CARTERET, N.J. -- Pathmark Stores' marriage to Yucaipa Cos. left the retailer's primary grocery supplier and a private equity firm waiting at the altar, the retailer here revealed in a letter to shareholders.
The letter, filed with the Securities and Exchange Commission, detailed Pathmark's 10-month search for strategic options to revitalize its operations and explained how Yucaipa emerged with the winning bid amid several alternatives. Pathmark's financial advisor, Dresdner Kleinwort Wasserstein, had discussed a sale with 50 interested parties, including national chains, since last summer. It has considered offers from as many as six groups, including one from a local competitor, the retailer said.
The deal with Yucaipa, which still requires approval from Pathmark shareholders, won approval of the board over an offer from an unnamed private equity firm, as well as overtures from a strategic buyer, which SN has learned was Pathmark's primary supplier, C&S Wholesale Grocers, Keane, N.H. A consortium that included a Pathmark competitor also made an offer. Other private equity-led deals had emerged, too.
Yucaipa aggressively played its part, according to the filing, agreeing to increase its offer in exchange for a two-week period of exclusivity and insisting on a "force the vote" proposition, which would have required Pathmark to hold a shareholders' meeting to vote on the proposed transaction, even if the board of directors withdrew support for it.
The board and Yucaipa signed their agreement on the final day of the exclusive period, while both C&S and the private bidder waited. The deal calls for Yucaipa to to receive 20 million newly issued shares of Pathmark stock for a cash payment of $150 million ($7.50 per share), as well as warrants to buy an additional 10 million shares at $8.50 per share and 15 million shares at $15 per share. The deal would give Yucaipa a 40% stake in Pathmark, with the potential to take nearly 60% through exercising warrants. The deal also provides Yucaipa with a five-year management agreement.
Pathmark's board detailed several reasons it approved the deal with Yucaipa, including that the cash investment could be used immediately to reduce leverage and support capital expense plans; the expectation that stock would rise; warrants providing investors with the incentive to raise the value of the company; and a fairness opinion from its financial advisor. It also saw downsides of accepting alternatives, including the possibility that employee anxiety over a strategic combination could result in attrition that could jeopardize a closing, the filing noted.
Throughout the process, Pathmark endeavored to avoid sharing confidential information with acquirers who might spin assets to its competitors, and seemed to favor deals that would keep the 143-store chain fully intact.
Though Pathmark did not publicly announce it was seeking strategic alternatives until December 2004, the board began looking into a potential sale in May after Pathmark reported poor quarterly results and lowered its profit estimates for the first of three times during 2004, the filing said. It first approached an unnamed "national supermarket chain that had in prior years expressed an interest in acquiring the company," which declined to make an offer on Pathmark, saying "due to demands on management it was not a good time" to pursue a merger, the filing reported.
In September, Pathmark contacted more than 20 potential strategic and private equity investors to sign a confidentiality agreement in return for a memorandum relating to the sale; this resulted in four written indications of interest and one oral indication. This group included Yucaipa, which initially offered to invest $150 million for a 49% stake in Pathmark (or $5 a share).
Wasserstein asked potential bidders to submit definitive proposals by Dec. 20. On Dec. 21, Pathmark received an unsolicited letter of interest from a consortium that included competitors of Pathmark, but the board directed that discussions not continue with that group because it included a competitor.
In January, C&S entered the picture, offering $7.50 per share, the filing said. Later that month, one of the two private equity firms in the running asked Pathmark for permission to discuss the sale of certain stores to competitors and with C&S, but Pathmark denied that request and the private bidder subsequently dropped out.
C&S also pressed Pathmark for permission to share confidential information with potential purchasers of assets, and Pathmark eventually agreed in exchange for C&S assuming Pathmark's antitrust risk. However, when the New York Post reported that Pathmark and C&S were negotiating, the retailer worried that panic among its employees could result in high attrition rates and could jeopardize the closing of a deal.
A remaining private equity bidder in the meantime increased its offer to $8 a share, but did not offer proof of financing until mid-March and still needed time to complete its due diligence. By then, however, Yucaipa had upped its offer for a second time on the condition it be granted a two-week period of exclusive negotiations. Pathmark agreed to the request March 9 in part because both the private bidder and C&S were "several weeks away from being ready to sign a definitive agreement," and because of risks of employee departures in the event of a possible breakup of the company. Pathmark also had unresolved questions regarding the financing for some offers.
Yucaipa's "force the vote" provision was granted in exchange for an expansion of veto powers for Pathmark's independent directors following a Yucaipa investment, the filing said. In the meantime, the private bidder and C&S had sent revised offers. However, because of the exclusivity agreement, Pathmark did not respond to them.
C&S indicated in a letter on March 21 that it expected to be able to sign an agreement on a revised offer "after several days of discussions." The private bidder said it extended its offer until 11 a.m. on March 24. Yet, on March 23, the board met to review the offers and a fairness opinion from Wasserstein, and that night voted unanimously to accept the Yucaipa offer.