PATHMARK IN TALKS TO RESTRUCTURE, REDUCE DEBT

ELLIOT ZWIEBACH

CARTERET, N.J. -- Pathmark Stores here said last week it has initiated discussions with its bondholders toward developing a consensual restructuring plan to reduce debt.

Sources said the move may eventually lead to a change in the company's ownership status.

Jim Donald, chairman, president and chief executive officer, said the restructuring "will enable [the company] to realize the significant value that exists in the Pathmark franchise."

Industry sources said the deleveraging could lead to Pathmark's emergence as a free-standing public company or it could result in the eventual purchase of the chain by another retail operator. The potential buyers most often mentioned by observers last week were Safeway, Pleasanton, Calif.; Albertson's, Boise, Idaho; and London-based Sainsbury, parent of Shaw's Supermarkets, East Bridgewater, Mass.

Pathmark said its debt totals $1.5 billion.

The company had reached an agreement in March 1999 with Ahold USA, Chantilly, Va., to acquire the chain; however, that deal fell apart in mid-December when Ahold terminated the transaction, reportedly after it was unable to reach agreement with the Federal Trade Commission on how many stores it would have to divest.

Pathmark is facing a $50 million sinking-fund payment June 15 on its 11-5/8% bonds -- a deadline driving the deleveraging talks with the company's bondholders, observers told SN.

Harvey Gutman, senior vice president of retail development for Pathmark, told SN last week a quick resolution is likely. "It's in the interest of the company and the bondholders to reach a speedy consensual agreement, and although I can't predict how long that will take, we believe we will have the restructuring wrapped up in a number of months."

He said Pathmark is considering "a number of options" for implementing the restructuring, although he declined to pinpoint them. The company said it has retained the investment banking firm of Wasserstein Perella & Co., New York, to assist it in developing its restructuring plan.

Industry sources told SN the restructuring could take a variety of forms, including a consensual out-of-court restructuring of the balance sheet; an in-court restructuring under a bankruptcy, or -- an unlikely possibility -- a Chapter 7 liquidation.

A bankruptcy -- which gives a company the option of rejecting leases and other contracts -- could take a number of forms, the sources said, including: a prepackaged filing in which the parties agree to a reorganization in advance; a prenegotiated bankruptcy, in which most but not all creditors agree in advance; or a regular Chapter 11, in which there is no prefiling agreement among creditors.

The most likely scenario for Pathmark involves the prepackaged bankruptcy filing, a variety of sources told SN.

Matt Ferko, a Stamford, Conn.-based distressed-securities analyst with Warburg Dillon Read, New York, said the restructuring is most likely to be done through a prepackaged or a prenegotiated bankruptcy, with a possible sale to another company after restructuring is complete. "Pathmark doesn't have to find a buyer [in advance]," he said. "They're not a forced seller."

Meredith Adler, an analyst with Lehman Brothers, New York, also said a prepackaged bankruptcy is the most likely scenario. "It's hard to imagine that Pathmark won't have to file a prepackaged bankruptcy," she told SN.

According to another analyst, "Pathmark is hoping to use a prepackaged bankruptcy to convert most of its senior bank debt to equity and move ownership to the junior bondholders while continuing to seek a buyer. If it gets agreement from the bondholders, it could be in and out of bankruptcy within three months."

Pathmark said the restructuring would affect its bond debt and the stock of its parent company, Supermarkets General Holdings Corp.

In financial results released last week, Pathmark said sales for the year ended Jan. 29 rose 1.2% to $3.7 billion, while same-store sales rose 0.6% and operating cash flow fell 0.4% to $211.7 million.

For the 13-week fourth quarter, sales were up 4.3% to $956.1 million and same-store sales increased 2.2%, while operating cash flow rose 4.3% to $60.6 million.