Deals Left Undone in '06 Appear Ripe for Closure

MONTVALE, N.J. A&P here was going to buy Pathmark, Costco was going to buy Smart & Final, Delhaize was going to buy Ahold, Kroger was going to buy Roundy's, private equity was eyeing BJ's, and Tops is still for sale. The supermarket industry in 2006 was brimming with deal speculation, and now some of those scenarios may be ready to make the transition from wishful thinking to reality in the early

MONTVALE, N.J. — A&P here was going to buy Pathmark, Costco was going to buy Smart & Final, Delhaize was going to buy Ahold, Kroger was going to buy Roundy's, private equity was eyeing BJ's, and Tops is still for sale.

The supermarket industry in 2006 was brimming with deal speculation, and now some of those scenarios may be ready to make the transition from wishful thinking to reality in the early part of 2007, analysts said.

The long-standing theory that Pathmark Stores, Carteret, N.J., and A&P should merge still holds water with analysts, many of whom believe a deal may quickly unfold.

“I think something will happen sooner rather than later,” said Karen Short, an analyst with New York-based Friedman, Billings, Ramsey. “They want to do it from a position of strength for both companies, and in a market as fragmented as the Northeast, there's no reason you would want to have them as stand-alone companies.”

She noted that A&P, controlled by Germany-based Tengelman Group, “has made no secret of the fact that they want to be an acquirer.”

Pathmark is 40% owned by Yucaipa Cos., Los Angeles, the Ron Burkle-led investment fund that has said it wants to be a consolidator of supermarket banners.

“There's a majority shareholder in each, so really what it comes down to is, what's the valuation?” said Short.

Jonathan Ziegler, an analyst with Dutton Associates, El Dorado Hills, Calif., also said he thinks something may happen soon between the two companies.

“I think the market is expecting it,” he said. “I think it would be logical to expect something is going to happen soon.”

Gary Giblen, an analyst with Brean Murray, Carret & Co., New York, said there are both pros and cons to a merger of the two companies, which primarily operate in the New York-New Jersey area, and he believes a deal will come together eventually.

“Ron Burkle likes to do deals, and he's hell-bent on building supermarket empires,” Giblen said.

Last year, speculation also heated up about the possible sale of some or all of Ahold's U.S. businesses — possibly through a merger with Brussels-based Delhaize Group — and late in the year the company put its Tops chain, which operates primarily in upstate New York, on the block. Price Chopper, Schenectady, N.Y., which acquired some Tops stores last year, has been mentioned as a possible buyer. Ahold is expected to release more financial information about Tops to interested parties this month, sources told SN.

In the Pacific Northwest, meanwhile, Associated Grocers, Seattle, said it is nearing a deal on a possible sale of its operations, after the cooperative wholesaler said in late 2005 that it was considering strategic alternatives.

John Runyan, president and chief executive officer, AG, told SN last week there are several interested entities, some of which are involved in due diligence.

Another company undertaking a strategic review that could lead to a sale in the early part of 2007 is Smart & Final, the warehouse-club hybrid chain partly owned by French retailer Casino Group. Casino last year said it would divest some of its non-core operations at about the same time Smart & Final said it had retained Goldman Sachs for the review.

“They are not giving any kind of detail about how progress is going,” Ziegler said. “I would think in the next quarter we should get some resolution. It's a mature issue whose time has come, and we want an answer.”

He said that although he thought Costco Wholesale, Issaquah, Wash., might have been a good strategic buyer for the 250-store chain, he also thinks it could be acquired by private equity, or possibly by Carrefour, another French retailer.

Short, of Friedman, Billings, Ramsey, also said she anticipates some word from Smart & Final on its strategic review early in 2007.

She said she thinks Smart & Final would make a good candidate as a private-equity buyout because of the value in its real estate.

BJ's Wholesale, Natick, Mass., was eyed by private equity for a possible buyout in 2006, but no deal emerged. Some analysts said the recent departure of CEO Mike Wedge could pave the way for a sale, however. Last week, the company also unveiled plans to cut back on some operations (see Page 6.)

Another potential sale that could emerge soon is of the Roundy's Supermarkets chain. CEO Robert Mariano said in a published report early last year that the chain could be sold or recapitalized by the middle of 2007. Roundy's was purchased in 2002 by Chicago-based investor Willis Stein & Partners.
Additional reporting: Elliot Zwiebach