A&P Exits New Orleans To Focus on Northeast

JON SPRINGER

MONTVALE, N.J. — A&P last week said it was in negotiations to sell its Sav-A-Center division in New Orleans, a move that would leave the onetime widespread retailer with stores in the Northeast U.S. only.

The move was widely anticipated by industry observers as part of A&P's strategy to focus on the Northeast, where it is preparing to merge with Pathmark Stores, Carteret, N.J.

In April, A&P said it would sell or close all of its Farmer Jack stores in Michigan.

Although A&P officials have acknowledged the company is unlikely to find buyers for all its Farmer Jack outlets, industry observers predicted a better outcome in New Orleans, where the 21-store Sav-A-Center group generates around $413 million in annual sales and EBITDA margins of around 4.7%. Farmer Jack, by contrast, has been bleeding sales and market share.

John Heinbockel, an analyst for Goldman Sachs, New York, in a research note last week estimated A&P could realize between $100 million and $110 million, or around six times EBITDA, for the stores. “However, A&P is not divesting Sav-A-Center to purge an underperforming asset or drive earnings accretion,” Heinbockel wrote. “Rather, the purpose of the transaction is to redeploy capital into the Northeast and free up management to devote its time to the upcoming Pathmark integration.”

A&P in a statement last week said it was in “advanced negotiations with a number of a buyers” for Sav-A-Center, and added that, based on those talks, it was “optimistic that the Sav-A-Center operations could be sold to a single buyer.”

Observers told SN that it was likely a single buyer would wind up divesting some properties, or that the stores would be sold to multiple bidders. That's because the chain's stores vary widely in size and focus. Stores range, for example, from 5,000-square-foot “original” A&P-developed stores within the city limits to 50,000-square-foot-plus former Albertsons stores in outlying suburbs that were bolted onto the chain in an acquisition three years ago.

“If there is an ultimate acquisition of the entire group, I would guess there would be multiple buyers involved,” J.H. “Jay” Campbell, president and chief executive officer, Associated Grocers of Louisiana, Baton Rouge, told SN. “There's some variation of store volumes and sizes. They have some very large stores and very small stores that might not fit for one buyer.”

Campbell said AG-Louisiana had not made any offers on behalf of itself or its independent customers for the Sav-A-Center stores.

A&P is marketing Sav-A-Center as a revitalized chain “positioned to thrive under new ownership committed to long-term growth,” according to a statement from Eric Claus, CEO of A&P. Though hit hard by the effects of Hurricane Katrina in 2005, the chain was fast to reopen its units, and it turned extraordinary sales gains in the months that followed. Though comparable-store sales figures are down now as Sav-A-Center cycles through the post-Katrina period, overall sales are higher than before the storm hit, A&P officials said.

Effects of Katrina linger, however, in the form of costs for insurance, and in the area economy, observers said.

“You have some issues in the New Orleans area,” Campbell said. “There's a fairly high cost of doing business there, with property and casualty insurance very difficult to find. And almost all of the stores are in what are considered Tier 1 hurricane zones. It does make one looking at the area pause and consider whether they want to take on that exposure.”

According to Mark E. Inman of Coldwell Banker-Tec Realtors in New Orleans, Sav-A-Center has a strong local reputation that would be of interest to an “A-minus or B-plus” retailer not currently doing business in New Orleans, such as Kroger. Independents might also be interested in certain locations, he added.

“On the negative side, those stores are small, and New Orleans, unfortunately, is still depressed after Hurricane Katrina,” Gary Giblen, analyst at Goldsmith & Harris, New York, told SN. “On the positive side, they have some good locations that are hard to get, in areas like downtown.”

David Livingston, a consultant based in Pewaukee, Wis., estimated that as many as 16 Sav-A-Centers could be sold to a single buyer such as Kroger. Its smaller stores — some of which are excellent performers — would be of interest to independent retailers, he added.

Other potential acquirers could be C&S Wholesale Grocers, the wholesaler that currently supplies the stores, or Winn-Dixie, the Jacksonville, Fla.-based competitor of Sav-A-Center.

According to the Metro Market Studies 2007 Grocery Distribution & Analysis Guide, Sav-A-Center ranks third in the New Orleans metro area, with a 16.2% market share. Bentonville, Ark.-based Wal-Mart, which operates its Supercenter and Neighborhood Market concepts there, is first at 27.5%, followed by Winn-Dixie at 20.6%.

Asked who might be likely bidders, Giblen said, “I would think Kroger could do that — they like to do bite-sized acquisitions, and they have stores in that area. Food Lion might also be interested, and maybe Winn-Dixie, although they didn't do too well with Delchamps.”

Burt P. Flickinger III, managing partner of Strategic Resource Group, New York, said A&P has “a lot of good options,” ranging from strong local independents to Wal-Mart, which could take some locations for its Neighborhood Market grocery banner.

“This is not going to be a Farmer Jack replay, where it sits in the water while a lot of lowball offers come in,” Flickinger said. “I expect there will be some motivated bidders.”