Burkle Sees Value In A&P

MONTVALE, N.J. — Ron Burkle, the supermarket magnate whose prior investments in A&P were not enough to keep the retailer from bankruptcy, is doubling down. Burkle's Los Angeles-based investment group Yucaipa Cos. is teaming with Mount Kellett Capital Management and Goldman Sachs Asset Management on a $490 million deal to buy the beleaguered retailer out of bankruptcy and operate it as a private company

MONTVALE, N.J. — Ron Burkle, the supermarket magnate whose prior investments in A&P [4] were not enough to keep the retailer from bankruptcy, is doubling down.

Burkle's Los Angeles-based investment group Yucaipa Cos. is teaming with Mount Kellett Capital Management and Goldman Sachs Asset Management on a $490 million deal to buy the beleaguered retailer out of bankruptcy and operate it as a private company beginning early next year. Under the plan, which could be approved by the court as early as this week, Burkle would appoint himself chairman and lead an all-new board of directors.

“Obviously, this shows that he maintains belief that there's value in this company,” Neil Stern, senior partner at McMillan Doolittle, Chicago, told SN.

According to the buyout plan, Yucaipa, along with holders of about 80% of A&P's convertible notes, would purchase $210 million in new second lien notes (at a 5% discount); $210 million in new convertible third lien notes; and $80 million in shares of the reorganized company's stock. The proceeds would provide enough to pay secured creditors fully in cash, give A&P money to continue its turnaround and provide a $40 million pool for cash distributions to unsecured creditors. The latter group would receive an average of about 1.6 cents on the dollar, based on approximately $2.5 billion in unsecured debt.

For Burkle, the buyout would culminate years of maneuvering to control A&P, beginning when Yucaipa bought A&P's then-rival Pathmark in 2005. Burkle later sold Pathmark to A&P in a deal that gave him a stake — and increasing influence — in the latter company, even as integration issues and debts incurred in the Pathmark deal led in part to the financial crisis that put it into Chapter 11 last December. And while the bankruptcy wiped out shareholders in A&P — including its previous majority owners, the Tenglemann Group — Burkle maintained some control in bankruptcy as a result of a stake in its debt.

Yucaipa officials did not return calls for comment last week.

“If it were another investor, you might look at it and scratch your head a little, but given Burkle's track record, you know he sees something. And it's hard to question what he sees,” Stern said. “Historically, he's been right a whole lot more than he's been wrong, particularly as it relates to this industry.”

Peter Chapman, who operates Bankruptcy Creditors Service, Philadelphia, told SN the judge in the case would likely conduct an auction for competing bids but said he would be surprised if any materialized.

“Ron Burkle's bid is the bid that's going to go to the finish line, unless there's somebody who's been in the tent for the last six months monitoring everything, and talking to the management, lawyers and creditors,” Chapman said. “Everybody else in the world has had a year to kick the tires and put a bid together.”

If the bid succeeds, Burkle would be taking over a business that shed millions in costs during the bankruptcy process but still needs to find its way to better sales and profits at its stores. Its accomplishments in Chapter 11 included extracting itself from an onerous logistics contract with Grocery Haulers; renegotiating a supply agreement with C&S Wholesale Grocers at a savings of $50 million in the first year; closing or selling 57 stores and exiting dozens of dark-store leases that would have cost it $77 million this year alone.

An agreement with organized labor was still to be negotiated as of late last week, but union officials said they were optimistic after meeting with Burkle.

A previous Yucaipa involvement with a then-bankrupt New Jersey retailer — Grand Union — led to a net gain in union jobs when those stores were sold to Stop & Shop, union leaders noted. Several union leaders contacted by SN last week said they were impressed with Burkle's experience and were eager to work together.

“When you hear someone like Ron Burkle speak, you get that he gets it,” Pat Purcell, a spokesman for UFCW Local 1500, Westbury, N.Y., told SN. “He's able to refer to other situations where he's been able to turn companies around.”

“If you look at all the possible scenarios, this is one of the better ones,” added John T. Niccolai, president of UFCW Local 464, Little Falls, N.J. “This isn't Ron Burkle's first ride at the rodeo. If you going to make a deal with someone, that's who you make a deal with.”

Around 95% of A&P's 41,000 employees are union represented. Burkle's plan envisions a new board of directors including one member appointed by the UFCW. Mount Kellett and Goldman Sachs would appoint two directors each and Sam Martin, A&P's chief executive officer, would also have a board seat.

Martin said the new investment would provide support to continue a business turnaround addressing sales volume, price perception and positioning of the company's 336 stores.