C&S'S MOTIVES ARE BIG QUESTION IN FLEMING DEAL

BRATTLEBORO, Vt. -- C&S Wholesale Grocers' recently announced interest in acquiring Fleming's wholesale grocery business and its assets has produced more questions than answers about the fate of those properties.The central question, however, is whether C&S really wants to acquire all the assets or whether it will devise a plan to keep what it wants and sell the rest to other interested parties.With

BRATTLEBORO, Vt. -- C&S Wholesale Grocers' recently announced interest in acquiring Fleming's wholesale grocery business and its assets has produced more questions than answers about the fate of those properties.

The central question, however, is whether C&S really wants to acquire all the assets or whether it will devise a plan to keep what it wants and sell the rest to other interested parties.

With the assets likely to be offered to potential buyers in an auction process, it's also possible C&S could be outbid, industry observers told SN last week.

C&S was conducting its due diligence review of the assets last week -- including distribution centers still in operation and those that have closed or are closing -- after signing a letter of intent for the acquisition 10 days ago. The letter does not include Core-Mark, Fleming's convenience store business.

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

As an apparent gesture of the sincerity of its interest in Fleming, C&S signed a separate agreement with Fleming to help the bankrupt wholesaler hold onto its customer base -- the base C&S hopes to serve -- by making arrangements to supply Fleming with selected products for distribution to Fleming retail customers.

"That's a sign of how serious C&S is in going after Fleming's assets," Gary Giblen, senior vice president and director of research for C L King Associates, New York, told SN. "C&S is actually helping Fleming hold onto sales and keep its current customers from falling off the wagon -- at the same time it's building a bond with its future potential customers."

According to Jonathan Ziegler, principal in PUPS Investment Management, Santa Barbara, Calif., helping supply Fleming is a way "for C&S to show its interest in the Fleming properties and to keep Fleming's customers happy. By helping Fleming boost its service levels, C&S will have a smoother transition when it takes over Fleming's distribution."

Industry sources said C&S will have until the end of this week to complete its due diligence and finalize its asset purchase agreement.

That agreement will be filed with the U.S. Bankruptcy Court, at which time a hearing will be set for July 17 to review the process for C&S and other bidders to submit offers, Shane Boyd, a Fleming spokesman, told SN. All bids would be due by the end of July, with the court reviewing those offers in early August to determine which promise the best return to shareholders, he explained.

Eric Larson, senior analyst with U.S. Bancorp Piper Jaffray, Minneapolis, said a sale of Fleming's assets to C&S is likely to hurt Supervalu and Nash Finch, "who both stood to gain many new primary customers if Fleming was simply liquidated... [But] there is an oversupply in the wholesale grocery distribution network, and the demise of Fleming could have aided margins at both Supervalu and Nash Finch."

According to Pete Willmott, interim president and chief executive officer at Fleming, "We believe the best way to maximize the value of the business for our constituents is to sell Fleming's grocery wholesale business to a strong buyer who can provide customers with the service and reliability they need. This arrangement with C&S is designed to allow performance to be restored and enhanced in our grocery wholesale divisions, to the benefit of our customers and associates."

In a prepared statement, Mark Gross, executive vice president of C&S, said, "The purchase of Fleming's wholesale grocery operations would allow us to expand our business into parts of the country where we do not presently operate. We are excited about working with Fleming and its chain and independent supermarket customers in a mutually beneficial transition for all parties."

C&S officials could not be reached for further comment last week, leaving the industry to ponder a series of questions, including:

Would C&S keep all the Fleming assets it acquires or would it sell some of them to other wholesalers -- similar to its approach three years ago when it acquired 185 Grand Union stores and sold off all but 31 to a variety of pre-arranged buyers?

Burt Flickinger, managing director of Strategic Resource Group/Flickinger Consulting, New York, said C&S "simply doesn't have the size or scale to really be a national wholesaler."

He characterized the C&S letter of intent as "a stalking horse syndication bid, in which C&S would ultimately wind up with a few distribution centers or divisions and try to syndicate the other pieces out to several other non-competing wholesalers across the country. If you look at Fleming as a pie, it may be cut up into six, seven, eight or maybe 10 different pieces with different wholesalers taking a slice."

