Weak Stock Ignites A&P Speculation

JON SPRINGER

MONTVALE, N.J. — Should A&P go private?

That's a question on the minds of analysts and industry observers who have witnessed the retailer's market value plummet by more than 50% during the last year. A&P's stock, which was trading at more than $32 per share at this time last year, fell to as low as $12.57 per share earlier this month — the difference between market capitalization of $1.9 billion and $811 million. The stock was trading at about $14 per share late last week.

Though no comment from A&P or its largest investor, the Tengelmann Group, was forthcoming last week, it may be a question the family-run, Germany-based group is mulling as well. Tengelmann currently owns about 45% of A&P's outstanding stock and has controlled the company since acquiring the majority of its stock in 1979. Christian Haub, a co-director of Tengelmann, is also A&P's executive chairman and its former chief executive.

The argument to take the company private is based on more than a languishing share price, analysts said. They contend that by doing so, A&P can concentrate on the integration and repositioning of the Pathmark stores it acquired last year, away from the scrutiny of Wall Street. And if successful, the company could spin off shares to the public again.

“If you assume the Pathmark merger is going to be a home run, then you take the company private now and have the improvement occur in private, out of the market,” Gary Giblen, an analyst with Goldsmith & Harris, New York, told SN last week. “And they could re-float it later.”

Karen Short of Friedman, Billings, Ramsey & Co., New York, expressed the same sentiment in a recent research note, urging Tengelmann to ramp up its share repurchase activity or take the company completely private, given the weak economy and relatively cheap share price. Short values A&P at $27 per share — a 6.6 multiple on projected 2010 fiscal year EBITDA of $410 million. It was trading at a 4.8 multiple when Short issued the note Sept. 4.

Asked to speak from Tengelmann's point of view at an investor conference earlier this month, Haub acknowledged that a long-term perspective on the company, and not necessarily control of it, was most important to Tengelmann.

“I think control is secondary to what we think the value upside is [over the] longer term and what the current stock price is presenting in terms of investment opportunity,” Haub said.

Those remarks — which analysts said may have been interpreted by the market to indicate that the benefits of A&P's combination with Pathmark could take longer to realize than initially expected — triggered a stock sell-off. That followed a 20% price drop in July when investors were unhappy with quarterly earnings. The company is scheduled to report second-quarter earnings next month.

Tengelmann and its associated funds had repurchased shares during August at prices ranging between $15.71 and $16.25, filings with the Securities and Exchange Commission show.

Historically, such buying does not indicate a takeover is imminent, however. Tengelmann in fact has maintained a similar ownership structure since first investing in the retailer in 1979. According to Giblen, “The structure has been weird ever since they've owned it.”

Giblen speculated that A&P may prefer to remain public to maintain access to the markets in the event of an acquisition or a sale.