Dec. 13 (Bloomberg) -- Great Atlantic & Pacific Tea Co., operator of almost 400 supermarkets under names including Waldbaum’s, Food Emporium and Pathmark, filed for bankruptcy after failing to compete with wholesale clubs and drugstores.
The Montvale, New Jersey-based retailer, incorporated 110 years ago, also runs stores under its own name, Super Fresh and Food Basics. It listed assets of $2.5 billion and debt of $3.2 billion yesterday in a Chapter 11 filing in U.S. Bankruptcy Court in White Plains, New York.
A shift in consumer spending to wholesale clubs, drugstores and supercenters hurt sales in the quarter ended Sept. 11, A&P said in a regulatory filing. The retailer had $8.8 billion in sales for the year ended in February, according to its website.
“We have taken this difficult but necessary step to enable A&P to fully implement our comprehensive financial and operational restructuring,” Chief Executive Officer Sam Martin said in a statement. “We could not complete our turnaround without availing ourselves of Chapter 11.”
The company announced a turnaround plan in July that included closing 25 stores in five states. It said in September it would sell another seven stores in northern Connecticut. Restoring competitive margins, remodeling stores and increasing cash flows were all goals, the company has said.
“The company couldn’t compensate for the combination of high debt and the suddenly fading purchasing power of the customers,” Karl-Erivan Haub, chief executive officer of Tengelmann Group, A&P’s biggest shareholder, said today in an e-mailed statement. The insolvency will help A&P to get a “solid financial basis, to advance necessary restructuring,” he said.
A bankruptcy is needed to bring costs into line with market reality and shed obligations that include $147 million in pension funding and more than $232 million in liabilities for leases the company doesn’t need and hasn’t been able to escape.
An unfavorable supply agreement obliges A&P to obtain 70 percent of its inventory from C&S Wholesale Grocers, Chief Restructuring Officer Frederic F. Brace said in court papers.
“The combination of falling revenues, a leveraged balance sheet, legacy costs, and unfavorable supply relationships could not be fixed outside of Chapter 11,” Brace said.
Union agreements, including pensions and health care obligations also put the company at a competitive disadvantage and “are unsustainable at existing levels,” he added.
Debt Due in June
Meeting liquidity needs with debt totaling $165 million coming due next June 15 prompted the initial move to restructure out of court, A&P said in regulatory filings.
A&P’s second-largest stockholder is Aletheia Research & Management. Holding more than 5 percent of its voting securities are GAMCO Investors, Bank of America Corp., DBD Cayman Islands and Yucaipa Cos. LLC. Ron Burkle’s Yucaipa Cos. also owns all of A&P’s series A-Y preferred stock.
A Yucaipa spokesman, Frank Quintero, didn’t immediately return a call for comment.
Goldman Sachs Group Inc. is the largest holder of the company’s 6.75 percent notes and 5.125 percent notes due in 2011. Elliott & Page Ltd. is the largest holder of 11.375 percent notes due in 2015, according to Bloomberg data.
Tengelmann, which owns Germany’s biggest home-improvement retailer, OBI, and the Kaiser’s supermarket chain, sees no impact on its other business from A&P’s insolvency, spokeswoman Jutta Meister said in an interview.
The closely held retailer previously wrote down the value of its A&P stake in the past and will now cut it to zero, she said.
Tengelmann, which has had an A&P stake since 1979, owns about 40 percent of the company. The stake had a value of about $64 million when markets closed Dec. 9, according to data compiled by Bloomberg.
A&P secured $800 million in debtor-in-possession financing from JPMorgan Chase & Co. and will have immediate access to a $187 million loan and $200 million in letters of credit, allowing it to keep stores open, according to the filing.
The loan agreement beat out a proposal by pre-bankruptcy lenders that would have given the company only $675 million. Second-lien lenders have agreed not to object to the financing under an inter-creditor agreement, according to a statement in court documents from Stephen Goldstein, a managing director and restructuring adviser Lazard Freres & Co., hired to help the company secure its loan.
Standard & Poor’s downgraded A&P’s debt in October and said it didn’t expect “material improvements in operating performance.”
According to its most recent quarterly report, A&P had a net loss of $153.7 million for the quarter ended Sept. 11. Shares fell 67 percent to 93 cents on Dec. 10 in New York Stock Exchange trading. The stock has declined 92 percent this year.
The New York Stock Exchange said trading in the company’s common stock and its bonds due 2039 was suspended immediately.
A&P was incorporated in New Jersey in 1900, 41 years after the first store was opened on Vesey Street in New York under the name Great American Tea Co.
It changed its name to the Great Atlantic & Pacific Tea Company in 1869, in honor of the completion of the coast-to-coast transcontinental railroad and its intention to operate stores across the country, according to its website.
The company expanded to California, Washington and Canada in the 1930s, with 15,357 stores across the continent.
The retailer yesterday sought court permission to continue paying employees and to maintain customer programs such as refunds and price guarantees.
Without such approval, the company would “risk losing market share and raising unnecessary doubts” about operations, it said in court papers. The law firm Kirkland & Ellis LLP represents A&P in the bankruptcy.
The company has 41,000 employees, 95 percent of whom are covered by union agreements, according to the bankruptcy petition.
In July, A&P hired Sam Martin as its second new chief executive officer this year. He succeeded Ron Marshall, who had held the job since Feb. 8. Company Director Bobbie Gaunt resigned from the board Nov. 28, according to a filing.
Brace, A&P’s chief administrative officer, was named chief restructuring officer Dec. 9, he said in a court document. Brace had been the chief financial officer of UAL Corp., parent of United Airlines, and helped guide the carrier through 38 months of bankruptcy restructuring that ended in 2006.
A&P has an interest payment of $13.4 million due Dec. 15 on unsecured notes, Brace said in his filing.
“Failure to make these payments would cause immediate issues” under the debt agreement, he said.
The case is: Re The Great Atlantic & Pacific Tea Co. 10-24549. U.S. Bankruptcy Court for the Southern District of New York (White Plains). It is assigned to Judge Robert Drain.
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