A&P Welcomes Higher Yucaipa, Tengelmann Investments, Posts ‘Challenging’ Q1

The Great Atlantic & Pacific Tea Company, Inc. said yesterday that the Yucaipa Cos., LLC and partners of Tengelmann Warenhandelsgesellschaft KG would increase their investments in the Montvale, N.J.-based grocer. Yucaipa will invest $115 million and Tengelmann $60 million, for a total purchase of $175 million of convertible preferred stock to be used toward a private offering.

With this new infusion of capital, A&P will be able to bolster its balance sheet and compete more effectively in the grocery industry. In accordance with their separate agreements, Yucaipa and Tengelmann will buy 115,000 and 60,000 shares of convertible preferred stock, respectively, each with an initial liquidation preference of $1,000. On a fully diluted basis, Tengelmann will remain the largest single shareholder, with an ownership interest of 38.6 percent, while Yucaipa’s ownership interest will rise to 27.6 percent. As a result of this change, A&P’s board of directors will consist of the nine current directors as well as two additional directors nominated by Yucaipa.

Conditions of the deal include the completion of a private placement of $225 million in senior secured notes due 2015. The notes will be second lien-secured obligations of A&P, guaranteed by all of its domestic subsidiaries. The grocer intends to use all of the net proceeds of the offering to repay borrowings under its existing credit facility and for general corporate purposes.

“This investment further solidifies Tengelmann’s over-30-year commitment to the company’s success,” noted Christian Haub, executive chairman of A&P and co-chief executive of Tengelmann. “Partnering with Yucaipa is an exciting opportunity to collaborate with one of the most successful investors in the supermarket industry, Ron Burkle. We believe this strategic partnership has the potential to unlock significant shareholder value.”

“The addition of Yucaipa as a significant investment partner provides the necessary resources to successfully execute our strategies and navigate through this difficult economy effectively with a focus on building sustainable profitability in the longer-term,” added A&P president and CEO Eric Claus.

Also yesterday, A&P released its fiscal 2009 first-quarter results for the 16 weeks ended June 20, 2009, posting sales of $2.8 billion vs. $2.9 billion in the year-ago period, while comparable-store sales fell 3.3 percent. Adjusted income from operations was $2.3 million, compared with $16.2 million last year, and reported loss from continuing operations was $58.3 million, as opposed to income of $2.8 million for last year’s first quarter.

“This quarter was challenging for our company as the retail market continues to experience one of the most difficult economic environments in history,” noted Claus. “Our decline in comparable-store sales this quarter was driven by a decline in the rate of our retail inflation, more promotional purchases and customers buying less.

Claus added that the Fresh, Gourmet and Discount formats were performing well, although the Price Impact or Pathmark stores were still struggling with negative comps and lower gross margins as a result of higher promotional spending and price investments. “Although, in the shorter term, this has negatively impacted our earnings, we believe this strategic pricing investment will well position us to generate long-term growth overtime and once the overall economy improves,” he said.

“[W]e are confident that our business optimization initiatives supported by our strategic investment agreements will benefit the company and allow us to mitigate some of the difficulties we are experiencing,” added Haub. “We are working on improving our results in revenues driven by our promotional and pricing strategies as well as decreased costs through greater efficiencies in labor and distribution, while also benefiting from increased private label penetration and lower stock losses during the remainder of fiscal 2009.”

A&P operates 435 stores in eight states and the District of Columbia under the following banners: A&P, Waldbaum’s, Pathmark, Pathmark Sav-a-Center, Best Cellars, The Food Emporium, Super Foodmart, Super Fresh and Food Basics.
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