C&S OFFER FOR FLEMING COULD TRIGGER MORE BIDS

DALLAS -- C&S Wholesale Grocers, Brattleboro, Vt., will pay approximately $400 million to acquire most of the assets of Fleming's wholesale grocery business under terms of a definitive asset purchase agreement signed by the two companies last week, Fleming here said -- a price that may leave the door open for other wholesalers to offer higher bids in an auction process.Fleming said it has scheduled

DALLAS -- C&S Wholesale Grocers, Brattleboro, Vt., will pay approximately $400 million to acquire most of the assets of Fleming's wholesale grocery business under terms of a definitive asset purchase agreement signed by the two companies last week, Fleming here said -- a price that may leave the door open for other wholesalers to offer higher bids in an auction process.

Fleming said it has scheduled a hearing Thursday in U.S. Bankruptcy Court to approve the sale process, including setting up an auction to allow other potential bidders to submit offers to purchase all or parts of Fleming's wholesale grocery business. Offers would be due by July 28, with an auction held on July 31 and a final sale hearing in bankruptcy court set for Aug. 4, the company said.

Fleming has been operating under Chapter 11 bankruptcy protection since April 1.

The $400 million selling price consists of $75 million in cash, plus an estimated $250 million or more for inventory (based on the cost of that inventory 10 days prior to the initial closing date of the purchase), and an additional $75 million for royalties from sales to Fleming customers transferred to C&S, equivalent to 1% of those sales and payable over five years.

The assets covered by the agreement include all product supply centers, inventory and equipment, plus corporate offices in Lewisville, Texas, a suburb here, and Oklahoma City and other real estate. It also includes Fleming's licensing rights to the Piggly Wiggly and Sentry Foods brand names.

The agreement excludes all assets related to Core-Mark, Fleming's convenience-store segment, which operates as a separate entity.

Industry observers told SN the $400 million selling price seems rather low -- equivalent to only approximately four times operating cash flow, compared with multiples of 7 to 7.5 times cash flow in recent retail acquisitions.

"Anything below five times cash flow is considered extremely low in any industry," Gary Giblen, senior vice president and director of research for C L King Associates, New York, told SN.

He said the $400 million price leaves the door wide open for other wholesalers or groups of wholesalers to try to outbid C&S in an auction, with spirited bidding potentially driving up the selling price considerably.

Another industry analyst said he doubts a wholesaler like Supervalu will be interested in participating in the auction process, explaining, "Why should it pay for business if it can take it away at no cost."

He also said the selling price seems low relative to Fleming's historic sales levels, "but since no one really knows what's left in Fleming's sales base, it's hard to know exactly what C&S is really buying."

A third analyst told SN he was not surprised by the selling price "because Fleming is a business that's spiralling downward, with wholesale sales of less than $6 billion, according to my estimates. But the reference point is not what the balance sheet looks like, as it would be in most acquisitions."

He estimated the selling price is probably equal to four times operating cash flow.

The analyst told SN he believes bidding by other contenders will be minimal, with C&S likely to take control of the company to preserve its value, then opting to sell off assets after stabilizing the business over the next few months.

According to the definitive agreement with C&S, the auction "shall be conducted in such a manner as to maximize the return to [Fleming's] estates," with initial bids required to be equal to C&S' estimated purchase price plus $22 million.

Subsequent bidders, including C&S, will be permitted to increase or modify their bids to make them more favorable to Fleming, the document explains, provided that each bid exceeds the preceding bid by $500,000 or a multiple thereof. "At the conclusion of the auction, [Fleming] shall determine... the highest or otherwise best bid(s)... and submit such bid(s) for approval to the Bankruptcy Court," the document says.

If the auction ends with a purchaser other than C&S as the winning bidder, C&S will be eligible for a breakup fee equivalent to 3% of its estimated purchase price, or $12 million.

According to Pete Willmott, interim president and chief executive officer of Fleming, "We committed to identify a long-term solution for our grocery wholesale customer, associate and creditor constituents. We are pleased to have begun operating under the recently signed supply arrangement with C&S and to have executed the asset purchase agreement. We view these as significant steps in delivering on our commitment."