RICHFOOD TO PURCHASE FARM FRESH

ELLIOT ZWIEBACH

Richmond, Va. -- Richfood Holdings here said last week it has reached an agreement in principle to acquire substantially all the assets of Farm Fresh, Norfolk, Va. -- its third-largest customer -- for $220 million and other financial considerations.

The transaction, which would involve 42 of 48 Farm Fresh stores, is expected to close in January following a prepackaged voluntary reorganization by Farm Fresh under Chapter 11 of the U.S. Bankruptcy Code, after which Farm Fresh would operate as a wholly owned subsidiary of its primary supplier, Richfood.

Richfood said the proposed acquisition has already been approved by an informal committee comprised of holders of a substantial majority of Farm Fresh's senior notes. Farm Fresh said it plans to close six stores before the deal is completed.

As it moves toward a definitive agreement with Farm Fresh, Richfood said it plans to take several steps, including the following:

To invest $80 million to $90 million in renovating approximately 25 Farm Fresh stores over a period of 24 to 30 months.

To name a new top executive to oversee Farm Fresh, as Ron Johnson, chairman and chief executive officer, and Richard D. Coleman, chief financial officer, both depart according to the contracts they signed when they were hired.

To assume all of Farm Fresh's trade liabilities. The acquisition would boost Richfood's overall volume to $3.8 billion, including $1 billion, or about 25% of total sales, coming from 59 corporate stores (approximately $660 million from 42 Farm Fresh stores and approximately $340 million from 17 Metro and Basics stores based in Baltimore).

Farm Fresh accounts for about 9% of Richfood's wholesale volume. Farm Fresh, a privately held company, operates 35 combination stores in the Tidewater area; 11 Rack & Sack superwarehouse stores in Hampton Roads and the Shenandoah Valley; one store called 3 Stores/1 Roof that combines a superwarehouse format with expanded perishables and a discount drug store; and one Farmco drug store.

John E. Stokely, Richfood's president and chief executive officer, told SN Richfood will convert the six Rack & Sack units in the Tidewater area to Farm Fresh combos "because we want to focus on a single format there, and we believe the market there is getting crowded on the everyday-low-price side, with Food Lion, Hannaford Bros. and Winn-Dixie all using EDLP.

"Combos tend to do less volume, but they are more profitable." The converted Rack & Sack units would use the new prototype Farm Fresh has used at its last couple of stores, which includes more emphasis on perishables, Stokely added.

He said Richfood is in the process of seeking a new president for Farm Fresh, who is expected to be hired from outside the Richfood and Farm Fresh organizations -- "hopefully before the deal is finalized," Stokely said.

Richfood was interested in acquiring Farm Fresh, Stokely pointed out, "because it is a strong franchise with excellent store locations and a solid marketplace reputation built over the past 40 years.

"We expect the transaction will be accretive to Richfood's earnings immediately and that it will provide other significant benefits by adding volume to our wholesale network and by preserving our market-share in the Tidewater region.

"We also see strong potential synergies in both the wholesale and retail operations through better utilization of our logistics infrastructure and existing transportation fleet, as well as enhanced procurement and private-label opportunities.

In addition, the combination affords us the opportunity to realize a variety of operating synergies on the retail side in much the same manner as we have achieved in our wholesale business with previous acquisitions.

"Importantly, the Farm Fresh retail store operations do not conflict with those of our existing wholesale food distribution customers."

According to Johnson, "This deal represents the beginning of a new day for Farm Fresh and its associates, who have been operating under a tremendous debt load during the last nine years. We truly believe this is a wonderful deal and a great opportunity for our associates."

Coleman stressed the importance of Richfood's willingness under the agreement to take over the retailer's trade liabilities, "because it means vendors won't be impacted by this deal in any way," he told SN last week. Observers noted that most of Farm Fresh's trade liabilities are to Richfood.

Johnson and Coleman said they will remain at Farm Fresh until the sale closes. "We took this job to help evaluate the company's strategic alternatives and see the process through, and we knew that we would be leaving when that process was completed," Johnson said. The two had been CEO and chief financial officer, respectively, during the turnaround at Kash n' Karry Food Stores, Tampa, Fla., before its sale last January to Food Lion, Salisbury, N.C.

Johnson said he will become chief operating officer of Jitney-Jungle Stores of America, Jackson, Miss.; Coleman declined to discuss his future plans.

Farm Fresh has been struggling under a heavy debt load since a leveraged buyout in 1988, despite a financial recapitalization in 1992 -- making store expansion difficult at a time competing operators in its trade areas were growing. The company hired Donaldson Lufkin & Jenrette, New York, last November to act as a financial adviser and to assist it in exploring strategic alternatives for preserving and creating value for Farm Fresh.

Although chain officials said earlier this year they would have to make a decision on the company's future by April 1, 1998 -- when a pay-in-kind interest obligation of more than $19 million is due to holders of 14.25% bonds at the holding-company level -- observers told SN a decision was more likely before Oct. 1 of this year, when an interest payment of $12.25 million is due to holders of 12.25% bonds in Farm Fresh's operating company.

Under terms of last week's agreement in principle, Richfood said it will not assume Farm Fresh's senior notes or other indebtedness for money borrowed, or its lease obligations for stores that have closed or will close prior to the sale.

The final acquisition price will include approximately $220 million in cash, plus the value of certain assumed capital leases, plus 1.5 million warrants for Farm Fresh bondholders to purchase common shares of Richfood over a five-year period at an exercise price of $25 per share.

Richfood said the exact amount of the purchase price would vary, depending on changes in Farm Fresh's working capital and the lease obligations assumed by Richfood.