A&P buying rival grocer Pathmark

The Great Atlantic & Pacific Tea Co., operator of A&P and other supermarket chains, is buying Pathmark Stores Inc. for about $679 million in cash and stock in a deal that would turn two rival, struggling grocers into a Northeast powerhouse.

The deal would create a 550-store supermarket chain, with annual sales of $11 billion, operating in the New York, New Jersey and Philadelphia metropolitan areas as well as in Michigan, Louisiana and the Baltimore-Washington, D.C., region.

"The combination will create a more competitive and profitable supermarket chain in the Northeast," Christian Haub, Great Atlantic's executive chairman, told analysts during a conference call. "It will turn two unprofitable companies operating in a highly competitive market into a profitable company" sooner than if they stayed independent.

Pathmark has posted losses in its last seven quarters, and Great Atlantic has lost money in most quarters since 2002.

Haub called the deal "the latest step in A&P's transformation," which he said has included selling its Canadian operations in 2005, appointing new executives, outsourcing distribution and reducing overhead sharply.

Pathmark shareholders are to receive $9 in cash and 0.12963 shares of Great Atlantic stock for each Pathmark share.

That would amount to about $13 a share for each Pathmark share, or a 15.5 percent premium over Pathmark's closing price on Friday. Pathmark had about 52.2 million shares outstanding as of its latest regulatory filing.

Great Atlantic & Pacific will also assume debt that would boost the overall value of the transaction to about $1.3 billion, the companies said.

Pathmark shares jumped $1.21, or 10.8 percent, to close at $12.46 in trading on the Nasdaq Stock Market. Great Atlantic shares rose $1.64, or 5.3 percent, to close at $32.50 on the New York Stock Exchange. Both prices are just under the companies' 52-week highs.

After the deal closes, 86 percent of the company will be held by Great Atlantic shareholders and 14 percent will be held by former Pathmark shareholders. The company will have about 49 million shares outstanding.

Haub will remain executive chairman of the combined company; Eric Claus, president and chief executive of Great Atlantic, will also maintain the same position in the combined company.

Goldman Sachs analyst John Heinbockel wrote in a research report that the brokerage was surprised Great Atlantic would be so dominant after the deal, "with no stated role for Pathmark's very capable executive team."

"We had assumed that any deal would represent more of a balance than this," he wrote.

Heinbockel noted the combination should boost profit margins long-term but that there are near-term risks, such as the chance the Federal Trade Commission will require divestiture of 50 or 60 stores, "many in very profitable Long Island."

Great Atlantic executives told analysts no store closures are planned but that some jobs would be lost when Pathmark's administrative and management functions are consolidated at Great Atlantic's headquarters in Montvale, N.J. Pathmark is based in Carteret, also in northeastern New Jersey.

The companies said they expect annual savings of about $150 million within two years, through greater efficiencies, reduced overhead and other changes.

The deal is expected to close in the second half of Great Atlantic's fiscal year, which just began late last month, after customary approvals from the FTC and state regulators are obtained. The boards of both companies unanimously approved the deal.

The Tengelmann Group, Great Atlantic's majority shareholder, will remain the largest shareholder.

A&P said it will raise some cash for the deal by selling shares in Metro Inc. or, if needed, A&P capital stock. A&P will assume about $170 million of Pathmark capital leases.

Great Atlantic has nearly 43,000 employees and 410 stores in the District of Columbia and Connecticut, New York, New Jersey, Pennsylvania, Delaware, Maryland, Louisiana, Mississippi and Michigan. Its stores include A&P, founded in 1859, as well as Waldbaum's, The Food Emporium, Super Fresh, Farmer Jack, Sav-A-Center and Food Basics.

Pathmark, founded in 1968, has more than 27,000 employees and operates 141 supermarkets in Delaware, New Jersey, New York and Pennsylvania.

Pathmark stores will retain their name and format at least initially, but over time some of the store names may be swapped.

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On the Net:

http://www.aptea.com

http://www.pathmark.com