Few Store Divestitures In A&P-Pathmark Deal

JON SPRINGER

MONTVALE, N.J. — A&P will surrender just six stores to satisfy federal antitrust regulators overseeing its takeover of Pathmark Stores — a remedy more closely resembling a drop of blood than a pound of flesh.

Although portrayed as a villain for opposing the Whole Foods-Wild Oats merger earlier this year, and having been accused of scuttling a proposed buyout of Pathmark by Ahold in 1999 with excessive mandated divestitures, the Federal Trade Commission trod comparatively lightly on the $1.3 billion A&P-Pathmark merger, which is expected to be finalized this week.

Regulators approved A&P's agreements to sell five stores in the New York borough of Staten Island — four Waldbaums and one Pathmark — to King Kullen Grocery Co., and a single Waldbaums store in the Long Island, N.Y., town of Shirley to Stop & Shop. Those deals are to be completed by Jan. 10. The divestitures account for far less in terms of stores, sales and earnings than many industry observers had anticipated, particularly after witnessing ongoing tangles between the FTC and Whole Foods in the industry's other big merger this year.

“This is a tremendous success for A&P,” one industry observer, who asked not to be identified, told SN. “It's not only fewer stores than anyone expected, it's also that five of the stores they are giving up are A&P/Waldbaums and not Pathmark, preserving some of the best locations and sales volumes. They also get to operate them through Christmas, so they get the benefit of the strong fourth quarter.”

That A&P steered its Staten Island stores to King Kullen, which until now had just one Staten Island location, is “extremely favorable from a competitive standpoint,” added Karen Short, an analyst for Friedman Billings Ramsey, New York. Several other suitors would likely have been interested in the properties, sources said.

Short estimated A&P would receive proceeds of $30 million to $35 million as a result of the sales.

The FTC did not impose restrictions that would prevent the combined A&P group from closing stores, which could also benefit the company, sources added.

FTC officials referred questions about differences in how it interpreted the Whole Foods-Wild Oats merger — which it is still suing to undo — and the A&P-Pathmark marriage to their respective published complaints. One significant difference is in what the FTC calls “relevant product markets” in which the companies operate. While A&P and Pathmark are considered among “supermarkets,” operators in the Whole Foods deal were more narrowly classified as “premium natural and organic supermarkets.”

The FTC appeared to have applied more rigorous standards to its review of the proposed Ahold-Pathmark merger in 1999. Ahold backed out of that deal before a final decision was reached, complaining that the commission was asking it to divest more than 50 stores. The unraveling led to Pathmark filing bankruptcy.

For King Kullen, the Bethpage, N.Y.-based regional chain, the acquisition of the former A&P stores brings it additional strength on Staten Island, where it currently operates a single store. The stores are expected to switch to the King Kullen banner shortly after the deal is finalized in January. A company spokesman told SN the stores will close only briefly to allow for the changeover. Other changes, including Boar's Head-branded delis, will follow.

King Kullen is expected to retain the current employees at the store, who will remain with their current unions: Local 338 of the Retail Department Store Union at Waldbaums, and United Food and Commercial Workers Local 1500 at Pathmark.

“Our hope is that King Kullen can use this deal as a springboard to start filling in the gap in Brooklyn and Queens. Everyone is talking about there being more conventional grocery stores in the five boroughs,” Pat Purcell, a spokesman for Local 1500, New York City, told SN last week.

“King Kullen fits very nicely into the Waldbaums category,” Purcell added. “Those customers who regularly shopped at Waldbaums will be very pleased with King Kullen. They're an excellent operator.”

A&P said the stores being divested represent combined annualized sales of approximately $149 million and EBITDA of approximately $6 million. Earlier this year, A&P officials said they were prepared to surrender a maximum of $36 million in EBITDA to divestiture. Analysts had expected that regulators would ask the company to shed as much as $25 million in EBITDA.