PEAPOD CEO EXITS; GROUP WITHDRAWS FUNDING PLAN

JON SPRINGER

CHICAGO -- Pioneering Internet grocery company Peapod.com here was facing an uncertain future last week after its chief executive officer resigned and investors withdrew a plan to invest $120 million in the company.

Peapod said it had $3 million cash on hand and that it may discontinue operations or sell the firm if it cannot secure additional financing. Peapod typically spends about $5 million per quarter.

"Given their cash burn, it seems it's going to be very difficult to get interim financing from a bank," Barry Stouffer, senior analyst for J.C. Bradford & Co., Nashville, Tenn., told SN. "They need equity in a hurry. Time is probably their biggest problem."

Peapod CEO and president Bill Malloy, a former AT&T Wireless executive who joined Peapod in September, resigned for health reasons, the company said. In light of Malloy's resignation, the investors, who in February said they would provide Peapod with $120 million in financing, terminated their letters of intent.

Malloy, 47, was hospitalized Wednesday after his health began to suffer during marathon talks aimed at securing the funding, according to Drayton McLane, a Peapod director.

"It's the most unusual sequence of events I've seen in 41 years of doing business," McLane told SN last week. "The parties were all in Chicago and in the second round of negotiations for the financing that was to go into place. The paperwork had been completed and due diligence had been done, when [Malloy] developed a severe health problem. Since he was the lead negotiator for the private placement, the parties decided not to go forward with it."

McLane did not specify the nature of Malloy's health problem.

Asked if there was any prospect that the financing arrangement could be reinstated, McLane said, 'there is no certainty of that, but we're exploring a number of other opportunities. But this no doubt puts us in a bind. It comes at a critical time."

The duties of CEO will be assumed by Peapod founder and chairman Andrew Parkinson, who will be assisted by McLane and Mark Van Strecklenberg, also a Peapod director.

The investors included Apollo Management, Yucaipa Cos., Pequot Capital Management, GRP II and Rallye S.A. Peapod had intended to use the investment to fund expansion into new markets and speed its conversion from a supply model based on local supermarket partners to a warehouse-based distribution system.

Peapod, which was founded in 1989, had rolled out its own warehouses in Chicago, San Francisco and Long Island, N.Y. It works with local partners in five additional cities: Austin, Houston and Dallas-Forth Worth, Texas; Boston; and Columbus, Ohio.

George Dahlman, a food analyst for U.S. Bancorp Piper Jaffray, Minneapolis, said Malloy's departure would be a big blow to the company.

"Bill had been a real sparkplug. He was just what that company needed," said Dahlman. "He had given them a new look and he knew how to brand the service. Losing him now was very unfortunate."

Dahlman said losing the financing package was "the difference between plateauing and growing" for Peapod. "They could do reasonably well on their own, but if it wanted to grow, the financing was critical. I don't think this has to be a fatal thing."

Peapod stock had dropped 52% by Thursday to $3 23/32, almost $2 below its previous 52-week low. It traded at $17 13/16 in November. Other publicly traded Internet grocers were also struggling: Streamline.com reached a new 52-week low Thursday and HomeGrocer.com was trading at $12 1/8, less than its opening trade at its initial public offering less than one week before. Webvan also fell.

"[Peapod] is representative not just of Internet grocers, but of all Internet stocks that are losing money and need capital," said Stouffer. "It highlights the issue that this business takes capital to execute and if you can't get capital, you're going to go away."

Peapod lost $29.7 million in 1999. Analysts said they were not sure last week who if anyone might be interested in acquiring the company should it choose to sell.

"It's conceivable that a well-capitalized smaller company like a Grocery Works or Shoplink might be interested," said Stouffer. "The Webvan model is different, so I don't think they would be interested. Streamline doesn't have a lot of cash itself, so I don't think they would be interested at this time."

Andrew Wolf, an analyst for BB&T Capital Markets, Richmond, Va., said a brick-and-mortar grocery company such as Albertson's might be interested. "Peapod's best asset is its customer base," Wolf said, noting the company attracted more than 110,000 customers in the fourth quarter. "It could be a cheap way to acquire customers."

Jim Chambers, CEO of NetGrocer.com, a private Internet grocery service in North Brunswick, N.J., told SN last week his company would not look to buy Peapod since Peapod's "van model" differs from NetGrocer's model, which focuses on center-store replenishment delivered via FedEx.

"I think it's an unfortunate situation for Peapod and I hope Mr. Malloy's health recovers and the company gets back on its feet," Chambers said. "The van-delivery business is a very competitive one."

Dahlman suggested a related "out-of-the-box player" might be interested. "If Ahold can buy U.S. Foodservice, who knows what could happen with this."