How A&P emerged from bankruptcy quagmire

It was a year ago that a pile of documents landed in a New York court declaring A&P bankrupt, unleashing anxiety among thousands of workers and others tied to the $7 billion Mid-Atlantic grocer.

Would its 395 stores go out of business? Would every shopping center in every town with a Pathmark or Super Fresh lose its anchor? Would nearly 40,000 workers be added to the nation's unemployment rolls? Was this the end for the 152-year-old company known as the Great Atlantic & Pacific Tea Co.?

After an extraordinary turn of events over the last six weeks, an answer has emerged: "No."

Steep concessions in the last two weeks from unionized workers - a condition of a $490 million buyout offer from investment firms that owned some of the company's $1 billion in debt - were a turning point in the yearlong odyssey through Chapter 11 reorganization.

Those compromises, and prior ones forged, were as painful as they were palliative, and all done in the name of keeping investors such as Goldman Sachs and private-equity man Ron Burkle interested in buying the bankrupt company, rather than having A&P sell itself off for parts like a scrapped old car.

Stores were closed, leases torn up, and vendor contracts renegotiated. But with the revised union contracts, the cost-cutting is now over, and the once-Wall Street-traded corporation may emerge as a privately owned business as early as February.

It will have 335 stores and a third of the debt it had when it went bankrupt. And top officials are so heartened by its newly lean finances that in recent days they met Philadelphia's mayor about possibly opening new locations here.

What loosened the bankruptcy quagmire was ratification by roughly 37,000 United Food and Commercial Workers (UFCW) members of $625 million in givebacks over the next five years, said Marc Perrone, the union's international secretary-treasurer in Washington. The new contracts reduced take-home pay and other benefits but left pension funds intact, he said.

"These changes were difficult but necessary," chief financial and restructuring officer Jake Brace, who attended the new-store meeting a week ago with Mayor Nutter, said in an interview Friday.

"The changes that we negotiated with the unions were what we needed to get our cost structure in line and to get the company on sound financial footing going forward, and to successfully reorganize the company and save more than 30,000 jobs," Brace said.

Within days of winning those concessions, top A&P officials met Nutter to discuss new stores in Philadelphia like the Super Fresh that A&P opened a few months ago in Northern Liberties.

Neither Montvale, N.J.-based A&P nor city officials came away with concrete financial incentives or locations for new stores, but Brace said the company likely would seek out "food desert" neighborhoods where few supermarkets operate.

Union officials and members of 13 locals in Pennsylvania, New Jersey, New York, and elsewhere characterized the concessions as difficult but essential to keeping investment funds managed by Goldman Sachs Asset Management, Mount Kellett Capital Management L.P., and the Yucaipa Cos. L.L.C. interested in buying the chain.

The new contracts eliminated about 10 percent of labor costs, mostly in the form of less money in the paychecks for each unionized worker.

"We hurt for our members," said Perrone, who bargained on behalf of all deli cutters, cashiers, stock clerks, and others. "Painfully, we went through this process. . . . And during that process we fretted, we talked to our folks, but ultimately, when it finally came down to it, we were under the gun."

When the company declared bankruptcy last Dec. 12, it listed assets of $2.5 billion and liabilities of $3.2 billion. It blamed declining sales, a failure to renegotiate a contract with its merchandise supplier, C&S Wholesale Grocers Inc., and the cost of its labor force as among the reasons for its filing.

A&P, however, had not been healthy for some time. A series of mergers and acquisitions had left the corporation with $1 billion in debt.

The company had purchased a number of grocery chains after 1982, when it emerged from an out-of-court restructuring. But its most ill-advised move, in the eyes of industry watchers, was its 2007 acquisition of Pathmark for $1.41 billion. That acquisition added $475 million in debt to A&P - and burdened it with a long-struggling supermarket chain, to boot.

In August 2009, crunched for cash and squeezed by a bad economy, the company raised $162.2 million by selling preferred stock to Burkle's Yucaipa Cos. and to Tengelmann Warenhandelsgesellschaft K.G., a German company.

But sales continued to suffer, and high debt constrained efforts to remodel or open new stores the way competitors Wegmans and Shop Rite were. When bankruptcy came, those last-ditch equity stakes became, effectively, worthless.

Over the last year, A&P assembled a new management team and went about abandoning leases for stores it had emptied. It also renegotiated a more competitive supply contract from C&S, to which the company points as one of its most important cost-cutting achievements.

Meanwhile, the power brokers that emerged among the creditors were investment firms that had accrued stakes in A&P's unsecured debt before the bankruptcy filing, and made additional purchases of debt during the restructuring: Goldman Sachs and Mount Kellett.

By late October, Mount Kellett and Goldman were working with A&P to assemble a buyout bid. Then Burkle's Yucaipa, on Oct. 24, proposed its own separate bid.

Burkle had invested in other supermarket companies and made them profitable in the past. His entrance as an investor was embraced by union leaders; they viewed him as a man who would help steer A&P with grocery-business know-how, rather than just a cold eye on cleaning up the company and quickly selling it for a profit, as some investors are wont to do.

What followed the next week, according to bankruptcy filings, were "around-the-clock negotiations" as Yucaipa, Goldman, and Mount Kellett cobbled together a joint bid for $490 million. The catch: Unionized workers would have to green-light big cuts or the deal would die.

In three days of voting that ended Nov. 29, UFCW members approved new contracts that did just that. But in return, they compelled the company to pledge to invest $100 million a year into its stores, whether in the form of price cuts for groceries to attract customers or in construction and renovations.

"My entire adult lifetime, having seen A&P struggle and decline and often operate rudderlessly, this is a bittersweet moment," Wendell Young IV, president of Local 1776 near Philadelphia, said Friday.

"Obviously, the concessions are the bitter part," Young said. "But the potential sweet part is that we have the best opportunity in the history of the company to see the company possibly improve as they move forward."

A&P is hopeful it will secure $750 million in exit financing (including a $400 million credit line) that would allow it to emerge from bankruptcy with $350 million in debt, Brace said.

Former Pathmark executive Neill Crowley said that given the company's collection of locations in densely populated communities, it could be several years before the new owners decide whether to spin off A&P as a public company or sell it.

"Number one, they have some excellent locations that are unapproachable because of what's around them," said Crowley, a lecturer with the food-marketing program at St. Joseph's University. "It's very difficult to go in and put a store up that will compete with them."