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Winn-Dixie leads long checkout line

by Richard Collings | Published December 20, 2011 at 3:17 PM

Private equity-owned Bi-Lo LLC's acquisition of Winn-Dixie Stores Inc. for $560 million may be but one of a number of grocery store deals in the coming months, according to a source close to the situation.

"The party is not over," said the source, in reference to future grocery store transactions.

Two industry sources expect continued consolidation in the grocery store space, particularly in the Southeast. The Southeast is one of the least consolidated regions in the U.S., with more regional chains than in any other part of the country, noted the source close to the situation. The second source said that the Carolinas in particular offer the most opportunity for consolidation in the region.

Examples of major players in the Southeast, the first source said, include listed Ingles Markets Inc., based in Black Mountain, N.C., whose founder Robert Ingle passed away in March; K-VA-T Foodstores Inc., based in Abingdon, Va., with a large presence in Tennessee; and Harris Teeter Inc. parent Ruddick Corp., based in Charlotte, N.C.

The source, however, cautioned that these companies are not necessarily currently engaged in potential transactions.

Grocery store retailers have received tough competition from Whole Foods Market Inc. and Trader Joe's, the second source said, with both chains offering either premium services and products, and in Trader Joe's case, value. Competition from Wal-Mart Stores Inc. on the discount end and Whole Foods on the high end will continue to encourage consolidation among the players in the middle, the second source said. As a result of new entrants over the past couple of decades, the market became oversaturated with grocery stores.

Consolidation will be further driven by the exit of large grocery stores from certain markets to focus on regions they lead in, the first source said.

The first source explained that more restructurings in the grocery sector are unlikely, as the industry has worked through most of its problems. Those issues are tied to the industry's rapid expansion in the late 1980s and early 1990s, which also involved mergers and acquisitions as well as highly levering businesses to finance such expansion, the source explained. Then Wal-Mart entered the grocery landscape, taking massive market share. As a result, it took years for the industry to work through this oversaturation of the market with stores and all the debt that was accumulated combined with the impact of lower sales due to competition from Wal-Mart.

Today, the first source said, most of the grocery store retailers, even the weaker players, are no longer highly levered, and can at the least limp along, even as they face new competition from not only Whole Foods and Trader Joe's, but also from drugstores such as Walgreen Co. that are now offering a large assortment of food products.

"Restructurings are always possible, but nothing notable [is on the horizon]," the source said.

The source emphasized that winners in a particular geographic area such as Bi-Lo can generally be expected to continue to consolidate their regions and in some cases seek initial public offerings. The source pointed to the IPO announcement by Roundy's Supermarkets Inc. The grocer, backed by Chicago-based private equity firm Willis Stein & Partners, announced on Dec. 5 it plans to raise $230 million from a public offering.

In addition, the bankruptcy of Great Atlantic & Pacific Tea Co., better known as A&P, and its impact on the grocery business in the Northeast, bears watching. A&P filed for Chapter 11 protection last December.

Both sources noted the impact of Wal-Mart on the grocery business. The first source said that competition from Wal-Mart was a key factor in both Greenville, S.C.-based Bi-Lo and Jacksonville, Fla.-based Winn-Dixie's going into bankruptcy. Bi-Lo filed for bankruptcy in March 2009 and exited in May 2010, with Lone Star Funds investing $150 million in cash in exchange for 100% of its shares. Winn-Dixie was under court protection from 2005 to 2006.

Wal-Mart, the source said, most heavily saturated the Southeast region. But Bi-Lo and Winn-Dixie emerged from their restructurings stronger than before, having shed unproductive real estate.

Bi-Lo said it shed $60 million in debt in its reorganization.

Winn-Dixie, meanwhile, closed about 43% of its stores during its 21 months in Chapter 11. The company exited bankruptcy with a new $725 million revolving loan from a consortium led by Wachovia Bank NA. According to the company's last 10-Q filing with the Securities and Exchange Commission on Oct. 31 for the quarter ending Sept. 21, Winn-Dixie had only $12 million of long-term borrowing under its credit facility.

Winn-Dixie was able to exit the Carolinas and focus on its core markets of Florida and Alabama during its bankruptcy.

The merger of the two companies does not create much regional overlap, and a number of operational synergies can be achieved. Winn-Dixie is self-distributing, for example, whereas Bi-Lo outsources distribution to its grocery stores.

Citigroup Inc. and Deutsche Bank AG have committed a $700 million senior secured asset-based revolving credit facility to finance the merger, according to Standard & Poor's LCD News.

Bi-Lo tapped William Blair & Co. LLC, Citigroup, Food Partners LLC, Deutsche Bank Securities Inc. and Alvarez & Marsal's Transaction Advisory Group for financial advice. Gibson, Dunn & Crutcher LLP's Jeffrey Chapman and Eduardo Gallardo and Hunton & Williams LLP provided legal counsel.

Goldman, Sachs & Co. and Paul, Weiss, Rifkind, Wharton & Garrison LLP advised a special committee of Winn-Dixie's board. The retailer also received legal advice from King & Spalding LLP and Greenberg Traurig LLP.

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