The Northeastern region of the United States is still considered highly fragmented and ripe for more consolidation, although potential dealmakers there might have to wait until the economy recovers before any more major mergers take place.
Some of the chains viewed as potential deal participants include Tops Markets, Price Chopper, Giant Eagle, Roche Bros. and Heinen's.
The announcement by Penn Traffic last month that it has sold its distribution operations to C&S Wholesale Grocers, Keene, N.H., put that chain on a better course toward a possible acquisition, one investor told SN.
“We hope that they wait for the right opportunity to sell themselves down the road,” said Tucker Golden, managing partner, Solas Capital, New York. “We hope that by fixing the balance sheet now, they put themselves in a position not to have to sell from a position of desperation or weakness, and they will be able to put their best foot forward when it does come time to become part of something larger.”
Penn Traffic said it plans to use the proceeds from the $43 million sale of its distribution operations to reduce its debt, freeing up more capital to invest in its store base.
The cash infusion should help Penn Traffic improve its payment terms to vendors, which in turn will help the company improve its prospects for finding a potential suitor, Golden said.
“When an acquirer looks at this business, they are going to see something profitable,” he said. “It's certainly not a growth business — it's nothing sexy, but it is a nice, profitable business.”
He said strategic acquirers that might be interested in Penn Traffic, which operates 91 stores in New York and Pennsylvania, include Buffalo, N.Y.-based Tops Markets and Schenectady, N.Y.-based Price Chopper Supermarkets.
Tops and Penn Traffic had discussed the possibility of a merger before Tops was acquired in 2007 by Morgan Stanley Private Equity, and Golden said he believes Tops is well positioned to become more acquisitive. Tops recently unveiled plans for store renovations and expansion in 2009, according to local reports.
Price Chopper, meanwhile, has been snapping up various locations from both Penn Traffic and Tops and converting them to its own banner.
Tops is strongest in the Buffalo market, while Price Chopper has a solid grip on the other end of the state, in the Albany region, leaving Penn Traffic's P&C, Quality and BiLo banners, based in Syracuse, N.Y., scattered roughly in the middle of the two operators, with little overlap.
“It seems to me, just looking at the geography, either Price Chopper or Tops would be a good combination [with Penn Traffic],” Golden said. “I would think, over the long term, either one of those combinations would make sense.”
He said he suspects Penn Traffic may scale back its size to some degree before any deal occurs, however.
“I think it's clear that operating 91 stores doesn't make a lot of sense,” Golden said.
Montvale, N.J.-based A&P, which launched what some observers said could be a slow wave of merger activity in the region with its 2007 acquisition of Pathmark, may have to sit on the sidelines until it finishes digesting that chain, according to Burt Flickinger III, managing director, Strategic Resource Group, New York.
Flickinger, who himself had been interested in buying Tops before it was sold to Morgan Stanley, agreed that further consolidation in the Northeast will likely occur once the economy improves.
“The challenge, in talking to a lot of the private equity and Wall Street firms, is that it really has become almost a creditless [merger and acquisition] market,” he said.
So many department store operators and specialty retailers are strapped for cash — several are said to be borderline bankrupt — that lenders are doing what they can to help them refinance their debt or muddle through the economic downturn, leaving little available for financing acquisitions.
“Commercial credit constraints haven't been this bad in almost 70 years, so unless a retailer is family-owned and -operated or can self-finance a lot of the acquisition, the capital may not be available to do a lot of those deals,” Flickinger said.
He said it could be late 2009 or early 2010 before M&A capital becomes available.
Strategic buyers may also be sitting on the sidelines, he said, to get a better gauge of a potential target's viability once the economy improves. In the case of Penn Traffic, the fact that the company operates in an economically depressed region also could deter some investors.
“Strategic buyers have told me they want to wait until the economy bottoms and bounces, so they can see what a true run rate on operating earnings or EBITDA is, to determine the true value of the business,” he said, “rather than to buy in a declining economy, where the earnings may be declining more in '09 than they did in '08.”
In addition to Penn Traffic, Flickinger cited several other chains in the region that could be in the sights of potential buyers as soon as financial conditions improve.
“There are a couple of crown jewels still out there,” he said, citing the 17-store, family-owned Roche Bros. chain, based in Wellesley Hills, Mass., “if and when the family wants to sell.”
He also named Heinen's in Cleveland, as well as Pittsburgh-based Giant Eagle, among the “crown jewels” that could eventually become part of larger entities. Giant Eagle is also often cited as a potential acquirer of other chains in its operating areas or in contiguous markets.
Last year Gary Giblen, an analyst at New York-based Goldsmith & Harris, cited Sunbury, Pa.-based Weis Markets as a potential acquisition target in the Northeast as well, although the company — profiled on Page 12 of this issue — doesn't appear to be headed in that direction.
In an interview with SN, Weis' new chief executive officer, David Hepfinger, said he would consider the possibility of being on the acquiring end of some deals, if the financing made sense.
“Provided it's economically sound, we would look at [making an acquisition],” he said. “But we certainly won't leverage the company at the risk of adding a little volume. You have to make sure, today more than ever, that you're not overpaying. There is a long history of companies making acquisitions in this industry that ran them into trouble in a year or two.”