Fresh & Easy placed into bankruptcy protection

November 2013 | DEALFRONT | BANKRUPTCY & RESTRUCTURING

Financier Worldwide Magazine

On 30 September, British supermarket chain Tesco Plc placed its US grocery store chain Fresh & Easy Neighbourhood Market, into Chapter 11 bankruptcy protection in order to help facilitate the unit’s sale to Los Angeles billionaire Ron Burkle. In its court filing, Fresh & Easy cited debts between $500m and $1bn.

Earlier in the month Tesco announced that it planned to sell more than 150 stores and other Fresh & Easy assets in California, Nevada and Arizona to Mr Burkle’s private equity firm Yucaipa Companies LLC.

Tesco had been exploring the prospect of selling the unit for some time. Notably, in December 2012, the company’s chief executive Philip Clarke said that the Fresh & Easy chain of stores were not profitable enough to sustain Tesco’s $1.6bn investment. Tesco had entered the US grocery market with much fanfare in 2006 when it opened the first of its stores, and expected to make a large impact on the US market. Ultimately, that did not materialise. According to paperwork filed at the bankruptcy court in Delaware, the US business never generated a profit.

In the company’s first two years in the US, Tesco spent $610m attempting to build the chain into a viable business. As a result of this investment, Fresh & Easy’s annual sales eventually grew to around $1.2bn, according to court documents. Despite these impressive sales the chain was unable to support the top-of-the-market store leases that it was saddled with. Accordingly, the last 12 months has seen Fresh & Easy lose approximately $22m a month, according to court documentation. Fresh & Easy hope that the bankruptcy process will allow them to reject or renegotiate those leases that it no longer deems to be economically viable. The chain’s annual lease obligations totalled around $72m, said Fresh & Easy. Of the 167 stores currently in operation, 25 sites are owned by Fresh & Easy outright, 50 are ground leases and 92 are store leases. The chain also owns 61 store locations that are not currently being operated, and it is also liable for leases for 36 non-operating store locations, including six ground leases and 30 store leases.

According to the bankruptcy filing, Fresh & Easy said that although it has about 2.6 million members on its loyalty card scheme, as well as a successful private-label program, it was “unsuccessful in obtaining a sufficiently broad customer base”.

The bankruptcy documentation notes that Fresh & Easy’s biggest creditor is Tesco, which is owed $738m. Tesco has itself had to endure a troubled period of late. Indeed, the company has had to carry out an embarrassing climb-down in Japan, as well as having to withstand a $1.6bn write-down on Fresh & Easy. Court documentation states that Fresh & Easy does not have any other credit agreements with banks, but it owes in the region of $18.4m to various vendors for goods and services.

It is believed that Yucaipa’s purchase of the chain of stores will be completed by the end of the year. The decision to place the chain in bankruptcy protection “is simply the next step in the restructuring process” during the sale and will have “no impact on customers’ shopping experience”, according to a Fresh & Easy statement. “It’s business as usual as we continue the transition to new ownership”, the company added.

Under the terms of the proposed sale, an affiliate of Tesco will lend Yucaipa $120m to help fund the takeover. Tesco has noted that any stores that are not sold as part of the deal will be closed. Through the sale the group hopes to preserve the jobs of around 4000 Fresh & Easy employees. Once the deal has been completed, a unit of Tesco will hold a 22.5 percent stake in the Yucaipa affiliate that acquires the grocery store chain, according to documents filed in Delaware.

Fresh & Easy notes that it plans to hold a court supervised auction in early November, during which the proposed sale to Yucaipa will serve as the leading bid. The company asked the court to schedule a hearing on 13 November to approve the sale.

Richard Summerfield