How Earth Fare's Last-Gasp Deal Collapsed

A recently as last weekend, the natural and organic chain Earth Fare was in advanced negotiations to sell 33 stores and its corporate headquarters to a strategic buyer who intended to operate them as a going concern. By Monday morning, that deal was dead, and so was Earth Fare.

A declaration by the retailer’s chief restructuring officer, filed as part of Earth Fare’s Chapter 11 bankruptcy proceedings this week, said a failure to close that deal—a last-ditch effort to raise money to pay off lenders with debt due and trade vendors on the verge of cutting off supply—prompted officials to quickly pivot to the liquidation strategy and bankruptcy proceedings announced this week.

Earth Fare did not identify the proposed buyer, but clues may well emerge in the days and weeks ahead as the company races to sell anything it can in court-led auctions. The Fletcher, N.C.-based retailer, now conduction going-out-of-business sales and taking offers on store fixtures and equipment, said it intends to wind down in as little as one month.

The restructuring officer, Charles Goad of FTI Consulting, said revolving bank debts due at the end of last year, along with a number of struggling stores, were at the heart of Earth Fare’s troubles.

He described a strategy in recent years to expand behind new units and a revamped store format but said competition—as well as legacy stores in need of renovation and, in some cases, substandard locations—continued to drag down the business.

“While many of the company’s expansions have been successful, others have struggled for a variety of reasons unique to store location or competition in certain markets,” Goad said. “At the same time, many of Earth Fare’s legacy stores required significant capital improvements, which caused a strain on liquidity. All of these factors coincided with the maturity of the company’s prepetition revolving loan obligations at the end of 2019, resulting in the significant liquidity challenges currently facing the company.”

He said Earth Fare had total annual sales of about $465 million—a figure that included results of a handful of stores that were closed and sold in the weeks before the filing.

A buyer with interest in 33 of Earth Fare’s stores would presumably indicate a multiregional operator with eyes on relatively small food stores. Sources suggested the discounter Lidl, which operates in many of Earth Fare’s current markets, would be one possibility, although only 24 of Earth Fare’s existing units are in states where the Alexandria, Va.-based discounter currently does business. Growth-minded Lidl made a bid a little more than a year ago for Best Markets units in greater New York and is operating those stores while gradually converting them to its banner.

Burt P. Flickinger III, managing director of Strategic Resource Group, New York, told WGB that another possibility would be Aldi, the Batavia, Ill.-based operator, which has been active in bidding for Lucky’s market sites. He pointed out that Eric Riegger, who as Lidl’s chief financial officer engineered the Best Markets deal, had recently assumed a high-ranking finance role at Aldi.

Dollar General, Ingles Markets and Ahold Delhaize’s Food Lion banner, all of which are based in the Southeast, would be other possibilities, he said.

Earth Fare entered negotiations with the buyer after a wide-ranging effort to find potential refinancing partners or buyers last year. Piper Jaffray contacted about 75 potential capital providers in two rounds of outreach on behalf of Earth fare and found three potential partners, but none of them could provide sufficient capital to refinance its indebtedness.

A separate effort led by Deutsche Bank to contact buyers as an alternative to a refinancing resulted in introductory meetings with two “major retailers” in May of last year to discuss potential sales, Goad said. In September, a formal effort to find buyers resulted in Deutsche Bank contacting 18 financial buyers and 23 strategic buyers who contemplated a purchase of some or all of Earth Fare’s stores. That effort drew 22 potential investors who signed nondisclosure agreements, one of whom—the above-mentioned bidder—submitted a proposal.

The filing describes an in-person meeting between that bidder and Earth Fare officials at the retailer’s headquarters in Fletcher on Jan. 28 during which Earth Fare had “hopes of finalizing the terms of a definitive agreement.

“However,” Goad continued, “late in the day on Jan. 29, 2020, the potential bidder advised the debtors that it was no longer interested in any transaction.”

He did not say why.