MONTVALE, N.J. — Before it agreed this spring to pay about $1.3 billion to acquire Pathmark Stores, A&P here rejected an offer of about the same amount by Pathmark to buy A&P last fall and also turned down a proposed “merger of equals” between itself and Pathmark more than a year ago.
Those offers — as well as an all-cash overture by A&P that was rejected by Pathmark — were revealed in a document A&P filed recently with the Securities & Exchange Commission.
The merger itself had origins dating back to Pathmark's pursuit of strategic alternatives in 2004, which led to a deal to sell a controlling stake in Pathmark to Los Angeles-based Yucaipa Cos. in 2005. Yucaipa, the filing said, continued reviewing strategic options for Pathmark after its investment, including staging several meetings between Ron Burkle, Yucaipa's founder, and Christian Haub, the executive chairman of A&P and scion of its controlling Tengelmann family, in late 2005.
Those meetings led to discussions of a stock-based merger of equals between A&P and Pathmark last March, the filing said. The deal that was discussed — but ultimately rejected — envisioned an equity infusion from Yucaipa along with a stock swap that would have provided Yucaipa with an equal stake in the combined companies to that of the Tengelmann Group.
Yucaipa at that time was also pursuing an acquisition of another retailer with stores in contiguous geographical regions, the filing said, but dropped those plans when it concluded Pathmark would be unable to offer a sufficient premium. The retailer was not identified by name in the document.
Balancing the interests of A&P's and Pathmark's respective lead investors was a theme throughout the courting, the filing showed. When Pathmark began pursuing an offer to acquire A&P last fall, Pathmark's board acknowledged that since Tengelmann owned the majority stake in A&P, “any transaction would require the support of Tengelmann.”
Pathmark made a formal offer to purchase all outstanding shares of A&P for $30 per share in early October, the filing said. A&P was trading around $24 at the time. The offering included an equity commitment from Yucaipa of up to $200 million.
Haub, however, rejected this proposal on behalf of Tengelmann, and did not respond to a follow-up letter from Burkle suggesting that Yucaipa was willing to increase its offer, the filing said.
A&P, in the meantime, was working on its own proposals to acquire Pathmark. According to the filing, A&P between July and November last year “explored a variety of ways to acquire Pathmark for consideration consisting entirely of cash and potential sources of financing for such a transaction.” A&P held discussions with private equity partners willing to go in on such a deal, but eventually made an offer to buy Pathmark at $12 a share, with $180 million of the purchase price financed through the sale of its stake in Canadian grocer Metro.
Burkle “expressed disappointment in the price offered by A&P” and suggested that an offer of $8 cash and $5 in A&P shares for each share of Pathmark would be acceptable. In December, A&P amended its offer to $9 per share and $3.50 in A&P stock for each share of Pathmark. This led to the signing of a confidentiality agreement and the commencement of due diligence between the retailers.
Though A&P and Pathmark envisioned announcing a deal as early as mid-January, numerous issues would need to be worked out in the coming months. Key among these were Burkle's insistence that the warrants for Yucaipa to buy additional stakes in Pathmark be converted to warrants to purchase A&P stock; assumptions of antitrust risk; timing issues related to financing; and an exchange ratio for the stock portion of the merger. The latter had still not been decided by the time stock market activity forced both sides to reveal they were in merger talks on Feb. 27.
A phone conversation between Haub and Burkle on March 2 finally settled the issue, which had become complicated due to the rising price of A&P stock. The amended deal — valuing A&P at $27 per share rather than on a 20-day average as initially discussed — resulted in an increase of around $25 million for Pathmark shareholders, the filing said. The parties eventually agreed to that deal, resulting in an announcement three days later.