The Fresh Market’s bonds plunge as Cerberus and other PE firms are circling.
The Fresh Market had made its name once upon a time by focusing on higher-margin groceries, such as imported cheeses and organic produce and wooing customers with on-site butchers. In March 2016, it was acquired by private-equity firm Apollo Global Management. As private company, it no longer has to report earnings publicly. But now its bonds are crashing.
Monday last week, it disclosed to some investors that same-stores sales had plunged 8.2% in the quarter, and that Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) was a lower-than-hoped for $29.3 million, according to Debtwire. This set off the bond plunge for the week.
There was more, according to Debtwire:
The market was also taken aback by the company’s disclosure that it recently obtained a $50 million unsecured revolver from its parent [Apollo], raising questions as to why it needs the extra liquidity. As of 30 July, TFM had $32.9 million of cash and $74.6 million of borrowing availability under its existing $100 million revolver.
By Friday, its $800 million of 9.75% first-lien notes due 2023 were trading at 57.625 cents on the dollar, down almost 15 points from Monday’s already beaten-down 72.25. And several large private equity firms, including Cerberus Capital Management – which owns Albertson’s and Safeway and has had to scrap the idea of selling them via an IPO – have acquired “sizable positions” in “a rash of high-volume trading,” according to “three sources familiar with the matter,” cited by Debtwire.
Why would Cerberus “quickly accumulate a stake” in the beaten-down first-lien debt of a competitor in the struggling supermarket spectrum? Among the possible reasons: In a restructuring or bankruptcy of a retailer, creditors holding first-lien debt have a lot of sway and can get a good chunk of the equity. It may be a gamble on a restructuring, and on a low-cost way of gaining control.
The Fresh Market has run into the same buzz saw that Albertsons and other supermarkets have run into, including those that have gone bankrupt recently: Powerful competition from Walmart, Kroger, Target, and German deep-discounter Aldi that is planning to invest $3.4 billion to expand its presence in the US to 2,500 stores – more stores than Albertsons (all brands combined, including Albertson’s and Safeway) currently has!
And Amazon, which for years has been trying to find the magic formula to power into online grocery, has bought Whole Foods, a competitor to The Fresh Market. It has already started to cut prices, in response to the price war in the supermarket segment.
The Fresh Market still operates “over 170 stores” in 24 states, it says on its website. This is down from 184 stores on January 31, 2016, reported in its last 10-K filing as a publicly traded company. For that year, revenues grew 6% to $1.86 billion, and that net income rose 4% to $65 million.
By that time, the problems had already started. In 2015, The Fresh Market announced that it would close all its stores in California, with the last stores begin shuttered in early 2016.
On March 14, 2016, the company announced that entities of Apollo Global Management would acquire it for $1.36 billion, at a premium of 53% over the closing price on February 10, 2016, “the day prior to press speculation regarding a potential transaction.”
In May 2016, two months after it was acquired, it announced that it would close 13 more stores, including all eight stores in Texas. “This shift also allows us to focus our energy and resources on the growth of our remaining stores, as well as new stores we have planned in the future,” it said.
In April 2017, it announced five more store closings. “This move will allow the company to focus on the success, service and growth of its existing portfolio of stores,” it said. “The decision to close these locations was made after careful consideration of the overall growth strategy and long-term performance of the company.”
It also opened some new stores. The net effect is that since January 2016, the number of stores went from 184 stores to “over 170” stores currently. And same-store sales at the remaining stores dropped 8.2%. A steep downward slope.
So what are Cerberus and the other PE firms betting on with these purchases of the first-lien bonds?
That The Fresh Market will recover and that these bonds will soar in value from their beaten-down levels, thus handing the company a tidy profit? Maybe.
But more likely, Cerberus, through its travails with Albertsons, knows intimately well that the supermarket sector is in a very tough price war involving the biggest players out there, now including Amazon-Whole-Foods, and that new competition is plowing into the sector even as overall sales are stagnating.
For a smaller player like The Fresh Market that is already trying to cut costs and shrink, instead of investing in growth and defending its turf, the writing may be on the wall clear enough for bondholders to see – so they’re dumping those bonds and causing the price to plunge. And the writing might be clear enough for Cerberus and the other PE firms to see, from a different point view, that buying a big stake in its first-lien debt could be a low-cost opportunity to gain control if the company does falter and has to restructure.
Bankruptcies can happen suddenly, as the meltdown of Toys “R” Us has shown. But now what? Read… The Fate of Toys “R” Us after Bankruptcy?