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The Penn Traffic Company said this week that it has entered into a definitive agreement to sell its wholesale business segment to C&S Wholesale Grocers, Inc. for approximately $43 million, a move that Penn Traffic president and c.e.o. Gregory J. Young said in a conference call yesterday represented "a significant step forward" in the grocer's goal of focusing on its retail stores and customers, and strengthening its capital structure.
The all-cash transaction, which includes the sale of about $13 million in wholesale-related accounts receivable to C&S, is expected to close by the end of the year.
"We expect this transaction will enable Penn Traffic to dramatically improve its financial position while focusing resources and attention on our P&C, Quality, and BiLo supermarkets, consumers, and our communities," observed Young. "At the same time this places the wholesale operation in the hands of a top-tier owner such as C&S, which is well positioned to build upon our historical success with the business."
During yesterday's conference call, an enthusiastic Todd Nestor, company c.f.o., called the agreement "truly transformational" for the grocer, which has been struggling to grow its business, although he cautioned that the deal wasn't "a silver bullet for our turnaround efforts."
Still, as well as enabling Penn Traffic to considerably improve its capital structure and cost structure, the transaction should "immediately enhance profitability by cutting much of the interest expense burden from our P&L," and "also allow the company to reinvest capital into our business in areas where we can earn returns above our cost of capital," noted Nestor.
Proceeds from the divestiture and the earlier reported sale of two stores are expected to be used to pay down more than half of Penn Traffic's outstanding debt, including a $17 million revolving line of credit and about $15 million of the grocer's $25 million supplemental real estate facility. This pay down of $32 million, or 62 percent of the company's outstanding funded debt, is expected to considerably improve availability in excess of outstanding letters of credit.
"For nearly a year we've been executing a strategy that includes focusing resources on our top-performing and highest-potential operations in our core store portfolio, while working to lower corporate administrative expenses and not-for-resale costs," said Young. "Now, with the significant deleveraging of the balance sheet, we expect to accelerate our progress toward rebuilding the company, restoring profitability, and positioning Penn Traffic for long-term success. While the divestiture will lower Penn Traffic's total revenues in the short term, the transaction is designed to dramatically improve the company's capital structure, profitability, and operating cash flows, and it enhances our strategic focus on grocery retail for the long term."
Syracuse, N.Y.-based Penn Traffic and its associates will continue to handle all transportation, warehousing, and distribution to the company's former wholesale accounts under a third-party logistics contract with Keene, N.H.-based C&S. The wholesaler has additionally engaged Penn Traffic to keep providing various support services to the wholesale accounts to ensure a smooth transition. About 30 Penn Traffic wholesale associates are expected to join C&S and will continue to serve their independent accounts from their current offices in Syracuse and Dubois, Pa.
"The wholesale team at Penn Traffic has done an outstanding job with its independent accounts, and we want independent operators to know that C&S intends to keep this group, their processes, and their successful service model in place with this acquisition," noted C&S chairman and c.e.o. Rick Cohen. "C&S has a substantial base of independent wholesale business and views this acquisition as a natural complement to our current business."
Cohen added that C&S planned "to further [develop] the New York, Pennsylvania and eastern Ohio markets, as well as leveraging Penn Traffic's proven service model in other regions."
Penn Traffic's wholesale operation supplies over 120 independently operated BiLo, Big M, and Riverside supermarkets and other independent accounts in New York and Pennsylvania, accounting for $210 million, or about 20 percent, of total company revenues in fiscal 2008.
The divestiture, which is subject to customary closing conditions, is the culmination of several successful transactions between the two entities. Since March 2007, C&S has provided procurement and distribution services for general merchandise and HBC items to the grocer. In March 2008 C&S began procuring produce for Penn Traffic, and in September 2008 the companies said those services would expand to include mainline and commodity grocery items, fresh meat, and floral products.
Describing how Penn Traffic plans to move forward in this adverse economic climate, Young said during the call, "We can't control the economy, but we can and will control how efficiently and effectively we operate our business, react to changing trends, and serve our customers."
Penn Traffic owns and operates 91 supermarkets in upstate New York, Pennsylvania, Vermont, and New Hampshire under the P&C, Quality, and BiLo banners.