Mel Evans  /  AP
A&P, once the nation’s largest grocer, filed for Chapter 11 bankruptcy protection Sunday after years of struggling with enormous debt and rising competition.
updated 12/13/2010 3:15:16 PM ET 2010-12-13T20:15:16

The fall into bankruptcy court by the Great Atlantic & Pacific Tea Co. is the culmination of years of decline but creates an opportunity for its competitors and could mean further consolidation in the supermarket industry.

The nation's oldest grocer filed for Chapter 11 bankruptcy protection Sunday after years of struggling with enormous debt, falling sales and rising competition from low-priced peers.

The company, which owns A&P, Pathmark, Super Fresh and other grocery stores, was scheduled to head to court Monday.

The lack of a prenegotiated bankruptcy plan leaves it unclear who will wind up owning the company or how creditors will be paid under this arrangement, though common shareholders will likely see their stakes lose all value.

Kirkland & Ellis, the law firm representing A&P in bankruptcy, did not return a call for comment.

A&P can come back as a viable competitor because it has good locations in the densely populated Northeast and strong brand names, retail consultant Burt Flickinger said. He expects competitors from discounters and supermarkets to large retailers will be evaluating A&P's assets.

The move could be good for the industry if it speeds up consolidation in the saturated sector, Citi analyst Susan Anderson said in a research note.

She expects Royal Ahold, which operates Stop & Shop markets, and Delhaize Group, which operates Food Lion, may be contenders for some of the company's valuable real estates.

Safeway Inc. may also look to acquire some of its stores to complement its Genuardi's business in the Northeast.

Overall, Anderson said she expects the company will likely emerge from bankruptcy as a stronger player with better management, real estate and cost structure.

The company's good relationships with its labor unions could also be a plus, Flickinger said. A&P has one of the most heavily unionized work forces in the business, with 95 percent of its workers covered under collective bargaining agreements. It said in its filing it would seek to work with the unions to lower costs.

"It's a company with a great legacy and great brands," Flickinger said. "A&P with a clean balance sheet and the opportunity to have a better supply agreement . will come roaring back."

The company's decision to seek bankruptcy protection was widely expected as A&P has been bleeding red ink for some time. In its most recent quarter, the company's loss doubled to $153.7 million as revenue continued to fall. In its filing in bankruptcy court, A&P listed total debts of more than $3.2 billion and assets of about $2.5 billion.

The filing capped a long, slow decline for 151-year-old company, based in Montvale, N.J., which was once the nation's largest grocer and retailer.

Like most grocers, it has faced consumer spending and intense competition. The company is also coping with high pension costs, lease costs for store locations it has closed and a contract with C&S Wholesale Grocers Inc., which provides the majority of its inventory.

A&P tried unsuccessfully to renegotiate its contract with C&S, which did not respond to a call for comment. It also had faced about $13 million in interest payments due to unsecured creditors Wednesday.

German retail company The Tengelmann Group is A&P's largest shareholder with about 40 percent of its stock. Tengelmann spokesman Karsten Biermann said the company has completely written off its A&P stake. The company said the stake was valued at a "high double-digit figure of million euro" but declined to elaborate.

Activist investor Ron Burkle's Yucaipa Cos. are also a significant stockholder in the company. His firm invested $115 million in convertible preferred stock last year. Yucaipa did not respond to a request for comment.

Among the largest unsecured creditors listed in A&P's filing are the Wilmington Trust Co., the agent for several classes of bondholders owed $632.8 million. Trade creditors include prescription drug supplier McKesson Drug Co., soda bottler Coca-Cola Enterprises Inc. and Pepsico's Frito-Lay Inc.

Wilmington Trust also holds $260 million in secured debt. Bank of America, at $133.8 million, is the other listed secured creditor.

A&P has secured $800 million in debtor-in-possession financing through J.P. Morgan Chase & Co. to allow it to keep operating.

The company now operates 395 stores in eight states under the A&P, Waldbaum's, The Food Emporium, Super Fresh, Pathmark and Food Basics grocery stores banners.

It said all its stores, which employ 41,000 people, will remain open. Loyalty programs and other promotions will continue.

The company already had a turnaround plan under way. It has brought in new management, sold a number of underperforming and drastically cut costs. It plans to continue that process.

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