Giblen said he also believes C&S intends to sell off some of the assets, "which will narrow the horizons for Supervalu and Nash Finch a bit because they would probably have to pay C&S more to get what they want than they would have had to pay Fleming."

In comments last week, Jeff Noddle, chairman and chief executive officer of Supervalu, said his company "may be interested in certain [Fleming] assets that fit with our long-term financial and strategic objectives."

How will C&S, a non-union wholesaler, deal with the unions that are in place at some Fleming distribution centers? Giblen said C&S could lease unionized warehouses to a third-party outsourcer -- possibly to ES3, the logistics company operated by C&S Holdings.

Will C&S be able to accommodate some of the smaller independent retailers Fleming has traditionally served, given that most of its customer base consists of larger chain operators?

Giblen said the acquisition of Grand Union has given C&S experience dealing with smaller stores, "so it can tell independent customers they will have the advantages of greater purchasing power resulting in lower prices while also telling them it will be able to pay closer attention to smaller customers than wholesalers that have their own corporate stores to consider."

C&S operates 18 distribution centers in the Northeast, Mid-Atlantic and Ohio areas, accounting for most of the company's volume of $9.5 billion. Fleming's grocery wholesale assets include 12 food distribution centers and five general merchandise facilities that are in full operation, plus 14 other food and general merchandise warehouses that are closed or closing.

Fleming's volume, which was approximately $15.5 billion at the end of 2002, is roughly equivalent to C&S', with the loss of $3.1 billion in Kmart revenue, the loss of approximately $2 billion from the shutdown of seven or more facilities, and lower sales resulting from reduced product availability since it filed for Chapter 11 protection.

Assets of C&S Holdings and Fleming Cos.

C&S HOLDINGS:

GU Supermarkets (25 units)

ES3, a logistics service provider

LC Transportation

J&R Ice Cream Corp.

C&S Wholesale Grocers (18 distribution centers)

Brattleboro, Vt. (dry grocery, frozen foods)

Buffalo, N.Y. (dry grocery, perishables, frozen foods)

Chester, N.Y. (perishables)

Montgomery, N.Y. (HBC/general merchandise)

Newburgh, N.Y. (dry grocery)

Dayton, N.J. (frozen foods) * North Brunswick, N.J. (dry grocery)

New Brunswick, N.J. (dry grocery)

Woodbridge, N.J. (Blair Road) (dry grocery)

Woodbridge, N.J. (Omar Ave.) (perishables)

Maple Heights, Ohio (dry grocery, perishables, frozen foods)

Harrisburg, Pa. (dry grocery)

North Hatfield, Mass. (perishables)

South Hatfield, Mass. (dry grocery)

Westfield, Mass. (frozen foods)

Windsor Locks, Conn. (dry grocery)

Aberdeen, Md. (frozen foods)

Collington, Md. (dry grocery, perishables, general merchandise)

FLEMING:

Full-line food distribution centers still in operation:

Ewa Beach, Hawaii

Fresno, Calif.

Garland, Texas

LaCrosse, Wis.

Lincoln, Neb.

Massillon, Ohio

Memphis, Tenn.

Miami

Milwaukee

Nashville, Tenn.

Sacramento, Calif.

Tulsa, Okla.

General merchandise distribution centers still in operation:

Dallas

LaCrosse, Wis.

Memphis, Tenn.

Sacramento, Calif.

Topeka, Kan.

Distribution centers closed or closing:

Fort Wayne, Ind.

Geneva, Ala. Lafayette, La. Lubbock, Texas

Kansas City, Kan.

Minneapolis, Minn.

North East, Md. Phoenix Oklahoma City

Salt Lake City South Brunswick, N.J.

Superior, Wis. Warsaw, N.C. King of Prussia, Pa.

(general merchandise)

Marshfield, Wis. (convenience stores)

Convenience-store distribution centers (not part of assets in C&S deal)

Altoona, Pa.

Leitchfield, Ky.

Plymouth, Minn.

Romeoville, Ill.