Investor May Eventually Exit A&P

MARK HAMSTRA

MONTVALE, N.J. — The Tengelmann Group may consider eventually selling its stake in A&P, a spokeswoman for A&P here confirmed last week following reports of the potential sale in a German newspaper.

Christian Haub, executive chairman of A&P and a member of the family that controls Tengelmann, reportedly told Manager Magazin that Tengelmann, which acquired a stake in A&P 30 years ago and still owns a 38.6% share in the U.S. retailer, is seeking to boost the profitability of the company over the next two years to maximize the price for a possible sale in the future.

Haub is also a partner and co-chief executive officer of Tengelmann, a privately owned company based in Mülheim an der Ruhrthat, Germany, that has more than 7,000 supermarkets and general merchandise stores in 15 countries, and generates more than $35 billion in annual sales. Tengelmann, established in 1867, is in its fifth generation of ownership by the Haub family.

The A&P spokeswoman, Michelle Kruchkowski, vice president, Mastro Communications, Warren, N.J., told SN that Haub's comments about the potential sale of Tengelmann's stake in A&P were taken out of context, and noted that “the potential sale of the business was only discussed as one of many possible longer-term alternatives which are a reality to any business.”

Asked what other longer-term alternatives Haub might have talked about, she said only that the company's “strategic optimization initiatives” were discussed.

Speculation about the future of A&P, and Tengelmann's plans for the company, heated up recently as Los Angeles-based investment firm Yucaipa Cos. acquired a 27.6% stake in A&P through a $115 million investment.

Yucaipa Cos., a group of funds headed by investor Ron Burkle, has a history of investing in supermarket companies and then seeking a return through the sale of those companies to other operators. It most recently did so with Wild Oats Markets, which was sold to Austin, Texas-based Whole Foods Market in 2007, and with Pathmark Stores, which A&P acquired.

A&P said at the time of Yucaipa's investment that the capital infusion, combined with a $60 million investment from partners of Tengelmann group and the issuance of $260 million in notes, would increase liquidity at the struggling retailer, help it reduce debt obligations and help with other initiatives, including the effort to turn around its Pathmark business.

“Mr. Haub is very excited about the current partnership with Yucaipa and is looking forward to creating more value for the company by concentrating on the strategic optimization initiatives recently announced,” Kruchkowski, the A&P spokeswoman, told SN. “This strategy and the current operations are the priority for Christian and the executive management team.”

Yucaipa Cos. could not be reached for comment last week.

Karen Short, a New York-based analyst with BMO Capital Markets, said she hadn't seen the German report but noted that it would be no surprise if A&P itself pursued a sale to another operator eventually.

“I don't think there's any secret that A&P would see itself as a good strategic fit with someone at some point because of their real estate,” she told SN. “I think the idea was always to buy Pathmark, integrate Pathmark, elevate EBITDA margins and then see what kind of multiple you can command.”

The weak economy might have slowed down that plan a bit, she said, but added that she “doesn't think that long-term thinking is off the table — I just don't know who the buyer is.”

She said some potential buyers might be put off by the long-term supply contract A&P has with C&S Wholesale Grocers.

Ahold, which owns the Stop & Shop and Giant-Landover chains that bookend much of A&P's operations in the Northeast, could be a buyer but might face a challenge from the Federal Trade Commission over market share, she said.

She also questioned whether Yucaipa could offer any operational expertise to improve the company's operations and boost its profit margins to the point where it might garner a strong sale price.

“Yucaipa is a master of timing,” she said. “Did they do anything at Pathmark except raise prices and prop up the EBITDA?”

She contended that Yucaipa's investment in Pathmark actually hurt A&P because by driving up margins in the short term, it caused the company to “overpay” for Pathmark.

“Timing worked against A&P, and they bought an asset that had not been fixed,” she said. “It worked very well for Yucaipa, so I would argue that [Burkle] has not demonstrated any ability to do anything operationally for a company. He just has great timing. Will he have great timing again? Maybe.”

She said that with A&P's challenges in finding a buyer and in bolstering its operations, Tengelmann might be in it for the long term.

“At the end of the day, I think Tengelmann does have some intention of selling the business, but I don't think that is by any means imminent.”