Yucaipa Ups Stake In A&P

JON SPRINGER

MONTVALE, N.J. — A&P last week unveiled new financing agreements that would provide the struggling retailer with $400 million, including a private stock sale to Yucaipa Cos. that would give Ron Burkle's investment group a 27.6% ownership stake in the company and two additional seats on its board of directors.

Yucaipa will invest $115 million, and the Tengelmann Group, A&P's Germany-based majority owner, will contribute $60 million toward a $175 million convertible stock offering, the company said. Under the new arrangement Tengelmann would remain the largest single shareholder with a 38.6% interest. The investments are contingent upon the completion of a $225 million debt offering that was announced separately last week.

A&P said it would use the proceeds from the new financing agreements to repay borrowings and invest in its stores, which have struggled badly amid the economy. The deals were announced at the same time A&P revealed a 3.3% sales decline and a $65.2 million loss in the first quarter, which ended June 20.

“With these new funds, A&P should be able to increase liquidity, reduce its leverage, and possibly address upcoming debt maturities,” Christian Haub, A&P's executive chairman, said in a statement. “I am particularly excited by the decision of Tengelmann to solidify its commitment to A&P and continuing its 30-year investment in the company. At the same time, I am thrilled to be joining with Ron Burkle in determining the future of A&P.”

The deal continues a relationship between Burkle and A&P that began when they were rivals and discussed buying one another. A&P eventually acquired Pathmark in 2007, which was then majority owned by Yucaipa. Yucaipa took a small stake in A&P as a result of that deal and already has one member on A&P's board. Burkle will name two new board members when A&P expands its board from nine to 11 members as the result of the new investment.

The Pathmark acquisition has turned out to be a challenge for A&P. The banner has suffered sales and store traffic declines — and experienced higher promotional spending and price investment that has eroded margins — since A&P took over and attempted to position it as a “price impact” entrant in a multi-format portfolio. Under Yucaipa, Pathmark endeavored to achieve a different objective — using strong traffic to drive better profits from perimeter departments and upscaling certain locations.

Haub, however, said investors and A&P management are on the same page, and that the price-impact positioning at Pathmark would benefit the company over the long term.

“Both Yucaipa and Tengelmann believe in the strategic value of the company following the acquisition of Pathmark,” Haub said. “While the company is not performing to its full potential, we have identified … all the actions we need to take to drive performance and enhance shareholder value.”

For the quarter, A&P reported sales of $2.8 billion, down from $2.9 billion in the same period last year, and a loss of $65.2 million vs. a $1.3 million profit. EBITDA of $80 million was below last year's $96 million figure, but within the expected range, said Simeon Gutman, an analyst for Canaccord Adams.

“Without the Burkle investment, it only means they couldn't put as much capital into the business, but I don't think they were in jeopardy of something severe without it,” Gutman told SN. “But it always helps to have more cushion.”