AWG AGREES TO PURCHASE BANKRUPT HOMELAND STORES

ELLIOT ZWIEBACH

KANSAS CITY, Kan. -- Associated Wholesale Grocers here said last week it has reached an agreement in principle to acquire "substantially all" the assets of Homeland Stores, Oklahoma City, operator of 44 supermarkets in Oklahoma.

Homeland has been operating as a debtor-in-possession since filing for Chapter 11 bankruptcy protection last Aug. 1 -- its second filing in five years. Since the filing, it has closed 24 underperforming stores in Oklahoma, Texas and Kansas, some of which were sold.

The deal is subject to approval by the U.S. Bankruptcy Court for the western district of Oklahoma. AWG, which is Homeland's wholesaler and which has provided financing to help keep it in business while it studied its options, said it expects to complete the transaction by mid-August.

According to Homeland, the deal -- valued at over $47 million -- is part of a joint plan of reorganization that contemplates payments to secured and unsecured creditors, although it does not include payments for outstanding shares of Homeland stock.

Industry observers said the company's financial problems stemmed from its inability to compete effectively with Wal-Mart; approximately 30% of Homeland's stores compete with Wal-Mart Supercenters or Neighborhood Markets.

One industry analyst told SN other operators with deeper pockets -- primarily Wal-Mart and Albertson's -- were continuing to build new stores in the wide-open spaces of Oklahoma, while Homeland was unable to generate the economies of scale it needed to survive long-term. Another analyst said Homeland was constantly feeling margin pressure from Wal-Mart, and although management maintained a proactive position with strong promotions, the situation failed to improve.

David B. Clark, Homeland chairman, president and chief executive officer, said last week he believes the sale to AWG is in the best interests of the chain's customers, employees and creditors.

"AWG and Homeland are already business partners, which is a major plus in putting together this opportunity," he said. "AWG's involvement in our current financing arrangements has allowed us to move in a strategic and effective manner through the reorganization process."

Gary Phillips, AWG president and CEO, said AWG will operate the 44 locations as corporate stores "for the near term" under the Homeland banner. "But ultimately we will look for opportunities to put them into the hands of independent operators," he told SN.

AWG is a retailer-owned cooperative that supplies over 850 stores in 10 states through four distribution centers, with an annual volume exceeding $3.2 billion.

As a cooperative, AWG returns all profits to its members in the form of patronage dividends. Phillips told SN last week the company plans to set up a separate, wholly owned subsidiary to acquire Homeland so that any potential losses would not impact AWG members.

AWG has one other retail subsidiary that was formed in 1998 to acquire 32 Food 4 Less stores; that subsidiary recently added five former Albertson's stores here, Phillips noted.

Asked why AWG expects to make a go of the stores when Homeland could not, Phillips replied, "The 44 stores have operated profitably for some time. But Homeland was burdened with a heavy debt leverage since it was formed in 1987, and we will have little if any leverage against us."

For the year ended Dec. 29, Homeland sales were $511.6 million, down 15% from $600.8 million in the prior year, which the company said was due to the shutdown of 31 stores and its inability to promote effectively because of vendor credit restrictions. The company said it had a net loss of $46.4 million for the year, compared with a loss of $5.9 million in the previous year.

For the first quarter ended March 23, Homeland said sales at its 44 remaining stores were $77.9 million, with a net loss of $2.3 million; operating profits excluding reorganization expenses were $685,000, the company noted.

"We are pleased with the position of the company at this point in our reorganization," Clark said last week, "and we are encouraged by the performance of our stores, which we believe bodes well for the future of the company and which led to the offer by AWG."

Clark said he was confident AWG would reinvest in the stores "to improve our stores' competitive position in the marketplace. For our customers and suppliers, it will be business as usual."

Homeland was formed in 1987 when Pleasanton, Calif.-based Safeway sold its Oklahoma City division for $165 million to division management and Clayton & Dubiler, New York-based investors. When Homeland ran into a cash crunch in 1995, it sold 29 stores and its distribution center in Oklahoma City to AWG for approximately $72.9 million.

The deal also included an agreement for AWG to be Homeland's supplier for seven years -- a period that expires at the end of this month.