Grocery Deal Must Run Gantlet of Bondholders

The partners in a planned supermarket mega-merger are negotiating with a group of their bondholders who are seeking higher interest payments and fees as a condition of participating in the deal.

The negotiations are the first step in the plan by Food 4 Less Supermarkets--operator of Alpha Beta--to secure financing to acquire Ralphs Grocery Co. The bondholders are being asked to swap their existing holdings for new bonds that would be issued by a merged supermarket entity.

If the deal is successfully negotiated, a new, separate $400-million bond offer would be made to help finance the acquisition.

Under a $1.5-billion deal negotiated last September, Food 4 Less is to acquire Ralphs. The combined firm would be known as Ralphs Grocery Co. and would be the largest supermarket chain in Southern California.

However, bond analysts said it may be difficult to complete the deal unless 80% of bondholders agree by next Wednesday to the bond swap. Company executives confirmed that bondholder talks are under way but would not comment further.

At issue is how much to compensate owners of $450 million in Ralphs notes--some at 9% and some at 10.25%--for swapping those notes for new notes in a merged company. Negotiators for the supermarkets have offered to pay $10 for every $1,000 in bond value in addition to interest payments.

Agreement also must be reached with Food 4 Less bondholders, including the owners of $175 million in notes at 10.45%.

“Everything depends on the bondholder point of view,” said Fran Shulman, a bond analyst at Moody’s Investor Service. “If they think the merged company will be strong, they may not demand as much.”

Food 4 Less, based in La Habra, also operates Boys, Viva and Food 4 Less warehouse stores. Ralphs is based in Compton.