The Great Atlantic & Pacific Tea Company Inc., which controls the A&P supermarket chain, filed for Chapter 11 bankruptcy overnight Monday and threatened to liquidate without approval for a sale of some of its stores.
The filing marked the second Chapter 11 bankruptcy for the 156-year-old A&P chain in the past five years, giving the company the dubious distinction of experiencing what restructuring advisers colloquially call Chapter 22.
The company has lined up tentative deals with three grocery chains that would acquire 120 of its stores employing 12,500 employees for nearly $600 million. A&P said it is discussing potential sales of additional stores with other suitors.
“We think that’s a real bright spot,” company attorney Ray Schrock said at a crowded bankruptcy hearing Monday in White Plains, N.Y.
Without the proposed sales, A&P will have “no choice but to liquidate their business in a fire sale and piecemeal fashion,” the company’s chief restructuring officer, Christopher McGarry, said in the bankruptcy filing.
The grocery chain traces its roots to A&P’s founding in 1859. The company claims credit for introducing the first U.S. supermarket in 1936, a 28,125-square-foot store in Braddock, Pa. The company boasted nearly 16,000 stores by the 1940s.
After an acquirer, Germany-based Tengelmann Group, bought the company in 1979, a series of strategic mistakes, industry changes and financial hurdles led to a dramatic corporate contraction.
The company is a division of Montvale-Para Holdings Inc., which is majority owned by Mount Kellett Capital Partners LP. Great Atlantic & Pacific Tea Co. has about 300 supermarkets and other stores under several brands, including A&P, Waldbaum’s,SuperFresh, Pathmark, Food Basics, The Food Emporium, Best Cellars and A&P Liquor.
The grocery chain sought federal bankruptcy court protection anew in the Southern District of New York, citing about $2.3 billion in debts and listing $1.6 billion in assets.
A&P listed supplier C&S Wholesale Grocers Inc. as its largest unsecured creditor with $39.4 million in claims. The next four largest unsecured creditors includee McKesson Drug Co. ($8.4 million), Facility Source LLC ($6.7 million), Coca-Cola Enterprises ($4.8 million) and Mondelez Global LLC ($3.2 million).
The grocery chain has about 28,500 employees, including about 20,000 who are part time, with an average hourly wage of $16.85. About 93% are represented by one of 12 different unions, and many of them have bumping rights that the company has described as a barrier to reducing costs.
About 25 stores will close almost immediately, the company said.
The United Food and Commercial Workers (UFCW) International Union, which represents many A&P workers, called on the grocery chain to “stay in business during this bankruptcy process and honor its responsibilities to its employees, our members and their families.”
“Our message to any potential buyers of A&P is that our hard-working members are not just employees, they are the heart and soul of these stores,” the union said in a statement. “For the sake of the men and women of A&P, now is the time for A&P and any potential buyer to focus on doing what is right for our hard-working members and their families.”
Chapter 11 bankruptcy allows companies to reorganize their operations and slash debts in an attempt to create a stronger company. They must win the approval of the court and creditors to reemerge from bankruptcy.
The prospective buyers of 120 stores — Acme Markets, Stop & Shop Supermarket and Key Food Stores — don’t want A&P’s pension obligations, according to court filings. That sets up a potentially bruising battle between the chain’s unions and the debtor.
“The best and only viable path to maximize the value of their business and preserve thousands of jobs is a strategic Chapter 11 filing to facilitate sales free and clear of liabilities,” McGarry said in the filing.
A&P lined up $100 million debtor-in-possession financing — a loan that allows the bankrupt entities to access capital while operating under court supervision. The financing won approval at Monday’s bankruptcy court hearing.
Like many retailers with a long legacy, A&P’s biggest asset may be its real estate, which the company described as “extremely valuable.” The grocery chain hired restructuring adviser Hilco to evaluate and monetize its commercial real estate.
Parts of A&P’s 2015 filing read like an explanation for why the 2010 bankruptcy — which ended when the company emerged from court protection in March 2012 — failed to place the grocery chain on a sustainable path.
A&P said it erred by keeping 50 to 60 underperforming stores open “in favor of preserving the jobs in those stores” and did not successfully reduce its pension obligations and other costs in the first bankruptcy.
“These obligations have been a drain on the company” since then, McGarry said.
The company has several sources of secured financing, including investors represented by U.S. Bank ($677.1 million) and Wells Fargo Bank ($561 million).
The grocery giant said it earned a 2014 fiscal-year profit of $46 million before accounting for taxes, interest, depreciation and other costs, but that translated into a book loss of $305 million.
Schrock, the company attorney, said that even though A&P had $5.5 billion in revenue, the grocery chain has been hemorrhaging cash. Cash losses were about $14 million a month this year, he said.
The company suffered a $25 million cash drain in recent months because some so-called direct store delivery vendors who supply milk, eggs, cheese and other critical products demanded changes in payment and credit terms or threatened to stop shipments, said Michael Nowlan, a senior managing director of FTI Consulting, a financial adviser for A&P and its affiliates.
In a statement, A&P CEO Paul Hertz described the bankruptcy and store closures as the right decision to “preserve as many jobs as possible” and “maximize value for all stakeholders.”
“While the decision to close some stores is always difficult, these actions will enable the company to refocus its efforts to ensure the vast majority of A&P stores continue operating under new owners as a result of the court-supervised process,” Hertz said. “We greatly appreciate the continued support of our customers, suppliers and employees, who have maintained an unwavering commitment to our business and our customers.”
Source: USA Today