Yucaipa Invests in 2 Grocery Chains
Los Angeles billionaire Ron Burkle, who made his fortune in groceries, is loading up his cart again to the delight of Wall Street.
Shares of Pathmark Stores Inc. and Wild Oats Markets Inc. jumped Thursday on news that Burkle, who once owned the Ralphs and Food 4 Less supermarket chains, was investing in the two beleaguered companies.
Burkle’s Yucaipa Cos. said it would buy a 40% stake in Carteret, N.J.-based Pathmark for $150 million. The announcement came a day after Burkle reported buying a 9.2% stake in Wild Oats, which sells organic foods in 24 states.
Pathmark, a weak regional chain that filed for bankruptcy protection in 2000, is undercapitalized, said Andrew Wolf, a retail analyst at BB&T; Capital Markets in Richmond, Va. If its stores, which are in need of remodeling, were more attractive and had better technology systems, Pathmark could increase sales, Wolf said.
The company will use the money from Burkle to renovate its 142 supermarkets in the Northeast and open new ones, Pathmark spokesman Harvey Gutman said. Pathmark’s stores are similar to Ralphs in Southern California but have been squeezed hard by competitors in the New York, New Jersey and Philadelphia metropolitan areas.
“We believe that a de-leveraged Pathmark, with increased resources to invest in existing and new stores, will have a significant competitive advantage,” Burkle said in a statement. “We see significant opportunity in the Northeast.” He did not respond to requests for further comment.
Pathmark hired investment banker Dresdner Kleinwort Wasserstein in December to advise it on options including a sale, but there were no takers.
Yucaipa also agreed to offer Pathmark advice on corporate strategy, marketing, operations, finance and retail development for five years. The sale is expected to close this summer, at which point Yucaipa would add five members to Pathmark’s six-member board of directors.
Shares of Pathmark soared 32%, or $1.44, on Thursday to $5.92 on Nasdaq. The stock had fallen 42% over the last year.
Wild Oats, based in Boulder, Colo., has 108 stores including 25 in Southern California, where it competes with Whole Foods Market Inc. and other purveyors of organic foods. The natural foods market is growing, but Wild Oats generally has smaller stores than Whole Foods and has trouble competing with them, Wolf said.
If Wild Oats is going to prosper, it needs larger, better-appointed stores, he said.
Burkle said in a regulatory filing that he bought Wild Oats shares as an investment only but that he might modify that stance based on the firm’s performance. He said he had contacted the board “to discuss shareholder concerns.” Among them: Wild Oats has lost money in three of the last five years, including a $7-million deficit on sales of $1.04 billion in 2004, and its stock is off 22% in the last year.
Burkle’s investment in the company “is a strong endorsement for natural foods and Wild Oats,” said Wild Oats spokeswoman Sonja Tuitele. “We’re pleased with that.”
So were investors, who bid Wild Oats’ shares up 14%, or $1.34, to $10.61 on Nasdaq.
The arrival of Burkle is big news for the natural foods industry, said George Whalin, president of Retail Management Consultants in San Marcos, Calif.
“It’s a market segment that is now legitimate,” Whalin said. “It was once thought of as sort of a niche business that couldn’t sustain real growth. Now obviously the health food business has legs.”
Burkle got an early start in the supermarket business; as a youngster, he bagged groceries for Stater Bros., which was once headed by his father. He went on to form Yucaipa and the investment firm buying and merging grocery chains such as Alpha Beta, Boys Markets, Food 4 Less, Ralphs Grocery Co. and Viva.
Burkle sold Ralphs to Fred Meyer Inc. in 1997 as part of a two-phase, four-chain deal for $4.8 billion. Burkle became chairman of the combined companies, which at the time were the industry’s fourth-largest in terms of sales. Two years later, he engineered the sale of Meyer to Cincinnati-based Kroger Co. for $12.6 billion.
Not all of Burkle’s investments have been home runs. Last month, he sued former Hollywood power broker Michael Ovitz, claiming that Ovitz reneged on a promise to share the financial risks in two ill-fated Internet companies that lost millions of dollars. Ovitz’s lawyer denied the allegations.
The pair joined forces in the 1990s to try unsuccessfully to get a National Football League franchise for Los Angeles.
Most of Yucaipa’s investments, however, are in retail, logistics and manufacturing.
Forbes magazine pegs Burkle’s fortune at $2.3 billion. The 52-year-old is a prominent donor and fundraiser for the Democratic Party and was named a vice chairman of John Kerry’s 2004 presidential campaign.
