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20 Jul 2005
MOODY'S PLACES RATINGS OF THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC. (CORPORATE FAMILY RATING AT B3) ON REVIEW FOR POSSIBLE UPGRADE
Approximately $1 Billion in Debt Securities Affected
New York, July 20, 2005 -- Moody's Investors Service placed the ratings of The Great Atlantic
& Pacific Tea Company, Inc. ("A&P") on
review for possible upgrade following the announcement that its subsidiary,
A&P Luxembourg S.a.r.l., had entered
into an agreement to sell A&P Canada for total consideration of the
Canadian dollar equivalent of $1.475 billion. The
review for possible upgrade reflects the anticipated significant increase
in cash and material reduction in debt when the transaction is completed
METRO INC., a supermarket and pharmaceutical operator in
Quebec and Ontario, will acquire A&P Canada for the Canadian
dollar equivalent of $982 million in cash, $409 million
in METRO stock and about $84 million in the assumption of certain
debt. In addition, METRO will pay $16 million annually
for the next several years under an information technology transition
agreement. Based on a Metro C$27.66 share price,
A&P's anticipated equity stake in METRO will represent a 15.83%
ownership interest; A&P will have 2 representatives on METRO's
board. A&P has stated that it will apply a portion of the cash
proceeds to fund the repurchase of or a tender offer for its bonds due
in 2007 and 2011 which aggregate about $429 million. Invested
cash immediately after this debt prepayment will likely approach $500
million, exceeding the remaining debt and capitalized leases.
However, the disposal of Canada also greatly reduces consolidated
earnings -- pre-tax profit before certain charges
in fiscal 2004 was $56.3 million in Canada and a loss of
$129.2 million in A&P's US operations.
As a result, key credit metrics such as gross leverage and interest
coverage will be negatively impacted in the near term.
The proposed sale of A&P Canada is one of a number of strategic initiatives
that the company has undertaken to boost profitability, strengthen
the capital structure and fund more aggressive capital expenditures.
In June, A&P announced the transfer of its U.S.
distribution operations to C&S Wholesale Grocers, with estimated
annual savings of $40 million after one-time costs of $65
to $75 million. The company also plans to divest its Farmer
Jack and Food Basics operations in Michigan and Ohio. Consequently,
the resulting smaller scale A&P operations will be concentrated in
the Northeast where the company will be able to better focus on expanding
its fresh and discount retail formats and on improving operating efficiency.
Moody's review will focus on the application of the company's
remaining large cash balances, financial policies regarding future
debt reduction and shareholder enhancement, ongoing capital expenditure
programs and the likely returns on the company's investment in converting
its remaining stores to a "fresh" format. The maintenance
of significant cash levels, combined with plans to bolster profit
margins in the core Northeast stores, could result in an upgrade
at the conclusion of the review. Conversely, the use of material
amounts of cash for shareholder enhancement and/or further erosion in
sales and earnings in the remaining US business segments could result
in the ratings being confirmed at existing levels.
Ratings placed under review for possible upgrade:
The Great Atlantic & Pacific Tea Company, Inc.
Corporate Family rating at B3
Senior secured and guaranteed bank agreement at B2
Senior unsecured notes at Caa1
Multi-seniority shelf at (P)Caa1 for senior, (P)Caa2 for
subordinated, (P)Caa2 for junior subordinated, and (P)Caa3
for preferred stock.
Speculative Grade Liquidity Rating of SGL-3
A&P Finance I, A&P Finance II and A&P Finance III
Trust preferred securities shelf at (P)Caa2
Headquartered in Montvale, New Jersey, The Great Atlantic
& Pacific Tea Company, Inc. operates 637 supermarkets
in 10 states, the District of Columbia and Ontario, Canada.
Sales for the fiscal year ended February 26, 2005 were approximately
William L. Hess
Senior Vice President
Corporate Finance Group
Moody's Investors Service
Elaine E. Francolino
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
No Related Data.
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