Tesco’s Fresh & Easy Files Bankruptcy for Burkle Sale

Tesco Plc’s Fresh & Easy Neighborhood Market Inc. filed for bankruptcy so it can sell itself at auction with an affiliate of billionaire Ron Burkle’s Yucaipa Cos. as the lead bidder.

Fresh & Easy today listed debt of as much as $1 billion and assets of as much as $500 million in a filing in U.S. Bankruptcy Court in Wilmington, Delaware.

Under the proposed deal, a Tesco affiliate would lend the Yucaipa affiliate $120 million to help fund the takeover. Tesco would get warrants to buy as much as 10 percent of the equity in the reorganized supermarket chain. Should Yucaipa win a proposed court-sanctioned auction, a Tesco unit would retain 22.5 percent of the equity in the reorganized chain.

Fresh & Easy blamed its failure on the economic downturn that began in 2008, especially falling real estate prices in California, Nevada and Arizona. To build the chain quickly in 2006 and 2007, the height of the U.S. real estate boom, Tesco spent $610 million.

“Many of Fresh & Easy’s leases are substantially above market, relative to its competitors,” Fresh & Easy Chief Financial Officer James Dibbo said in an affidavit filed in court today. “The effect of the real estate market was especially pronounced.”

Monthly Losses

Fresh & Easy said it owes $738 million to Cheshunt, England-based Tesco, the U.K.’s biggest retailer. Fresh & Easy never made a profit and lost an average of $22 million a month in the 12 months ended in February, Dibbo said.

Tesco said Sept. 10 that the total cash outflow relating to stores being closed should be no more than 150 million pounds ($243 million), including a loan from Tesco to the Yucaipa affiliate.

“This filing is part of the orderly restructuring process we described on 10 September, therefore the costs to exit remain as set out in that announcement,” Tom Hoskin, a Tesco spokesman, said today in an e-mailed statement.

Dumping Fresh & Easy after about six years cut profit by 1.2 billion pounds, Tesco said it April when it announced that it was exiting the U.S.

Under the U.S. Bankruptcy Code, Tesco can cancel unwanted leases easier than outside of court protection and hold an auction for Fresh & Easy’s assets.

‘Stalking Horse’

As the “stalking horse,” Los Angeles-based Yucaipa’s affiliate would have the opening bid. Should no other offers come in, the company would be required to buy Fresh & Easy.

At an initial hearing tomorrow, Fresh & Easy will seek routine rulings from U.S. Bankruptcy Judge Kevin J. Carey that will allow the chain to keep operating without interference from creditors.

Yucaipa has agreed to take over about 150 of the markets along with its production facility in Riverside, California, where the company produces meals under the Fresh & Easy brand. The company employs more than 4,000 people.

Fresh & Easy operates 167 stores in the Western U.S., 142 of which involve leases. The company also owns 61 store properties that aren’t being operated and leases 36 non-operating locations.

Frank Quintero, a spokesman for Burkle, didn’t immediately respond to an e-mailed request for comment on the buyout.

Tesco American depositary receipts fell 14 cents to $17.52 in over-the-counter trading in New York at 12:01 p.m., after earlier dropping as much as 1 percent. Each receipt is worth three shares.

The case is In re Fresh & Easy Neighborhood Market Inc., 13-bk-12569, U.S. Bankruptcy Court, District of Delaware (Wilmington).

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