C&S MAKES $300M BID TO BUY GRAND UNION ASSETS

JON SPRINGER

BRATTLEBORO, Vt. -- C&S Wholesale Grocers here last week made a bid to buy nearly all of the Grand Union Co. for $300 million in cash, in an effort to ensure it keeps the business of a large but faltering customer.

If the deal is approved -- and exceeds other bids at a bankruptcy auction this month -- C&S then plans to sell the Grand Union stores to other chains it supplies, observers said. C&S's offer for Grand Union is for 185 of the chain's 197 stores, and its Montgomery, N.Y., distribution center.

Grand Union, Wayne, N.J., filed for Chapter 11 bankruptcy in October to facilitate the sale of the company. The chain, which operates stores in New York, New Jersey, Connecticut, Pennsylvania and Vermont, has experienced what one analyst called "miserable results" over the past year, mostly due to heavy competition and poor strategic decisions following its emergence from Chapter 11 bankruptcy in 1998.

The offer from C&S could still be trumped at a bankruptcy auction Nov. 16. The deal is also subject to antitrust and court approval, and the signing of a definitive agreement. If C&S is outbid at the auction, it is entitled to a "break-up fee" at 2.8% of its bid, according to the letter of intent signed by C&S and Grand Union.

Assuming a definitive agreement is signed as expected on Nov. 13, the offer from C&S would serve as a "stalking-horse agreement," setting a base value for the Nov. 16 auction, Jeffrey Freimark, Grand Union's executive vice president and chief financial officer, told SN.

"The court will decide the highest and best bids for the company," Freimark said. "If someone wants to buy elements of the company, the decision about whether that's the highest and best bid must be made by the court."

Observers told SN the move was a shrewd one for C&S but also was its best option to save around $2 billion in annual sales. C&S, which does not operate any retail stores, had approximately $7 billion in overall sales last year, said Carl Wistreich, spokesman for C&S. In addition to Grand Union, C&S customers include Pathmark, Woodbridge, N.J.; A&P, Montvale, N.J.; Stop & Shop/Edwards Food Stores, Quincy, Mass.; Shaw's, East Bridgewater, Mass.; and Big Y Supermarkets, Springfield, Mass.

C&S was already involved in discussions with "more than one" of its customers regarding spinning off the Grand Union stores, Wistreich told SN. He added C&S would talk to "all interested parties" about the stores.

"C&S could have lost a significant part of its business had it not done this, so it's not a big surprise," one analyst, who spoke on the condition of anonymity, told SN. "This deal allows C&S to keep their volume and place it in the hands of better performing, more credit-worthy companies."

The analyst said he considered C&S's $300 million bid was "probably above expectation" for Grand Union.

Said Wistreich, "We think this is an attractive deal."

However, observers told SN that other companies not supplied by C&S may make bids for certain assets at the auction, including Hannaford Bros., Scarborough, Maine, and Penn Traffic, Syracuse, N.Y.

Neil Golub, chief executive officer of Price Chopper, Schenectady, N.Y., told SN "we certainly have an interest" in at least some Grand Union properties.

Peter Chapman, a bankruptcy expert and founder of Bankruptcy Creditors Service, Trenton, N.J., told SN that competing bids in a bankruptcy auction can often complicate the process and make for a lengthy settlement.

"There are a lot of possibilities still out there," he said. "Bids can presumably overlap. It can become an incredibly complicated process."

C&S has supplied Grand Union since 1995. According to documents Grand Union filed with the Securities and Exchange Commission, Grand Union's supply agreement with C&S "provides for substantial monetary penalties in the event the company is sold or closes stores, and such closed or sold stores are not thereafter supplied by C&S."

Freimark said he could not comment on the specifics of the agreement.

Golub, whose company competed for many years with Grand Union, said he believes Grand Union faltered first as a result of poor merchandising strategies, then because it attempted to improve performance with an overly ambitious store development program.

"The seeds of Grand Union's troubles were planted long ago when it lost touch with its pricing and merchandising strategies," Golub said. "As competition became more difficult, it was a downward spiral."

Golub said opening megastores following its emergence from the 1998 bankruptcy was the "whip cream on top of the sundae," saying Grand Union lost millions on stores that were built but never occupied, or closed shortly after they opened.