MAULDIN, S.C. — In a merger that would create a $10 billion network of supermarkets with a contiguous footprint across the Southeast, Bi-Lo — less than two years out of bankruptcy — has offered to buy Winn-Dixie Stores for about $560 million.
While some analysts said the $9.50-per-share offer for Winn-Dixie — which itself went through bankruptcy just six years ago — could be a boon to both companies, many also pointed out that integrations of this size seldom go off without a hitch, and the two companies have yet to release details about what potential synergies they might derive from the combination.
Karen Short, a New York-based analyst with BMO Capital Markets, said synergies could include the eventual elimination of about $120 million in overhead, presumably from eliminating duplicated functions, as well as the savings that could be derived in the supply chain. Bi-Lo could either leverage Winn-Dixie’s existing in-house distribution network to supply some Bi-Lo locations, or outsource the distribution for Winn-Dixie to C&S Wholesale Grocers, which currently has a multi-year contract to supply Bi-Lo. Winn-Dixie’s current supply infrastructure could in that case be divested, she pointed out.
She also said she feels it is unlikely that a rival bidder will emerge, even though Winn-Dixie’s stock had traded at a higher level as recently as July. In recent weeks Winn-Dixie’s stock had been trading at under $6 per share.
“In our view, Winn-Dixie has unofficially been ‘for sale’ since emerging from Chapter 11 in the spring of 2006 — and no bidder has emerged,” Short said in a report on the planned merger.
While analysts said Winn-Dixie’s recent “transformational” remodeling effort has shown some signs of driving sales, they also said the chain remains in need of significant capital investment.
Randall Onstead, chairman of Bi-Lo, told SN last week that Bi-Lo’s parent company, Dallas-based Lone Star Funds, is committed to supporting the combined entity, although it was not clear exactly what Lone Star’s strategy might be.
“Lone Star is and has been Bi-Lo’s financial sponsor about six years now, and they are very supportive of this transaction,” Onstead told SN. “Their role has been one of support, and they will continue to be supportive of the combined company going forward.”
He said the current plan called for both companies to continue their existing supply arrangements and to operate under their existing banners. No store closures are planned. He declined to comment on any specific synergies that could be accrued through the merger.
The companies said they would not comment on the potential management structure of the combined company until the merger is closer to completion. Peter Lynch has been president and chief executive officer at Jacksonville, Fla.-based Winn-Dixie since 2004 — later adding the title of chairman — and led it through the bankruptcy reorganization that saw it exit many of the markets where it had competed with Bi-Lo. At Bi-Lo, another industry veteran, Michael Byars, has been at the helm as president and CEO since 2009.
“I think the fortunate thing here is that Bi-Lo has a very strong management team, and Peter Lynch and his group have a strong management team,” Onstead said. “We are looking forward to being able to collaborate with one another. We think Winn-Dixie does a lot of things very well, and we think Bi-Lo likewise does a lot of things very well. I think the combination of those ideas will greatly benefit our customers.”
Observers noted that Bi-Lo has enjoyed sales growth for the last few years, including comparable-store sales gains of about 3.7% in 2010, executives previously told SN. The company declined to disclose sales results for 2011, although observers estimated the company’s volume at about $2.8 billion.
“We continue to be very pleased with our sales results here, and have been for the last three years,” Onstead said.
Although he declined to go into specific detail about the structure of the transaction, he said Bi-Lo would have a “strong” balance sheet going forward.
“Bi-Lo doesn’t have a lot of debt, but we will be assuming additional debt to do the transaction,” Onstead explained. “It’s a very appropriate amount, and there will be new equity put into the business as well. It’s not a levered transaction as most people would think about one.”
Tim Carroll of William Blair & Co., Chicago, which advised on the merger, told SN the transaction as currently planned would include an asset-based loan and equity, with no new high-yield bond issue to finance the acquisition.
“It’s a sizable equity investment,” he said. “It’s Lone Star’s plan to make sure the balance sheet is very, very solid.”
Carroll, who also advised Bi-Lo on its acquisition by Lone Star in 2005, said the merger could become a platform for future acquisitions.
“Over time — whether it takes three, five or 10 years — there will be consolidation in the Southeast,” he predicted.
Bi-Lo — which had previously been reported to have been for sale itself by Lone Star — approached Winn-Dixie about the possibility of a merger, Carroll explained. The Bi-Lo and Winn-Dixie merger “has always made a lot of sense,” he said. “You just needed to wait for the right time.”
The combined companies would have an estimated $10 billion in annual sales and about 690 stores in eight Southeastern stores. Bi-Lo currently has 207 supermarkets in North Carolina, South Carolina, Georgia and Tennessee, and Winn-Dixie has 480 stores in Florida, Alabama, Mississippi, Louisiana and Georgia. Winn-Dixie had sales of about $6.88 billion in the fiscal year that ended June 29, 2011.
“By combining Bi-Lo and Winn-Dixie, we anticipate building a company that is stronger than our individual businesses and creating opportunities for continued advancement through the cross-pollination of our people and the sharing of ideas across our organizations, all to the benefit of our guests, suppliers, team members and the neighborhoods that Winn-Dixie serves,” said Lynch in a statement.
He could not be reached for further comment.
A committee of the Winn-Dixie board of directors, advised by independent financial and legal advisors, negotiated the transaction and recommended it to the full board. The full board unanimously approved the agreement and recommended Winn-Dixie shareholders vote in favor of the transaction, the companies said.
The transaction is expected to close in the next 60 to 120 days, subject to shareholder approval and other closing conditions.
Several securities law firms said they were “investigating” the proposed merger, saying that Winn-Dixie had not done enough to seek out other offers. Although the bid was a 75% premium to the share price at the time, the stock had traded as high as about $30 a share in 2007.
