Daily News: September 19, 2013

ABLs Stand to Benefit from Retail Grocery Business Shifts

Dramatic shifts in the retail grocery business continue to create opportunities for asset-based lenders and private-equity investors alike, a Tiger Group expert noted in a Sept. 12 panel discussion with colleagues from Nixon Peabody and Deloitte. But the deals tend to hinge on a host of practical and legal challenges that are unique to the fast-changing retail grocery sector.

“Traditional grocers are under the gun amid the economic downturn and the fierce competition posed by the likes of Walmart, Target, Amazon, Trader Joe’s and Whole Foods,” said Jason Rae, director of Business Development for Tiger Group. “That makes this sector top-of-mind in the ABL and private-equity communities. It is important to carefully consider the potential impact of union-dominated workforces, perishable inventories, regulations, real estate values, the competitive landscape and many other factors. Maximizing returns in this space takes some finesse.”

Conducted at Nixon-Peabody’s New York City office, the panel discussion was called “Cleanup on Aisle 9: Distressed M&A and Reorganization Opportunities and Challenges in the Retail Grocery Sector.” Joining Rae were Craig Boucher, director of Deloitte’s Corporate Restructuring Group, and Nixon Peabody partners Richard C. Pedone and Lee Harrington.

Panelists began with a discussion of the state of the retail grocery landscape and an overview of recent reorganization and M&A activity.

“Traditional groceries tend to be low-margin, high-volume businesses, and so even a small drop in revenue can push a company or store into the red,” said Rae. “And today, trends such as unemployment and rising gas prices are driving cash-strapped shoppers away from traditional grocers and into the arms of mass-market discounters who are able to leverage their economies of scale to offer lower prices.”

This is all-important, Rae added, because market surveys consistently show that price is the top priority of today’s more value-conscious consumer. With their deeper pockets, meanwhile, giants like Walmart and Costco are better able to woo shoppers in other ways as well. “They can afford to adopt innovative private-label branding and technology strategies, for example, that struggling chains lack the capital to emulate,” Rae said. “When you look back at the growth in this segment since 2008, it has mostly been driven by the mass merchants. Traditional grocers’ revenues have stayed flat or contracted.”

Meanwhile, M&A activity is running high. “According to one analysis by Bloomberg,” Rae noted, “M&A activity in 2013 has already reached the highest level since 1999.” So far this year, notable M&As include Bi-Lo’s acquisition of three Delhaize Group nameplates, Spartan Stores’s acquisition of Nash Finch and Kroger’s acquisition of Harris Teeter Supermarkets. “Growth has been occurring primarily through acquisitions for some time,” Rae said. “Over the past six years, for example, Tiger Group has been involved in the liquidation of more than 250 underperforming Albertson’s stores.”

Tiger is a participant in the Cerberus Capital-led group that invested in Supervalu and acquired certain Supervalu brands for about $3.3 billion earlier this year.

During the discussion, Rae’s fellow panelists described multiple legal considerations that tend to affect restructuring, including specialized regulations and issues related to mechanics liens on store properties, reclamation and critical-vendor claims, and lease assumption/rejection decisions.