More and more food retailers are going “green” — but in this case it has nothing to do with envir-onmental stewardship. The type of “green” these retailers are cultivating lately comes with Benjamin Franklin printed on it.
Across the food-retailing landscape, increased access to capital has begun accelerating merger-and-acquisition activity, fueling growth and reviving the hopes of bankrupt companies that had slammed head-first into the closed credit markets of a year ago.
Recent indications that equity markets are opening up for food retailers include Bi-Lo's emergence from Chapter 11 bankruptcy with $150 million in new financing, as well as an internal memo at Bashas' stating that talks to obtain new investment are making progress and that the retailer could exit bankruptcy by August.
In addition, a successful initial public offering at Dollar General — along with plans for a secondary offering — and a proposed IPO at Fresh Market are also indications that money can be found to support the growth of the right retail concepts.
Recent strategic acquisition activity includes the sale of most of Penn Traffic's former stores to Tops Markets; the purchase of Ukrop's by Giant of Carlisle; and the sale of Shaw's Connecticut stores to Wakefern and Stop & Shop.
“There are more deals getting done,” said Neil Stern, senior partner at consulting firm McMillan Doolittle, Chicago, although he emphasized that ongoing merger-and-acquisition activity is likely to be “more measured” than the industry might have seen in the past.
“There's access to capital, then there's crazy, unfettered, no-restrictions access to capital,” he said. “We don't have that yet.”
Stern said he expects an uptick in the pace of buying and selling of retail assets, although such activity will be “fairly measured.”
“I think we'll see some divisions get sold, and I think we'll see some strategic buys in some regions, but I don't know that we are going to be getting back to the Wild Wild West,” he said.
He cited Cincinnati-based Kroger Co. and Brussels-based Delhaize as two companies that appear well-positioned to make strategic acquisitions in the current environment.
“The real question will be with private equity activity — either private equity getting back into the game, or shedding some of the things they had bought previously, either through another sale or potentially through public offerings.”
He cited Marsh Supermarkets, the Indianapolis chain owned by Sun Capital, as an example.
“It's very likely that we'll see something happening there,” he said.
Tim Carroll, a principal with William Blair & Company, Chicago, who recently advised Bi-Lo during its bankruptcy exit, said he believes the industry is entering a “new era” of asset consolidation.
“The market has gone through the excesses of the past — we've seen the bankruptcies, and we've seen the store closings, and in many, many markets, we have rationalized the store base,” he said. “Now the larger strategic guys have invested in their store base, and now they are looking to grow.”
Private equity became active in buying supermarket assets in the last three or four years, Carroll noted, because the large strategic buyers were “extremely distracted” with competitive issues and other matters driven in part by previous “over-buying.”
“Now they are not distracted any more,” he said.
In particular, he said, regional chains of substantial size that come up for sale are likely to be targeted by strategic investors.
“The big strategic players need to grow, and they have the capital,” he said. “That's not to say private equity would not make a play, but if there's a good strategic asset available, there's probably a big strategic guy around it — or two or three — who wouldn't mind grabbing that chunk.”
Smaller players interested in growth should also benefit from the increased access to capital, Carroll explained.
“Access to capital is benefiting everyone,” he said. “If you are a good company that wants to grow, and you have a good story to tell, there's a lot of money out there looking for something to do.”
