Chief Executive Officer Sam Martin of the Montvale, New Jersey said in a statement yesterday: “We have taken this difficult but necessary step to enable A&P to fully implement our comprehensive financial and operational restructuring… 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. In September, it said it would sell another seven stores in northern Connecticut. Restoring competitive margins, remodeling stores and increasing cash flows were all part of the turn around plan. Meeting liquidity needs, given that debt totaling $165 million was coming due June 15, 2011, was a reason for its initial move to restructure out of court.
Tengelmann, A&P biggest share holder, 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. The closely held retailer has previously written down the value of its A&P stake in the past and will now cut it to zero. 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.
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. In October, Standard & Poor’s downgraded A&P’s debt 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.
Rich History
A&P was incorporated in New Jersey in 1900, 41 years after having opened the first store on Vesey Street in New York under the name The Great American Tea Company. 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. The company expanded to California, Washington and Canada in the 1930s, with 15,357 stores across the continent.
Restructuring History
In July, A&P hired Sam Martin as its second new chief executive officer this year, replacing Ron Marshall, who had held the job since Feb. 8. Company Director Bobbie Gaunt resigned from the A&P board Nov. 28, according to a filing.
Frederic Brace, A&P’s chief administrative officer, was named chief restructuring officer, 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.
The supermarket operator has 41,000 employees, 95 percent of whom are covered by union agreements, according to the bankruptcy petition.
Labor costs mean it has less flexibility to invest in other parts of the store, said Jim Hertel, a managing partner at Willard Bishop Consulting, a Barrington, Illinois-based firm which advises retailers and suppliers.
A&P has an interest payment of $13.4 million due Dec. 15 on unsecured notes, according to filing. “Failure to make these payments would cause immediate issues” under the debt agreement, said Brace. A&P also has legacy obligations that put it at a competitive disadvantage, including paying rent on stores the company hasn’t been able to sublease or terminate the leases for, Brace said. The rent expenses for the mostly empty stores will be $77 million next year.
The company also has about 70 percent of inventory tied to one supplier in an unfavorable contract, Brace said. Union agreements, including pensions and health care obligations also put the company at a competitive disadvantage and “are unsustainable at existing levels”.
