Pathmark Acquisition Ends Three Years of Anticipation

JON SPRINGER

MONTVALE, N.J. — A&P last week finalized its $1.4 billion takeover of rival Pathmark Stores, creating a 450-store, $9.4 billion chain with market share leadership in metro New York and enhanced strength in the Northeast.

The partnership is seeking to unleash value through a portfolio of uniquely positioned store banners; improved market share and buying power; and $150 million in cost savings, according to A&P, which will combine the operations of the companies at its headquarters here.

A&P said it will retain the Pathmark name and store network. About 125 corporate employees and virtually all of Pathmark's store personnel will be retained, A&P added.

“The merger of these iconic brands will transform A&P's financial performance, efficiency and competitiveness, create substantial value for shareholders, and offer enhanced security and opportunity for associates,” Christian Haub, A&P's executive chairman, said in a statement.

The merger provides the resolution to more than three years of positioning by the respective companies. Pathmark appeared destined for consolidation since the productive but financially strapped retailer put itself up for sale three years ago. Ron Burkle's Yucaipa Cos. gained control of it in 2005 with a $150 million investment and a plan, Burkle told SN at the time, to improve its financial standing with an eye toward participating in eventual consolidation.

Though a new management team was making progress toward goals of improving its profitability and stores, the opportunity to consolidate came first.

“The renovated store we did [in Kinnelon, N.J.] and the team we were able to transfer over to A&P were our major accomplishments,” Ken Martindale, Pathmark's former chief merchandising officer and co-president, told SN last week. “We were glad to be able to get profitability up to a level where we were attractive to A&P.”

Martindale, who was hired by Pathmark in 2005 with a group of other Yucaipa-affiliated executives, said he will look to other opportunities now that the merger is complete. John Standley, Pathmark's former chief executive, and Frank Vitrano, co-president, are likewise not joining A&P.

With the acquisition, Yucaipa's $150 million investment has turned into at least $241 million in cash, as well as more than 3.4 million shares in A&P, according to government filings.

Yucaipa owns 5.3% of the combined companies, but the transfer of warrants could increase Yucaipa's stake to around 9.4%. A&P's largest shareholder, Tengelmann Group, retains 44.8% of the combined company's shares.

A&P's admiration for Pathmark's strength in Center Store merchandising and in real estate is reflected in the top executives from Pathmark it retained: John Ruane, senior vice president of merchandising, and David Kelly, senior vice president of construction and store development. Gregory Mays, a Yucaipa-associated member of Pathmark's board of directors, has joined the board at A&P.

For A&P, the Pathmark acquisition marks the completion of a strenuous transformation to concentrate and strengthen the retailer's presence in the Northeast. This effort kicked off in 2004 when A&P centralized its operations in Montvale, outsourced its distribution and put its profitable Canadian division up for sale. Proceeds of the Canada sale in 2005 helped to fund renovations to A&P's existing stores, creating three distinct store formats (fresh, gourmet and discount) with which to go to market. A&P also sold off operations in Michigan and New Orleans over the past year.

Officials said they will work to position Pathmark as a “full-shop, price-impact” operator that would complement its three existing formats.

An A&P spokesman told SN that as of last week there were no anticipated closures, although sources said they expect at least some locations may close or be sold to non-grocery retailers.

The completion of the deal also triggered benefits for A&P executives, who will be awarded restricted stock for meeting the goals of a 2005 turnaround incentive plan.

A&P said it will work to achieve $150 million in cost benefits in the coming 18-24 months. Officials last week were still in the process of negotiating a single contract with C&S Wholesale Grocers for the entire company. Pathmark and A&P have separate contracts with the Keene, N.H.-based distributor.