Pathmark Gets $150M Bailout

CARTERET, NJ-Supermarket turn-around pro, Los Angles-based Yucaipa invests $150 million in the 142-unit Pathmark supermarket chain, effectively rescuing it from the selling block. Following a loss of $3.6 million in Q3 2004, Pathmark management hired Dresdner Kleinwort Wassertstein to explore what it called "strategic alternatives" for the company, which included a potential sale. Now, shored up with new funding, it announces plans to upgrade its existing store base and open additional units.

Yucaipa, a private equity firm founded in 1986 by Ron Burkle, is a hands-on investor that works with management to reposition retail and distribution businesses. Among those it has invested in the supermarket sector are Food4Less, Dominick's, Ralph's Grocery Co., Smith Food and Drug and Fred Meyer.

Its hands-on practice applies to the Pathmark agreement. Yucaipa will buy 20 million newly issued shares of Pathmark common stock, which will represent approximately 40% of the company's stock. In addition, it will acquire just over 25 million shares of Series A and B warrants, or stock rights, at a price of $8.50 a share for a three-year term, and $12 a share for a 10-year term, respectively.

The deal also includes a five-year management consulting agreement, which covers corporate strategy, marketing, operations, finance and retail development. In addition, it calls for a shift in the make-up of Pathmark's board of directors. At the close of the agreement, the board will be comprised of six current or new independent directors, plus five additional directors nominated by Yucaipa. The new directors have the right to name their successors.

Calling this "the culmination of [Pathmark's] decision last year to evaluate strategic alternatives for building shareholder value," James L. Moody, non-executive chairman, said the transaction "represents an exciting opportunity for Pathmark to partner with one of the most successful investors in the supermarket industry, improve our financial flexibility, and increase the level of investment in our stores."

Shareholders apparently agreed. On the day of the announcement, March 24, shares of PTMK common stock closed at $5.92 a share on the Nasdaq, up $1.44 a share for a stunning increase of just over 32% for the day. The 52-week high, $9.27 a share, occurred about a year ago, while the 52-week low of $3.20 a share resulted following the disappointing Q3 loss.

"We see significant opportunity in the Northeast," Burkle said. Pathmark stores are located primarily in the New York, New Jersey, and Philadelphia metropolitan areas. "Pathmark's prime locations, high store volumes, talented associates and loyal customer base make it a key asset in this market and a viable platform for future consolidation," Burkle continued. "We believe that a de-levered Pathmark, with increased resources to invest in existing and new stores, will have a significant competitive advantage."

Pathmark CEO Eileen Scott said the transaction "represents a powerful strategic combination" of the supermarket's "strong market position. . . with Yucaipa's capital and industry expertise," and said she looked forward to working together "to take full advantage of the opportunities before us."

Even following its losses and prior to this agreement, Pathmark got a solid rating from Jonathan H. Ziegler, an analyst at Dutton Associates research firm. In a report, he ranked Pathmark's units "among the highest volume stores in the country," noting that their $540,000 average sales per week compared with an industry average of between $350,000 and $400,000 a week.