MEGAFOODS IS SELLING ITS ARIZONA UNITS TO BASHAS'

ELLIOT ZWIEBACH

MESA, Ariz. -- Megafoods Stores here said it has reached an agreement in principle to sell its 16 price-impact locations in Arizona to Bashas', Chandler, Ariz., for an undisclosed price. Megafoods also said it will operate its conventional stores in Texas as a stand-alone company, although it would entertain offers to sell the 19 stores there.

Bashas' is expected to complete its due diligence and make a final bid on the Arizona stores late this week. After that, a judge in the U.S. Bankruptcy Court in Phoenix would have to approve the transaction, make the selling price public and formally notify Megafoods' creditors of the offer -- a process that could delay consummation of the deal at least until the end of the month, William J. White, Megafoods president and chief executive officer, told SN.

Megafoods said its official creditors' committee already has given preliminary approval for the sale of the stores. "We're very happy with the Bashas' bid, and we think it's a fair offer," White said last week. "But the bankruptcy proceedings also allow for an overbid-breakup procedure." White explained that under the procedure -- standard in bankruptcy cases -- other potential buyers may submit offers to outbid Bashas' once the selling price becomes public knowledge, though they would not be able to do any due diligence work. Any new offers would then have to be submitted for approval to Megafoods' creditors committee, he added.

If Megafoods were to accept another bid, Bashas' would be entitled to a breakup fee from the ultimate buyer, White noted.

Megafoods, which has been operating under Chapter 11 since August 1994, operates the 16 price-impact stores in Arizona under the Megafoods name and the 19 conventional stores in Texas, based in San Antonio, under the Handy Andy banner. The preliminary agreement with Bashas' does not include the Handy Andys, which White said will operate as a stand-alone company -- unless Megafoods can find a buyer for them.

White said Megafoods has not received a written offer for the Texas stores, although it has received an oral offer from a wholesaler that he declined to name. "But that offer was unacceptable," he noted. "However, if an offer comes up that's acceptable, then we'll review that option," he added. "It's likely, however, that we will ultimately sell the Texas stores at some point."

A Bashas' spokeswoman declined to say why her company was interested in the Megafoods stores. She said the two companies had hoped to delay making any announcements in advance of a final agreement, "but there were so many rumors going around, and so much interest, that a public announcement had to be made."

Bashas' operates 63 conventional stores under the Bashas' name; two price-impact stores under the Bargain Basket logo; three Food City units and one Bashas' Mercado store, all of which target Hispanic shoppers, and four upscale gourmet specialty stores called AJ's Fine Foods. It was unclear last week what name the company would use on the Megafoods stores.

The addition of those 16 stores would raise Bashas' total from 73 units to 89 -- making it the largest chain in Arizona.

The Arizona office of Megafoods has overseen the administrative support functions for the Handy Andy stores, White said, "but in the next two or three weeks, we will shift all accounting, management information services, payroll and personnel functions to Texas to bring that operation up to speed as a stand-alone company." White said the company has not yet determined if he and other members of management will move their base of operations to San Antonio to oversee the Handy Andy stores.

Megafoods initially had sought to sell the Arizona and Texas stores before filing for Chapter 11 two years ago but was unable to find a buyer for all the locations, White said. The potential sale of the stores became a possibility again in August, after Megafoods and its former supplier, Fleming Cos., Oklahoma City, reached a settlement under which Megafoods withdrew all litigation against Fleming and Fleming relinquished its secured credit claims against the retailer. "That reopened the alternative of getting more value for unsecured creditors [including bondholders and vendors] if we put the company up for sale," White said.

The decision to sell was also hastened by the merger of Smitty's, Phoenix, into the Arizona division of Smith's Food & Drug Centers, Salt Lake City, White said. "After renovating our stores, our sales in late July were up 12% to 15%," he explained. "But once Smitty's and Smith's got together, they reduced 15,000 prices and saturated the market with advertising and giveaways, and Fry's began triple couponing and offering buy-one-get-one-free items. And those programs negated a lot of our efforts."

Accordingly, Megafoods put together a financial package for the Arizona locations and sent it "to six or seven companies that had previously expressed an interest," he explained, "and while several were still interested, selling to Bashas' seemed to make the most sense for us because they were willing to take all the Arizona assets, while other companies wanted to pick and choose.

Since filing for Chapter 11 bankruptcy protection, Megafoods has closed eight price-impact stores in Arizona, eight others in California and four in Nevada plus 17 conventional stores in Texas.