, the matter never came to an FTC vote; Ahold backed out when it became clear which way the wind was blowing.

Interestingly, the then-new viewpoint on inter-market competition came to represent the FTC's thinking concerning future deals; for instance, also on the front page of this week's SN you'll see that Kroger Co.'s proposed buyout of Winn-Dixie Stores' Texas division was nixed by the FTC for much the same reason. Moreover, Hannaford Bros. was obliged to exit the Southeast last month to facilitate its proposed buyout by Delhaize America, again for much the same reason.

As a result, it can be stated with some certainty which companies will not buy Pathmark: Any company with a significant business presence in the New York region is out of the running. So what prospects are left?

Many observers have their money on Safeway. That chain would have no evident FTC conflict. Safeway also has an orphan division in Baltimore-Washington that would only be enhanced by a connection to the North. Further, Pathmark's chairman used to be a Safeway executive, so the lines of communication are unmistakable. Finally, in recent weeks Safeway agreed to lease its Maryland distribution facility to C&S Wholesale Grocers, the same C&S that currently supplies Pathmark. The last point may or may not be telling, given that Safeway outsources portions of its distribution fairly routinely. C&S also supplies a number of other chains in the Northeast, such as Grand Union, A&P and Wal-Mart Stores' Supercenters.

As you'll see in the front-page news article, numerous other buyout possibilities are being bruited about, one of the more intriguing being Carrefour, the French hypermarket operator.

But, buyout or not, Pathmark is poised to be a far more formidable force in the marketplace than it is now.