WINN-DIXIE SETS SIGHTS HIGH

JON SPRINGER

JACKSONVILLE, Fla. - Winn-Dixie's plan of reorganization has won the cheers of its creditors, but so far has drawn a mixed reaction from industry observers and the trading markets.

Winn-Dixie Stores, which has operated under federal bankruptcy protection for 16 months, late last month revealed a business plan emphasizing top-line sales growth through identical-store sales gains, renovations and new store openings. A projected statement of operations from the reorganized retailer estimates a sales increase of 27.5%, and EBITDA increasing fourfold, over the next five years.

If successful, the plan could return note holders more than 95% and vendors morethan 70% of the millions owed to them. But those projections, a source told SN last week, are "highly aggressive."

Meeting them will require taking additional market share from competitors like Publix Super Markets and Wal-Mart Stores, and maintaining a strong sales pace in Louisiana, where a number of stores received sales boosts as the result of hurricane-related population shifts. The company also has to show it can generate profits without the benefit of asset sales and lease rejections during the Chapter 11 process, they said.

"When you emerge out of Chapter 11 and have profitable stores and a strong balance sheet, you've got a clean slate," Neil Stern, principal with McMillan-Doolittle, Chicago, told SN last week. "What's unknown is what they are going to do with that. One thing that hasn't changed is that the prevailing challenges they faced before bankruptcy - Publix and Wal-Mart - are still there.

"I think they've done a good job making progress, cleaning up the stores and sending out a message to consumers that's compelling," Stern continued. "But that's a far cry from saying they can maintain it into the future."

David Livingston, a consultant in Pewaukee, Wis., noted that Winn-Dixie stores in rural Louisiana may suffer in a few months as residents displaced from New Orleans return to the city. He said his research indicated some stores saw sales increases as high as 50% in the months following last year's storms, but predicted year-over-year decreases as the company cycles those events.

Winn-Dixie's plan pencils in annual capital spending at 2% to 2.8% of sales - or between $145 million and $204 million in fiscal 2007, according to company projections. One observer, who asked not to be identified, told SN this may not be enough to overcome two years of little to no investment during the bankruptcy, and could serve to increase debt levels shortly if sales don't improve at the pace the company predicts.

Some uncertainty over the projections appeared to have been reflected in the trading markets last week. Winn-Dixie bonds late last week were trading at 83 - or a 12% discount to the retailer's estimate of a 95.6% recovery for bondholders. Similarly, Winn-Dixie's trade claims were generating less than the retailer's estimate of trade creditors' recovery would suggest, according to reports.

Creditors, who in the weeks leading up to the reorganization plan worked with Winn-Dixie to overcome issues of consolidation, told SN last week they are supporting the retailer. Projected recoveries for vendors and landlords of 70.9%, to be paid in stock in the reorganized entity, suggest a comparatively strong recovery in a retail bankruptcy, sources said.

"I would say my group is very satisfied with the settlement because it gave them close to what they would have gotten in a total victory," Thomas R. Califano, an attorney with DLA Piper Rudnick, which represented a committee of product vendors, told SN. "I'm not aware of any significant constituency that's going to have a problem with this plan."

Jerrett McConnell, an attorney for Friedline McConnell in Jacksonville that represented retirees in the case, told SN coming to agreement on consolidation of the 24 affiliated debtors was key because it allows Winn-Dixie the opportunity to reinvest in stores at its earliest opportunity, providing his classes of creditors their best chance at recovery. Retirees, owed $87.8 million, will receive an estimated recovery of 59.1%; death benefit claims under the management security plan will be paid in full, he said.

"Do we like it? No. But we think it's the best opportunity to recover the maximum amount of dollars in this bankruptcy," McConnell told SN. "We don't think the company could survive a long drawn-out battle over things. We think it's the best it can do given the circumstances."

For its part in the consolidation, Winn-Dixie offered the approximately 1,200 members of the retiree class a card offering a 10% discount on Winn-Dixie groceries for a period of two years, McConnell said. "It was something that the debtors threw out there. It wasn't a deal maker or deal breaker of any kind, but as long as they threw it out there, that's fine."

An analysis prepared by Winn-Dixie's advisers suggested the retailer's reorganization plan would provide superior returns than would liquidation under Chapter 7. In that scenario, creditors would recover only between 4% and 13% of the monies owed them, the analysis said.

"Winn-Dixie needs to get under new management and progress. It can't be languishing in Chapter 11," McConnell said. "All the [creditor] parties felt we needed to get it through so that a new management team can come in and take what looks like a good framework - some good market placement and a good reputation - and move forward. It's rebuildable."