ANALYSTS SAY PATHMARK COULD FACE DISSOLUTION IF SOLD

Christina Veiders

CARTERET, N.J. -- The sale of Pathmark is a likely option going forward. However, analysts wonder if the company will remain a single entity, operating under its 37-year-old banner.

Last year, the struggling company here retained investment banker Dresdner Kleinwort Wasserstein to explore strategic options, including putting itself on the auction block.

Although speculation abounds, including selling the company off in pieces, a sale has yet to be announced.

Pathmark officials declined to discuss any possible bidders. Pathmark has been impacted by promotional price-cutting wars, plagued by inflation and rising costs, and hampered by sluggish consumer spending in a region struggling to recover in a rebounding economy.

Industry observers said the competition, particularly from ShopRite retailers, who are supported by the Wakefern cooperative in Elizabeth, N.J., can be fierce when it comes to low prices. The privately owned Wakefern reacts quickly to market conditions and can absorb thin margins better than its publicly traded competitors in order to win shoppers, analysts pointed out.

While Pathmark has fought back, it hasn't been able to gain share points from Montvale, N.J.-based A&P, which is concentrating on its Food Basics and Fresh Market formats. Nor has it taken away business from Ahold's Stop & Shop, Quincy, Mass., which has been integrated with Giant, Landover, Md., to gain cost advantages.

Pathmark suffered three straight quarters of disappointing sales and earnings losses, despite its failed efforts to promote some categories with price specials.

It has been forced to revise its guidance downward on several occasions. The latest projections put same-store sales down 1% or flat, and net losses between 13 and 25 cents per diluted share for the 2004 fiscal year that ended Jan. 29.

Analysts said Pathmark is a major-league property because its real estate is in high-density urban markets where available sites are scarce. Many of Pathmark's leases are long term and carry favorable terms. In comparison to some of its competitors, Pathmark's 55,000-square-foot stores are large.

Gary Giblen, director of research, C L King Associates, New York, mentioned Linden, N.J., a blue-collar town, as an example of the type of community where Pathmark has a strong presence. "You simply can't get supermarket locations in most of these areas because they are fully developed and built up," he said.

In some locations, particularly in metro New York, Pathmark may be the only game in town, said Jonathan Ziegler, principal at PUPS Investment Management, Santa Barbara, Calif., who also follows Pathmark for J.M. Dutton and Associates, El Dorado Hills, Calif.

Valuable real estate is not the only attraction Pathmark offers a potential supermarket buyer, analysts said. Wal-Mart has yet to make significant in-roads in the metro area, even though the discounter hopes to build its first supercenter in southern New Jersey this year.

What puzzles some analysts is that no one -- either a strategic or financial buyer -- has yet come forward to bid on the chain. Names mentioned as possible supermarkets that could be interested in buying the chain include Delhaize, Albertsons, Kroger, Safeway and C&S Wholesale Grocers, Pathmark's distributor.

One analyst, who wished to remain anonymous, believes interest among potential buyers is limited because the metro area is fragmented with no dominant player in some areas. "Many markets have two, three and four players -- all with a fair share," he said. "Albertsons when they bought Shaw's in New England, it was the No. 1 or No. 2 in every market. Albertsons felt it was getting a top-notch company. Here, some Pathmark stores fit that description, but not the whole base."

Even likely financial investment companies like Apollo Management; Cerberus Capital Management; Kohlberg, Kravis Roberts & Co.; and Yucaipa Cos. have remained silent.

"While the real estate is certainly compelling because these are nice-size stores with adequate parking in congested areas," said Ziegler, "[financial investors] have to come up with a way to recognize their investment pretty fast either with a lot of cost cutting or selling off stores. They would have to look if there was a better use of the real estate [other than as a supermarket]. The answer is probably not."

There are no guarantees any potential buyer will keep the chain as a stand-alone entity. Some buyer interests may be in obtaining contiguous territories without risking expansion into new areas like metro New York. Others like Delhaize, which went after Pathmark in 1998, may want to keep the chain as a whole to fill the gap between its operations in New England and the Southeast.

"If they don't get bought out, they are stuck in a rut," said Giblen. "However, ruts can be very deep and kick up a lot of dust. Pathmark is a stable company. They redid their covenant twice, so they have to have $135 million EBITDA and are running at $140 million a year. They can maintain that level and stay in a rut and not see significant improvement without a restructuring."