RESIGNATION, END OF TALKS CLOUD FARMER JACK SALE

Jon Springer

DETROIT -- An uncertain future for Farmer Jack here appeared even more cloudy after talks to sell to the chain unraveled and its president resigned.

The events were related only to the extent that each indicated an end was near for the 78-year-old chain -- but perhaps not the one its owner, A&P, had hoped for. Mike Carter, Farmer Jack's president, told a Michigan newspaper he was to resign last Friday, adding that he announced his intentions to Montvale, N.J.-based A&P earlier this year but agreed to stay on board to help prepare the company for a sale.

But that effort suffered a setback when Grand Rapids, Mich.-based Spartan Stores announced late last month it would not pursue an acquisition. Though Spartan's statement did not indicate Farmer Jack by name, numerous sources told SN that Spartan had been engaged in "serious talks" to purchase Farmer Jack and was the potential buyer with whom A&P worked out labor concessions that would take effect in the event of a sale.

A&P did not comment last week on the progress of talks. Tim Carroll, a principal at Chicago-based William Blair & Co., which is advising A&P on a Farmer Jack disposition, told SN last week that A&P had not indicated a change in its desire to sell the 70-store chain to a single buyer but declined further comment.

Several observers said, however, that a sale to a single strategic buyer appeared highly unlikely, particularly with Spartan no longer a suitor. According to one source, Farmer Jack had begun contacting potential buyers other than Spartan last week.

"To every potential buyer, the whole portfolio is no longer an option," Michael Sarafa, president of Associated Food Dealers of Michigan, a trade group representing independent stores in Michigan, told SN. "Kroger might be interested in some portion of it, and another portion is of great interest to our membership, but how that gets done, I don't know. There's nobody who can come in and take the whole portfolio and deal with it. I think some stores will have to go dark because they don't make sense for anybody."

According to Sarafa, Spartan had "serious talks" about purchasing Farmer Jack with the intention of spinning off at least some of the stores to its independent distribution customers. Negotiations were serious enough to have involved union labor, which after two votes, approved contract revisions that would take effect in the event of a sale.

While Spartan did not cite specific reasons for calling off further pursuit of an acquisition, observers said that increased competition, employee morale issues and a sluggish Michigan economy leading to performance and profitability declines within the Farmer Jack portfolio may have been factors. Spartan in the meantime had come under fire from an investor group strongly opposed to making such a deal (see related story, this page).

Pittsburgh-based Giant Eagle had been the subject of industry speculation as a possible buyer, but a spokesman for that chain said last week that while Giant Eagle is always examining acquisition possibilities, Farmer Jack was "not something we are considering right now."

An A&P spokeswoman did not comment on Carter's departure, and attempts to reach Carter last week were unsuccessful. But he told the Detroit Free Press it was his understanding that A&P did not intend to name a replacement.

Neil Stern, senior partner, McMillan/Doolittle, a retail consulting firm in Chicago, said a financial buyer may still be a possibility, but Spartan's decision not to pursue the stores was a "curveball" requiring a new strategy. Stern said it was likely that Farmer Jack -- despite the closure of more than 30 stores earlier this year -- is not turning a profit, making estimations of a sale price difficult.

According to Sarafa, any number of strategic buyers remain interested in Farmer Jack stores but have to be particular about which of the 70 stores they would take. "Some of the stores just don't make sense," he said. "Some of them aren't good for independents; some of them would give Kroger an antitrust problem; some have unattractive leases; some are too old; and some have Costco, Meijer and Wal-Mart problems, which independents won't touch."

James McTevia, managing member of McTevia Associates, Bingham Farms, Mich., said he felt labor concessions -- which would reportedly cut worker wages by 10% -- might not be enough given Michigan's troubled economy and issues in the Farmer Jack portfolio.

"I think the question that had to be asked by a buyer was, 'How many checks are we going to have to write to cover the negative cash flow until things turn around,"' McTevia told SN. "Michigan is in the worst set of economic circumstances in the nation, and just about anyone will tell you it will be years before things can turn around."

A&P said it would seek to sell Farmer Jack as part of a restructuring announced in March and said it had hoped to sell the portfolio before the end of its fiscal year in February 2006. A&P said the chain -- then at 101 stores -- lost $20 million on $1.2 billion in sales during fiscal 2004. Analysts have estimated A&P could get as little as $50 million -- or much as $100 million -- for the chain.

Loeb Seeks Spartan Dividend

GRAND RAPIDS, Mich. -- Saying it was unsatisfied with Spartan Stores' recently re-emphasized strategies, Loeb Partners last week demanded the retailer/distributor here offer to buy back 20% of its shares at $13.50 per share and institute a quarterly dividend. New York-based Loeb is Spartan's largest shareholder and has frequently called for changes since it first invested in the company late last year.

Spartan acknowledged late last month that it had undertaken a strategic review but said it determined its current course of business was in the best interest of shareholders and that it was not seeking to make an acquisition, nor sell itself. "We will not go away until you reward us with access to your cash flows," wrote Gideon King, manager of Loeb, in a letter to the Spartan board, adding it would use shareholder proposals to gain access if Spartan does not act.

But Peter Lewis, director of research for St. Louis-based Towle & Co., Spartan's second largest investor, told SN last week that he felt Spartan should use its cash not for dividends but for debt. "We were happy that they wouldn't go through with an acquisition and we were happy with them saying they would continue with their current business plan," Lewis said. "Buying back shares would be nice, but I think they would better served in the short term to pay down debt."