CERTIFIED GROCERS TO ACQUIRE FRESH BRANDS

ELLIOT ZWIEBACH

SHEBOYGAN, Wis. -- Pressured by a lack of economic clout, Fresh Brands here said last week it has signed a definitive agreement to be acquired for $100 million by an affiliate of Certified Grocers Midwest, the Hodgkins, Ill.-based member-owned cooperative.

The price includes $34.8 million in cash to shareholders, plus assumption of debt and other liabilities, primarily capital leases.

The merger would leave Certified with total sales of nearly $1.3 billion -- approximately $675 million from Fresh Brands and about $600 million from Certified.

If the deal is approved, Certified would become the parent company of Fresh Brands, which franchises 74 Piggly Wiggly supermarkets and operates 20 Piggly Wiggly and Dick's corporate stores in Wisconsin, northern Illinois and northeastern Iowa.

However, the stores would not become co-op members, said John H. Dahly, chief financial officer of Fresh Brands. Instead, Fresh Brands would become a voluntary wholesaler to the Piggly Wiggly and Dick's stores, and those stores would be owned by Certified's shareholders and controlled by Certified's directors, he said.

"We would still license stores under the Piggly Wiggly name, though whether we would open additional corporate stores has not yet been determined," Dahly said.

To complete the merger, Fresh Brands plans to submit proxy materials to the Securities and Exchange Commission as soon as possible for review and comment, Dahly said. It expects to have proxies and vote solicitations in the mail to shareholders by mid-January and hopes to schedule a special shareholders meeting in mid- to late February, he said.

If shareholders approve the deal, Fresh Brands would be acquired by Certified Acquisition Co., which was established specifically to execute this deal, Dahly said.

He said Fresh Brands' management team will remain in place during the transition period, "though there may be some changes after that."

Dahly said Fresh Brands decided to seek out a buyer to gain more leverage. "Size creates an issue in terms of your ability to buy in the right price brackets," he said, "and business systems are costly to install and maintain for a company of our size.

"And being public, we were spending $1.7 million a year to conform to the requirements of Sarbanes-Oxley without any real benefit."

Fresh Brands had a $3 million loss for the fiscal year that ended last Jan. 1. Through Oct. 8, when its third quarter ended, it had a loss for the year to date of $7.8 million, which it attributed to a non-cash impairment charge of $8.9 million resulting from operating problems at three underperforming corporate stores.

The chain, whose name was changed from Schultz Sav-O Stores in 2001, introduced a value proposition strategy in November 2004 to drive sales, which it said resulted in better sales and operating profits for most corporate and franchised stores and significant gains in its wholesale segment during the third quarter.

Fresh Brands said in April it was exploring strategic alternatives. Dahly said Fresh Brands has evaluated its prospects periodically every five years, "and this time we felt it was appropriate to explore a possible sale. We have known the people at Certified for many years and have had a mutual respect for each other, and it seemed to make a lot of sense to merge with them because of our comparable sizes."

Ken Koester, president and chief executive officer of Certified, said the acquisition of Fresh Brands will provide "many opportunities to strengthen both organizations. Both are dedicated to providing independent supermarket operators with excellent service at a low cost, and we believe the enhanced buying power and other benefits of the merger will provide greater value and opportunities to the Fresh Brands franchisees as well as the independent supermarket operators that we serve."

Certified serves approximately 200 member stores in Illinois, Indiana, Iowa, Michigan and Wisconsin, though there is little overlap with Fresh Brands' stores.

Louis Stinebaugh, president and chief operating officer of Fresh Brands, said the merger is "a win-win for shareholders, franchisees, employees [and] vendors."

For shareholders, the selling price of $7.05 per share represents "a fully financed, fair price," he said.

For franchisees, the combination with Certified "will allow us to improve our economies of scale and realize many business and operating synergies and efficiencies, including lowering product cost."

For employees, being part of a $1.3 billion company should provide opportunities for advancement, he said, while for vendors, "this transaction provides us with long-term financial security with a company most of them know and respect for the way they operate."