GRAND UNION HIRES ADVISER, MULLS CAPITAL RESTRUCTURING

GREG GATTUSO

WAYNE, N.J. -- Grand Union Co. here said last week it has retained financial adviser Salomon Smith Barney, New York, to evaluate financial alternatives that might include a capital restructuring.

J. Wayne Harris, Grand Union chairman and chief executive officer, said last week that despite improved operating performance, "the company's highly leveraged debt position continues to constrain our future growth. We believe it is essential that we address the capital structure issue.

"We believe it is imperative that we create a new capital structure that will support, and not inhibit, the continuation of our efforts."

Bob Lupo, high-yield securities analyst with BA securities, Chicago, said the move was long overdue.

"The signal is clear," he said. "They have to restructure. This company is overleveraged. This company has no wherewithal to maintain its store base in the marketplace going forward with its amount of debt. It had to come."

However, industry observers said they did not know when the restructuring would occur. Specifically, they wondered whether it will take place before or after March 1 -- the due date for a $36 million coupon payment on the chain's 12% senior notes due 2004.

The company also has a $6 million bank interest payment due that same day.

The company's bonds traded down early last week after the company announced it had retained Salomon Smith Barney and after industry rumors sprouted saying the company might miss the coupon payment.

But bond prices rebounded by mid-week, after the company's quarterly results showed improved cash flow performance.

Financial analysts told SN that Grand Union will most likely have the $36 million on the due date, however they disagreed on whether it would be to its advantage to make the payment.

"I think it would be a mistake to pay the coupon, even if they have the money," Lupo said. "In my view, given their leverage and given their store base and where they have to put money, they can not afford -- from a strategic standpoint and from a competitive standpoint -- to make that coupon payment. It drains away from the value of the franchise to pay that coupon."

According to analysts, the company has promised to make the March 1 payment -- but has not reiterated that pledge recently.

A company spokeswoman said that no decision had been made as of last week about whether the coupon payment would be made. She said that decision -- and any decision about restructuring -- would come after Salomon Smith Barney has made its recommendations.

The chain said it believes that none of the alternatives it may pursue will adversely affect its ordinary business operations, or its ability to pay operating expenses or trade obligations necessary to conduct its business.

If the company misses the payment, Grand Union's bondholders would be within their rights to petition the courts to force a bankruptcy filing, according to Mike Kirkpatrick of Mendham Capital Group, Rosedale, N.J.

Grand Union emerged from Chapter 11 bankruptcy protection in June 1995.

"Pushing for a Chapter 11, or a contentious restructuring, is not a good idea," said John Wlodek, a securities analyst with Imperial Capital, Beverly Hills, Calif. "It's bad press, and it can keep customers away from stores, because people think the company is going out of business.

"Also, suppliers get edgy and you tend to lose promotional allowances which are the lifeblood of a grocery store.

"My estimate is that they have enough money to make the coupon payment, especially since their cash flow performance is so good. Since they'll have the money, I think the best thing for them to do is to make the payment, almost as a goodwill gesture to bondholders, and then people will come to the negotiating table in a much more orderly and civilized manner," Wlodek said.

"They have to address the fact that there is too much debt on the company. The amount of the interest burden on the company has to be decreased. Restructuring would give them more flexibility to respond to whatever competitive actions occur in the marketplace," he added.

In a statement last week, Grand Union said "it is not known at this preliminary stage of the analysis what impact any capital restructuring might have on the company's outstanding debt and equity securities."

The highly leveraged company has a $67.8 million revolving credit facility, a $104.2 million term loan, a $78 million supplemental term loan facility and $600 million of senior unsecured notes, analysts said.

Analysts said the company's extremely leveraged financial position has cut into the company's remodeling efforts, making it even more difficult to compete even in traditionally profitable areas, such as Vermont (where it competes against Shaw's), and upstate New York (where it competes against Price Chopper). In addition, the company's margins have been eroded by significant price promotions in the New York metropolitan areas.

Grand Union's supplier, C&S Wholesale Grocers, issued a statement last week in support of the chain, saying, "C&S regularly meets with and has confidence in Grand Union's management team and that confidence is bolstered by the company's third-quarter results. Grand Union has reaffirmed its supply agreements with C&S and C&S will continue to supply Grand Union under the terms of these agreements. C&S looks forward to maintaining its relationship with Grand Union now and in the future."

With five fewer stores than in the year-ago period, sales for the third quarter ended Jan. 3 declined 0.5%, from $537.2 million to $534.3 million. Comparable-store sales, however, increased 1.2% over last year and represented a significant improvement over the 1.7% decline in comparable-store sales reported for the first half.

Company officials said earnings before interest, taxes, depreciation, amortization and unusual items were $26.2 million during the third quarter, compared with $26.0 million during the comparable quarter of the prior year. Third-quarter EBITDA represents the second quarter of an improving trend, officials said.

Sales in the company's 40-week period were $1.761 billion, a decrease of 2% from sales of $1.797 billion during the same period of the prior year. Comparable-store sales decreased by 0.7%. EBITDA for the 40 weeks was $49.3 million ($4.93 per share), compared with $97.3 million ($9.73 per share), during the same period of the prior year.

The company reported net losses of $47.9 million during the third quarter, compared with net losses of $32.5 million during the third quarter of the prior year. For the 40 weeks, the company reported net losses of $188.2 million, compared with net losses of $107.2 million during the comparable period of the prior year. "We made substantial progress in improving sales and EBITDA performance during the third quarter," Harris said. "Our results reflect a return to normal gross margins, increased advertising/promotional allowance income, stronger promotional programs, better store inventory levels and good expense control."