IS PATHMARK AN ACQUISITION TARGET?

ELLIOT ZWIEBACH

WOODBRIDGE, N.J. -- Pathmark Stores here may be an acquisition target for a number of operators, according to persistent trade reports.

Among possible buyers, various observers told SN, are J. Sainsbury, London; Ahold, Zaandam, the Netherlands, and Kohlberg Kravis Roberts & Co., New York. Pathmark officials declined comment on the reports. A chain executive instead said Pathmark hopes to revive its plans for an initial public offering, which was aborted in the spring of 1993.

"Our goal remains to become a public company once again when we feel the proper [stock] valuation can be achieved. But we have no time frame in mind," a chain executive told SN. Spokesmen for Sainsbury and KKR declined comment on speculation linking them with Pathmark. Ahold could not be reached for comment last week. Moreover, discussions of Pathmark's future would have to include Merrill Lynch Capital Partners, since the group has owned 80% of the chain's equity since 1987. A company spokesman declined comment. Pathmark operates 142 stores in New Jersey, New York, Pennsylvania, Connecticut and Delaware. Its 1994 sales were $4.15 billion. With strong financial results for the first quarter ended April 29 -- and the likelihood of a good showing in the second quarter, whose results are scheduled for release later this week -- Pathmark may be hoping it has time to impress Wall Street with another strong quarter or two before scheduling an IPO. Howard Goldberg, a high-yield analyst with Smith Barney, New York, said he expects Pathmark to move forward on an IPO within 12 months. However, observers said that may be too late to head off an acquisition bid from one of the three companies named as potential acquirers. Pathmark's cash flow situation is said to be a factor in this situation.

According to Bob Lupo, a high-yield analyst with PaineWebber, New York, Pathmark's second-quarter numbers appear to be good -- "better than a year ago, with same-store sales up 1%, but cash flow below analysts' projections, and that means Pathmark would have a hard time getting the numbers to work for an IPO at this time. "So an acquisition would make sense. And Merrill Lynch would certainly like to monetize its investment." In discussions with SN, analysts made various arguments for and against a sale to each of the potential acquirers. Of the three companies, most current speculation revolves around Sainsbury, possibly because of Pathmark's geographic location between Sainsbury's other U.S. holdings -- Shaw's Supermarkets to the North and Giant Food to the South. Sainsbury owns the majority of Shaw's, East Bridgewater, Mass., and 50% of Giant Food, Landover, Md. Peter Brockwell, a securities analyst with Morgan Stanley, London, said Sainsbury is probably looking for additional acquisitions outside the United Kingdom, although he was not aware of any talks with Pathmark. Lupo said it would make strategic sense for Sainsbury to acquire Pathmark "because it would create a powerful franchise in the Northeast corridor from Boston through Washington, D.C." Also in Sainsbury's favor, Lupo said, is the exchange value of the dollar relative to foreign currencies. He estimated the selling price for Pathmark would be 6.5 to seven times cash flow, or $1.7 billion to $1.9 billion. Goldberg also said the price Pathmark would be likely to sell for would be about $2 billion -- "which would probably preclude most financial buyers because they won't be able to wring much more from the company." However, he said he doubted if either Sainsbury or Ahold is financially equipped to make an acquisition at this time. Ahold, which already owns a series of contiguous supermarket chains along the East Coast, recently closed on its purchase of Mayfair Super Markets, Elizabeth, N.J. "Sainsbury has spent a lot the past year on Giant," Goldberg said, "and it has its hands full with that company and a do-it-yourself chain in the U.K. that it bought earlier this year. And Ahold's acquisition of Mayfair gives it a toehold to expand in Pathmark's area -- a much cheaper prospect than betting the ranch by acquiring all of Pathmark." Lupo expressed similar thoughts, noting that Ahold was unlikely to buy two chains (Mayfair and Pathmark) in the same region, "but Pathmark would be an attractive opportunity for KKR." KKR's stable includes four supermarket chains: Safeway, Oakland, Calif.; Fred Meyer Inc., Portland, Ore.; Stop & Shop Cos., Quincy, Mass., and Bruno's, Birmingham, Ala., which it acquired in August. According to Gary Giblen, managing director of Smith Barney, KKR's acquisition of Bruno's "is a strong indication it is still hunting for supermarkets after not acquiring a supermarket since Stop & Shop in 1988." Giblen said he doubted that KKR's acquisition of Bruno's would preclude a purchase of Pathmark, "since investors would sell their souls to participate in a KKR deal."