MONTVALE, N.J. — A&P's impending purchase of Pathmark will be funded by proceeds generated by a sale of its remaining stock in Canadian retailer Metro.
The swapping of ownership interests will help A&P shore up its balance sheet, strengthen its strategic positioning and avoid the need to raise funds through the debt markets, analysts said last week. It also indicated that the Pathmark deal — including store divestitures as required by federal regulators — is nearing completion.
“By forgoing $400 million-plus of high-yield debt, the company could save $40 million-plus of annual interest expense [and] would only lose about $6 million in Metro dividends,” John Heinbockel, an analyst at Goldman Sachs, said in a research note last week. “We regard the Metro divestiture as a clear near-term positive for A&P.”
A&P acquired a 15% ownership stake in Montreal-based Metro in 2005, as part of a deal to sell Metro A&P's stores in Canada. A&P liquidated one-third of that stake earlier this year, also to raise funds for the Pathmark acquisition.
Last week, A&P said it would seek to sell its remaining 11.7 million shares on the open market, and agreed to a deal with TD Securities whereby TD will offer to purchase the shares on or prior to Nov. 28 at a price to be determined. Although the shares were worth around $435 million based on Metro's trading price at the time A&P made its announcement, Metro shares traded down — hitting 52-week lows — as investors “shorted” the stock, knowing it would face downward pressure until the A&P block is actually sold.
Those activities helped to reduce the value of A&P's shares to around $385 million by midweek.
Proceeds from the stock sale will minimize A&P's indebtedness at the closing of the $1.3 billion Pathmark deal, which is expected next month, the retailer said.
Karen Short, an analyst with Friedman Billings Ramsey, New York, said the announcement was an indication that compliance with the Federal Trade Commission-mandated store divestitures was “imminent.” Once A&P complies with the FTC, the agency has two weeks to approve the transaction, Short said, indicating the deal could close in early December.
The stock should be sold shortly after Metro reports quarterly earnings Nov. 21, she added.
Lower debt at the time of the closing will provide A&P greater flexibility to pursue a robust store remodeling program after the Pathmark deal closes, according to Heinbockel. “That should enhance the Pathmark integration story.”
Standard & Poor's last week said the move may also allow it to raise its debt rating on A&P “at least one notch,” from its current “B-” rating.
The agency said it would wait to examine A&P's capital structure following the deal to make its final determination.