Fresh & Easy Neighborhood Market Inc. filed for Chapter 11 protection in U.S. Bankruptcy Court less than a month after being promised to Los Angeles billionaire Ron Burkle.
The grocery chain, in the process of trading hands from British supermarket giant Tesco to Burkle's Yucaipa Cos., cited debt of $500 million to $1 billion in its Monday court filing in Delaware.
The move "is simply the next step in the restructuring process" during the sale and will have "no impact" on customers' shopping experience, Fresh & Easy said in a statement.
"It's business as usual as we continue the transition to new ownership," the company said.
With six unprofitable years in the rearview mirror and a deal with Burkle, Fresh & Easy recently started closing some stores, including a handful in San Diego.
The brand ran into troubles from its inception, opening in the crowded and ultra-competitive West Coast grocery market on the eve of the recession and relying heavily on technology in an industry driven by human contact.
Nearly 170 stores are in operation, according to court documents. Of the more than 61 Fresh & Easy stores that aren't operating, 36 involve leases.
The chain, which was run from El Segundo, employs more than 4,000 people.
The bankruptcy will allow Fresh & Easy the flexibility to shake up its store portfolio and shed unprofitable locations, said analyst Neil Saunders with Conlumino in London.
"This is vital as the chain needs to be streamlined if it is to remain viable for the new owners," he said.
The filing allows Tesco to back out of leases before they conclude and auction off the brand's assets, which are worth $100 million to $500 million. Yucaipa, through an affiliate, would then have the right to bid first for the chain in a November court auction.
Under a proposal outlined in court documents, Tesco would give Yucaipa a $120-million loan to help its Fresh & Easy purchase.
"Many of Fresh & Easy's leases are substantially above market relative to its competitors," the company's financial chief, James Dibbo, said in an affidavit. "Given Fresh & Easy's geographic focus on California, Nevada and Arizona, the effect of the real estate market correction was especially pronounced."
Analysts said some landlords had already accepted offers from Fresh & Easy for the chain to pay a lump sum to terminate the leases early. Those who refused are being left "high and dry," said Garrick Brown, director of research at commercial real estate services firm Cassidy Turley.
"I'm surprised that everyone didn't take the deal," he said. "It's better to get something than nothing. Fresh & Easy is going to be able to just walk away from those leases."
Some analysts believe Burkle's game plan is to use Fresh & Easy space — which ranged from 3,000 square feet to 10,000 square feet — to relaunch grocery chain Wild Oats Markets Inc. The chain has been closed since 2007.
A trademark application filed by Wild Oats Marketing surfaced this summer with Yucaipa's Sunset Boulevard address.