CARTERET, N.J. -- Pathmark Stores here opted to accept Yucaipa Cos.' offer to plow $150 million into the company to increase its long-term value rather than selling the company outright in a depressed market, Ron Burkle, Yucaipa's managing general partner, said here last week.
"Our argument to the board was that it made more sense over the long term to increase the company's value by investing in it than selling it," Burkle explained. "Why sell the company now, at a time when Pathmark earnings are down and supermarket multiples are at their lowest point in 20 years? This is a poor time to sell and a great time to invest."
Eileen Scott, Pathmark's chief executive officer, told investors the chain's directors had been exploring their options since December, when the company hired Dresdner Kleinwort Wasserstein to help it evaluate strategic alternatives.
Frank Vitrano, Pathmark's president and chief operating officer, said the directors determined that the Yucaipa transaction "made the most sense for the company and its shareholders."
The three executives made their remarks during a conference call with investors to discuss the pending investment by Yucaipa that will give it a 40% stake in Pathmark. The deal is subject to shareholder approval, with a special stockholders' meeting to be scheduled "in the middle of the summer" to vote on the transaction, the company said last week.
Scott said Pathmark anticipates it will see positive results from Yucaipa's investment within two years, with better paybacks from a more aggressive pace of store renovations likely to begin next year, and better returns from increased investments in new-store growth beginning in 2007.
She said one of Pathmark's first goals will be to develop a blueprint for future growth initiatives that will drive profitable top-line sales growth. That blueprint will encompass the following, she said:
- An increase in store remodels.
- A more aggressive push for new-store opportunities.
- Enhancements in the stores' delis to make them into home meal centers.
- Upgrades in perishables, including more natural and organic offerings and enhancements of the stores' floral offerings.
- Upgrades in store systems to maximize efficiencies.
Scott said the specific ways Yucaipa will help Pathmark "are still in the discussion phase. We've talked over the last few weeks, and we are excited about the opportunities to share information and the expertise Yucaipa will bring to Pathmark to help us in several areas to achieve top-line growth and profitability."
Asked how Yucaipa's prior investment experience will help Pathmark, Burkle said, "We've learned something from each acquisition, and our method has been to work with managements to learn instead of coming in with set ideas of our own. We probably picked up more ideas from Dominick's than from Ralphs, Smith's or Fred Meyer about what customers want to see and how to differentiate stores. Our plan is to see what fits and what works here and what will be good for this market."
In response to a question, Burkle said Yucaipa set its investment at $150 million "after we looked at the stores to determine what would be the ideal capital structure for Pathmark. We reviewed each store, the systems in place, the competitive environment, what the company could generate and the amount of invested capital required, and we felt an investment of $150 million was what the company needed. At its current cash-flow levels, Pathmark will be well capitalized."
Vitrano said some of the $150 million will be used to pay down debt, with the rest going onto the balance sheet.
Scott said Pathmark is in the process of trying to determine how much of the $150 million will go to new stores and renovations, with Vitrano noting that new stores cost $9 million to $10 million, and renovations average $1.7 million to $2.5 million apiece.
Renovations will be a priority, Scott said. "What we want to do first is get our current base to where it should be. We've had one hand tied behind our backs for a long time, and we want to look at our current base and be able to add concepts to get those stores to where they need to be."
Asked what kind of renovation schedule Pathmark might pursue, she said the company has averaged 15 to 18 renovations a year over the last two and a half years, "but we have quite a few more that we're interested in renovating."
Scott also said Pathmark has several sites under consideration for new stores, "and we're at different stages in that process with different locations." Pathmark will look at small acquisitions "if they become available and are right for us," she added.
Burkle said Yucaipa is likely to seek additional acquisitions in the Northeast to achieve more scale. "We've always looked at in-market acquisitions in each transaction we've done over the last 15 to 18 years. However, in each case, when we made our first investment, we've never seen what could become available. But, hopefully, we will find acquisitions that make sense."
Scott said Pathmark will also look at enhancing systems to get greater efficiencies. Among the projects under review, she said, are increasing the number of self-checkout installations and enhancing front-end, point-of-sales systems.
