Delhaize Bids to Buy Bi-Lo

JON SPRINGER

MAULDIN, S.C. — Bi-Lo may be going from bankruptcy court to the kingdom of its largest competitor.

Delhaize Group, the Salisbury, N.C.-based parent of Food Lion stores, last week filed a letter of intent to acquire the “substantial majority” of the assets of Bi-Lo Holdings for $425 million in cash. Bi-Lo, which operates 214 stores in North Carolina, South Carolina, Tennessee and Georgia, has been operating under Chapter 11 bankruptcy protection since March.

Food Lion operates more than 1,300 stores in 11 states and is a competitor of Bi-Lo's throughout the Carolinas.

The proposed transaction would be subject to a bankruptcy court order and could still be trumped by a higher bidder or alternative plan of reorganization, people familiar with the matter told SN last week. Bi-Lo's owners, however, have been pursuing a sale for some time without success.

In a letter of intent filed in bankruptcy court last week, Delhaize acknowledged that senior leaders from the company had been investigating the transaction for nearly a year. In a statement, Rick Anicetti, chief executive officer of Food Lion, said, “We at Food Lion have great admiration for the associates and stores at Bi-Lo. We believe our markets and service philosophy are complementary and we look forward to continuing our discussions with Bi-Lo.”

Delhaize declined further comment through a spokeswoman.

One source, who asked not to be identified, said he believed Food Lion would wind up buying 75% or more of Bi-Lo's stores with the intention of converting many of them to the Food Lion brand. Value would be created through leveraging Food Lion's existing distribution and infrastructure network. The source estimated the deal could be complete by early next year.

Food Lion's offer is for stores and inventory only. It calls for an “acceptable resolution” to Bi-Lo's existing supply contract with C&S Wholesale Grocers, and said it did not anticipate retaining staff at Bi-Lo's headquarters.

“They're literally just buying the sales, but at a good price,” the source said.

Michael Byars, chief executive officer for Bi-Lo, in a statement last week said, “Bi-Lo remains focused on maximizing the value of the estate for the benefit of all Bi-Lo stakeholders. All options for Bi-Lo remain under consideration, and we believe it is important to carefully review our options and determine the most appropriate course of action in the context of the Chapter 11 process.”

Bi-Lo did around $2 billion in sales in 2008 but earnings and revenues have declined sharply since 2006, the chain said in its bankruptcy filing. Observers told SN the chain suffered in part because of frequent changes in leadership and inadequate investment in its stores.

Founded by former Winn-Dixie operator Frank Outlaw in 1964, Bi-Lo was sold to Dutch retailer Ahold in 1977 but spun off when that company faced financial crisis. Its current owner, Dallas-based private equity firm Lone Star Holdings, purchased Bi-Lo and its sister chain Bruno's from Ahold for $660 million in 2005. Both chains filed for bankruptcy this year, with Bruno's liquidated.

“Neither with Bruno's nor Bi-Lo did Lone Star get what they wanted,” Burt P. Flickinger III, manager director of Strategic Resource Group, New York, told SN.

Ultimately, observers said, Bi-Lo was the victim of competition from Wal-Mart Stores — a catalyst in bankruptcies of numerous regional grocers throughout the South, including Winn-Dixie, Bruno's, Jitney Jungle, Schwegmann's, National, Delchamps and Harvest.

“It's sad to think about all the strong, regional chains in the Southeast that had done so well, that became unable to compete,” Jon Wilkin, a former chief operating officer at Bi-Lo, now the chief executive of a South Carolina-based pharmaceutical firm, told SN last week. “Especially in the Southeast, where the household incomes aren't as strong as they are elsewhere in the country, price is king, and when it comes to price, Wal-Mart is king.”

An analysis of a proposed combination of Food Lion and Bi-Lo stores by an analyst at BMO Capital Markets indicates the chains would exceed 35% market share in nine markets, and combine for top market share in 14 of the 17 markets where they both currently do business.

Flickinger said he felt the proposed deal is “a strategic master stroke for Delhaize” that would help Food Lion fill in territories between North Carolina and Florida, and provide the best outcome for Bi-Lo and its creditors.

“The family-owned and midsized companies will all be in play for the next couple of quarters to next couple of years because of this deal,” he said.