A&P eyes sale of Canadian, Midwest unit, expects "substantial" debt reduction

By Paul Deckelman

New York, May 10 - The Great Atlantic & Pacific Tea Co. Inc. announced a far-reaching restructuring plan on Tuesday that will see the parent company of the venerable A&P store chain explore "strategic transactions" involving its profitable Canadian unit and divestiture of its struggling Midwestern operations. The result, company executives said on a conference call, will be a "New A&P" focusing primarily on its 250 stores in the New York metropolitan area, as well as 75 other stores in the Middle Atlantic region, primarily in the Philadelphia and Baltimore markets, and a small, but profitable presence in the New Orleans market.

"We are exploring potential strategic transactions to unlock the value of A&P Canada," the company's chairman and chief executive officer, Christian W.E. Haub, told analysts on the conference call that followed the release of fiscal fourth-quarter and fiscal-year 2004 financial results.

"The long-standing success of our Canadian operations, combined with current conditions in the Canadian retail marketplace, present us with what we believe is a unique opportunity to realize the substantial value of A&P Canada at this time," Haub said. "We believe that the proceeds of a transaction involving our Canadian operations could dramatically improve our balance sheet and liquidity, and provide a more solid financial footing from which to achieve and sustain improved profitability and accelerated growth in the U.S."

Neither Haub nor the company's chief financial officer, Mitchell P. Goldstein, would offer any kinds of details as to the anticipated amount of proceeds the company might expect to reap from the sale of the Canadian unit and the divestiture of its struggling Farmer Jack and Food Basics operations in Ohio and Michigan, nor would they give any hints as to possible likely buyers or the progress of any negotiations up to this point, other than Haub's assertion, in answer to an analyst's query during the question-and-answer portion of the call, that "interest in this [Canadian] asset is high."

As to the same analyst's comment that in general, efforts by other supermarket companies to profitably divest U.S. assets have produced "pretty poor" results over the past few years, Haub countered that in its own past asset sales, such as its New England stores, A&P has been "quite successful," and "we are not pessimistic at all" about the prospects for being able to get a decent price for the Ohio and Michigan assets of which A&P plans to dispose.

While declining to lay out a specific timetable for finishing up the Canadian "strategic transactions" and the Midwest divestiture, Haub said that he expected them to be done by "the end of the [current 2005] fiscal year" next February, "at the latest."

Negative net debt possible

Assuming A&P is able to negotiate a transaction that values the Canadian assets for their full worth - and Haub warned "and that is the only kind of transaction that we will consider or pursue" - Goldstein said that A&P, which had net debt of $921 million as of the end of the 2004 fiscal year on Feb. 26, could conceivably end up "with negative net debt," should the company decide to pay down most of its debt with the proceeds.

As of the end of the fourth quarter and the end of the 2004 fiscal year, the company had $697 million of debt and capital leases on its balance sheet, including an estimated $631 million of outstanding junk bonds -$214 million of 7¾% notes due 2007, $217 million of 9 1/8% senior notes due 2011, which are callable in 2006, and $200 million of 9 3/8% unsecured notes due 2039.

It also had $328 million of long-term real estate liabilities, partly offset by $104 million of short-term investments. The latest net debt figure was up from $847 million the year before, when A&P had less in the way of long-term real estate liabilities and more in the way of short-term investments.

Likely to pay 2011 bonds

Goldstein explained, in answer to an analyst's question about company plans to get rid of existing debt with the proceeds of any transaction involving the Canadian unit, that "clearly, if we were to generate proceeds, we're not going to pay off real estate financings. As a practical matter, you can't pay them off, they're leases.

"We'll determine what the right use of proceeds is, in terms of which bonds to pay off, and of course, we'll adhere to our obligations." He noted that "in the case of the '07s, we have no obligation to pay them off [early using any asset-sale proceeds], because they were issued without a requirement. In the case of the '11s, we have an obligation to pay them off if we have no other use of proceeds, so we'll have to see - but chances are those will get paid off."

He said that while the 2039 bonds "are out there, they're callable, they are somewhat equity-like, and 35-year money remaining is a great security." He told an analyst that there is no specific obligation under the bonds' indenture to make any kind of early payment on them.

Goldstein told another analyst asking about which bonds might be taken out that it was "premature to speculate on exactly what we will do. Certainly, our obligations are different under the different securities, and it all depends on what it costs to buy them back, [or] whether it's worth it just holding the cash."

A&P has, he emphasized "no obligations to chase the '07s to the moon - and we're not going to."

The bottom line, he said is "we'll have plenty of cash available, which would, at a minimum, offset whatever debt we have," and whether the company would actually be at "negative net debt" would depend on "how the math works out."

He continued that "one of the things we want to make sure we have is great liquidity, to do the investments that we need to make in the business, and then do whatever we need to do to appropriately ensure that we generate shareholder value."

At the end of the fiscal fourth quarter, Goldstein said, the company had $227 million of borrowing availability under its revolving credit agreement. Combined with the $104 million of short-term investment, that gave it total liquidity of $331 million.

The company had a leverage ratio of debt at 3.6 times annual EBITDA, an improvement from 3.9 times a year earlier. On the basis of adjusted debt versus EBITDAR (which includes rental and lease expenses), the leverage ratio declined to 5.7 times in fiscal 2004 from 6.1 times a year earlier.

Cuts net loss

A&P, which has been struggling to transform and restructure itself in the highly competitive, low-margin supermarket industry over the past several years, managed to cut its net loss to $5.7 million (15 cents per share) in the latest quarter, a substantial improvement from $59.9 million ($1.56 per share) in the year-earlier period. Haub proclaimed that the quarter's performance was "one of the best in the last three years," and a sure sign that A&P's U.S. business was turning around.

He predicted continued improvement, particularly as the company's "fresh store" format transformation concept, aimed at making A&P more attractive to customers, is translated to an ever-increasing number of its existing outlets. So far, he said, it's been "a resounding success."

Haub predicted that once the transactions were accomplished and A&P had cut its debt and had continued to otherwise cut expenses and overhead and was able to devote its resources to continuing the "fresh store" transformation in the company's core Connecticut-to-Washington D.C. corridor, there would be a return to "sustainable profitability by the latter part of 2006."

EBITDA rises

Adjusted EBITDA for the quarter - a key cash-flow measure - increased an impressive 59% to $81 million from $51 million in the year-earlier quarter. For the full year, adjusted EBITDA rose 19% to $256 million from $216 million.

Goldstein said that the trend of strong and increasing adjusted EBITDA "was in direct and stark contrast to most of our [supermarket industry peers], and a sign that we are gaining traction in our initiatives."

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