A&P CANADA GOING STRONG, BUT COULD BE SOLD

BRIAN DUNN

MONTREAL (FNS) -- Speculation continues to grow that A&P Canada, a wholly owned subsidiary of A&P, Montvale, N.J., will soon be sold to help pay down debt of its struggling parent.

A&P declined to comment on the matter.

The Canadian division has been a rock-solid performer over the last few years, contributing between 25% and 42% of A&P's operating profit, according to Perry Caicco, merchandising analyst at National Bank Financial, Toronto.

For fiscal 2001 ended Feb. 28, A&P Canada earned an estimated $20 million on sales of $2.5 billion, the same profit as last year, but double what it earned two years earlier.

In contrast, the U.S. firm posted a $25.1 million loss for fiscal 2001, ended February, and said it was considering closing some stores.

As a result, the Canadian subsidiary remains an attractive asset for several possible purchasers, according to a number of analysts on both sides of the border.

"It is certainly one of the more desirable parts of the company," said Gary Giblen, director of research, senior vice president, C L King Associates, New York. "The rumor mill is very active that it will be sold, probably before the end of the year, and the company is struggling with a decision whether to divest it. It wouldn't be their first choice, but it is easily one of their more marketable assets."

Caicco said he believes A&P Canada will soon be on the auction block.

"With A&P's debt situation worsening and with lenders concerned, pressure may come on Tengelmann [A&P's major shareholder] to deal off some assets. The most discreet, yet highly valued asset is A&P Canada. We believe as debt pressure mounts, offers for A&P Canada will, in fact, be entertained."

The analyst estimated A&P Canada's price tag at between $520 million and $550 million. He said the best suitor in Canada would be Sobeys, Stellarton, Nova Scotia, which badly needs a retail presence in Toronto, where it has two distribution centers but no stores. Most of Sobeys' network is outside the Toronto area and in suburban Ontario.

Caicco also said Sobeys can afford to buy A&P with the $504 million it received for its interest in Hannaford Bros. Co., Scarborough, Maine, from Hannaford's acquirer, the Belgian-based Delhaize Group.

Another possible suitor Caicco mentioned is Metro, Montreal. "Metro could also be interested, but there are no synergies there," he said. "They could either buy it for a very good price or be prepared to erode earnings for the next couple of years to pay a premium and build a distribution network. Metro also lacks acquisition experience."

Because of its huge market share, Loblaw would probably be prevented from making a bid for A&P by Canada's Competition Bureau, according to Caicco.

Safeway Canada, Calgary, Alberta, might be another interested party if it wanted to move into the Ontario market, according to Bill Chisolm, Dundee Securities, Toronto.

"But it's a better fit for Sobeys or Metro, although there might be more store overlap with Sobeys," Chisolm said. "Also, Safeway may not be as good a fit because they're not in the franchise business."

Chisolm said he doesn't think a U.S. buyer would be interested in A&P Canada unless it bought the American operations as well. And his most likely choice of a U.S. buyer would be Safeway, Pleasanton, Calif., the corporate parent of Safeway Canada.

Asked about the possible acquisition, the U.S. firm declined to comment.

Although A&P Canada could be put up for sale, it's not imminent, suggested another analyst, who requested anonymity.

"Why would A&P want to sell its gem to offset its underperforming assets in the U.S.?" he asked. "Wouldn't it be better off selling some of its American stores?"

Jack Murphy, an analyst with Credit Suisse First Boston, New York, also said he isn't convinced a sale will take place.

"It's awfully difficult to sell one of your better-performing divisions. If you sell what's working, you're left with what's not. But something will have to be done soon."

A Sobeys spokesman said the company is aware of rumors of the possible sale of A&P Canada.

"The sale of A&P Canada would be the next logical step in the continuation of the grocery consolidation in Canada," said Stuart Mahoney, head of investor relations, Empire Co., Sobeys' parent. "However, we're concentrating our main focus on category management and growing our existing business."

However, Metro would be interested if A&P Canada was for sale, according to Denis Chouinard, the company's director of investor relations.

"We're always interested in acquiring new assets, especially in Ontario, but not at any price. But I think A&P is occupied with turning around its U.S. operations and less concerned about what's happening in Canada."

A&P Canada operates only in Ontario, where it has an estimated 20% market share. The company was cobbled together from an original group of A&P stores in Canada; the Dominion store chain, purchased in 1984; and the Miracle Mart assets purchased from Steinberg Inc.

During the 1990s, most of the Toronto outlets were converted to Dominion stores while the bulk of suburban and rural stores were converted to the A&P banner.

Today, there are approximately 97 A&P corporate stores, 59 Dominion corporate stores, 73 Food Basics franchised discount-box stores, eight Ultra food and drug stores, and eight The Barn fruit market outlets.

According to Caicco, the key to A&P Canada's success is its Food Basics format, launched in 1994. "The company took an aggressive attitude and quickly converted many underperforming conventional A&P and Dominion stores to the Food Basics banner," he explained.

"A combination of low pricing, great locations and strong store design made Food Basics an instant hit with customers," he added. "In Ontario, the discount-stores format now accounts for almost 18% of total grocery sales, so A&P Canada's move into this popular format was life-saving."

Food Basics now has about a 30% share of the Ontario discount-food market, according to Caicco, second only to Loblaw's No Frills 46%.

Caicco attributed A&P Canada's strong performance to the fact that 70% of its stores are in the metropolitan Toronto area, Canada's largest market, where it has an estimated 32% market share vs. 45% for front-running Loblaw.

"With Loblaw and A&P Canada so dominant, and good, available Toronto sites almost nonexistent, both companies have stores in this market that are among the most productive in North America," said Caicco.

But the analyst said he feels A&P may have peaked and faces an uncertain future for several reasons. He said last year was exceptionally strong for Ontario grocery sales that likely won't be repeated.

Also, Caicco noted the discount-box format may be reaching a saturation point in the province; Sobeys is making major gains in suburban markets; A&P Canada's rural markets are under attack by independents; and the company is falling behind the competition in capital spending.