EAGLE EXAMINES SALE OPTIONS POST-CHAPTER 11

MILAN, Ill. -- Eagle Food Centers here said it is considering "possible sale alternatives" following the filing last week of its second voluntary Chapter 11 bankruptcy petition in three years."The company will continue to focus its resources on maintaining the quality of our operations while we explore sale alternatives," Robert J. Kelly, chairman, president and chief executive officer of the 61-store

MILAN, Ill. -- Eagle Food Centers here said it is considering "possible sale alternatives" following the filing last week of its second voluntary Chapter 11 bankruptcy petition in three years.

"The company will continue to focus its resources on maintaining the quality of our operations while we explore sale alternatives," Robert J. Kelly, chairman, president and chief executive officer of the 61-store chain, said.

Asked if selling the stores is the only alternative Eagle is pursuing, a company spokeswoman told SN the company could opt to reorganize as a smaller company or get an equity infusion to move forward. She said there is no timetable set for Eagle's emergence from Chapter 11.

According to Kelly, Eagle filed for bankruptcy protection after its board of directors determined that a Chapter 11 would "ensure Eagle Food Centers' continued viability. The Chapter 11 process allows time for the company to restructure its debt, negotiate with the unions, and continue day-to-day business activities without interruption."

According to the company, the filing -- by Eagle and four wholly owned subsidiaries -- was intended "to effectuate restructuring initiatives and provide sufficient liquidity to continue to operate the business." The subsidiaries are Eagle Country Markets, BOGO's (Buy-One-Get-One), Eagle Pharmacy Co. and Milan Distribution Co.

Eagle said last week it has secured interim approval from the Bankruptcy Court for $40 million in debtor-in-possession financing from Congress Financial Corp., New York, which has provided the chain's revolving credit facility since 1995. A final hearing on the DIP facility is scheduled for April 25.

The DIP funds will enable Eagle to continue funding obligations to employees and suppliers, as well as to conduct other day-to-day operations, the company said.

Eagle also got approval from the Bankruptcy Court last week to pay pre-petition and post-petition employee wages, salaries and benefits and to honor its various customer programs, including the Eagle Savers' Card.

Kelly said employees and customers will not see any difference in operations in the wake of the filing.

"Looking ahead, we believe the series of actions begun today will result in a more competitive future for Eagle Food Centers," he said.

However, Kelly was specific on only one possible outcome -- selling off stores. Industry observers contacted by SN said a sale of the company is the likely outcome of the reorganization.

According to Chuck Cerankosky, an analyst with McDonald Investments, Cleveland, "The future of Eagle is grim if one expects all the stores to survive. In the best scenario, maybe less than half the stores will continue to operate, or else it could go the way of Homeland [Stores, Oklahoma City], which filed Chapter 11 last year and then went into liquidation."

Cerankosky said it's significant that Eagle is "another chain in Chapter 11 that's a unionized operator. Without economies of scale, a small operator like Eagle suffers the negative effects of union work rules that reduce in-store labor productivity and generous fringe benefits -- and that's a structure that's not viable in today's hyper-competitive marketplace."

Companies with possible interest in some Eagle locations might include Kroger Co., Cincinnati; Supervalu, Minneapolis; "or other wholesalers and the independents those wholesalers supply," Cerankosky said.

Eagle has been for sale "on and off" since 1994, observers told SN, "and it may have difficulty finding buyers for most of its stores if that's what it decides to do," another analyst noted.

Sources said the stores have been for sale to a potential buyer for the right price, although Eagle has not actively tried to market the chain; it was able to sell three stores to independent operators in the last six months.

Eagle has been struggling for several years to deal with competitive pressures from a host of better-funded operators -- primarily Hy-Vee, West Des Moines, Iowa -- who have been opening up new stores against Eagle locations at a time when Eagle was unable to keep up with such fierce expansions.

"Eagle has tried different names and formats over the years, but nothing seems to have worked," one analyst said.

Its competitive challenges have been exacerbated in recent years by the expansion of several low-cost operators, including the move of Meijer Inc., the Grand Rapids, Mich.-based supercenter operator, into the Chicago market; the opening during the past six months of three additional Wal-Mart supercenters; and the move of Woodman's, operators of a 220,000-square-foot store, into its trade area, local observers told SN.

"The company is a bit of tainted goods," one analyst told SN. "The store base is tired, the economy in central Illinois and eastern Iowa has not been great, and the chain has been struggling for years, with its market share declining -- even in its home market.

Eagle went through a six-month Chapter 11 reorganization in 2000 in a successful attempt to force bondholders to refinance $85 million of their $100 million outstanding notes; it also rejected 19 leases during the Chapter 11 process.

Following that bankruptcy, Wall Street analysts said the company still faced a difficult situation. "They've deleveraged the balance sheet, which will give them a little more flexibility and more money to spend on capital expenditures and promotions," one analyst said at the time. "But Eagle still faces a difficult competitive environment, and it remains to be seen whether they will be able to compete."

Late last month, Eagle hired Huron Consulting Group, Chicago -- a restructuring and turnaround company -- to assist it in exploring all strategic options. Companies interested in acquiring Eagle locations can contact Huron to evaluate the chain's financial records, the Eagle spokeswoman told SN.

Kelly said last week Eagle will continue to negotiate with representatives of its labor unions to renew and modify terms of their collective bargaining agreements and will also begin negotiations with representatives of its noteholders on a debt restructuring.