COSTS, RISKS LEAD INDUSTRY COMPANIES TO GO PRIVATE

Mark Hamstra

Some of the most admired companies in U.S. food retailing are privately owned, regional operators.

Chains like Wegmans, H-E-B and Publix might be attractive to equity investors if their stock became available on the public market, but their ownership has chosen instead to maintain the independence and control that come with being privately held. By restricting their shareholders to a limited group, those companies also don't have to navigate some of the other obstacles publicly-owned companies face, such as complying with the burdens of Sarbanes-Oxley, the law that went into effect last year requiring, among other things, stringent controls over accounting procedures.

In the last two weeks, two small public companies in the industry have decided to shuck their ticker symbols and become privately owned, and both cited the costs of conforming with Sarbanes-Oxley as factors in their decision, along with competitive pressures.

Foodarama, the Freehold, N.J.-based ShopRite operator that is being taken private by the family of its chairman and chief executive officer, estimated in a filing with the Securities and Exchange Commission that its Sarbanes-Oxley-related costs for the most recently-ended fiscal year were about $692,000, including $588,000 paid to external accountants, legal advisors and other outside vendors. That represents 24% of the company's pre-tax income for the year.

Fresh Brands, the Sheboygan, Wis.-based franchisor of Piggly Wiggly stores that is planning to merge with member-owned Certified Grocers Midwest, said it was spending $1.7 million per year to comply.

John Catsimatidis, chairman of Red Apple Group, parent of the Gristede's chain in New York City, told SN the costs of complying were a factor in his decision to go private in 2004.

Add to those companies the potential acquisitions of Marsh Supermarkets, BJ's and Albertsons, and the roster of public companies in the food-retailing industry is dwindling fast. A year ago, SN tracked 33 food retailing and distribution stocks in the U.S. and Canada. Now that number is down to 30, including the companies listed above.

While Sarbanes-Oxley was only one factor in the decisions of these firms, it reflects a broader issue in a mature industry increasingly dominated by Wal-Mart: Is it really worthwhile for supermarket companies to list their shares?

As Foodarama stated in its SEC filing, "It is virtually impossible to achieve the levels of growth typically required by the public markets without continued expansion," which the company said it views as too risky in today's market.

For fast-growing companies like Whole Foods whose expansion provides substantial returns for investors, having publicly-traded stock affords them the option of leveraging their equity to fund growth. The same goes for large companies like Supervalu, Safeway and Kroger, which could be players in ongoing industry consolidation or otherwise generate returns.

Considering the costs of being public and the risk vs. return involved in expansion, Foodarama and Fresh Brands may have made the best decision for the success of their companies. Don't be surprised if more of their peers follow them in bidding farewell to public equity.