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Covid-19 Pantry Stocking Brings Grocers Back From Brink

Dec. 9, 2020, 11:31 AM

The same Covid-19 pandemic that sidelined the restaurant industry has proved a savior for grocery stores like Kings Food Markets.

The chain’s debt-laden parent was about to close for good when a sudden spike of coronavirus-spurred shopping gave it the chance to reorganize under a Chapter 11 bankruptcy instead. The extra sales boosted the company’s bottom line, put it on better footing with lenders, and gave it enough cash flow to afford the extra costs of marketing itself for sale in bankruptcy.

“To get to a place where we could begin planning in earnest, the company had to have the runway and liquidity to get there,” said Vincent Indelicato of Proskauer Rose LLP, the grocer’s attorney. The unexpected jump in sales “suddenly gave the business life,” he said.

Kings Food Markets joins other grocers whose outlook has improved, if not completely brightened, by the pandemic. Measures to curb the spread of the virus have forced restaurants to scale back, boosting grocery sales as American consumers shifted to eating most meals at home.

That financial lifeline has spurred investor interest, making it easier for grocers to obtain bankruptcy financing, sell their businesses, and restructure in Chapter 11.

Successful Bankruptcies

Since the pandemic started, bankrupt grocery store operators such as Lucky’s Market, Fairway Group Holdings Corp., and Earth Fare have successfully sold assets in bankruptcy auctions.

By the time Kings Food Market’s parent, KB US Holdings Inc., had filed for bankruptcy, it already had secured a $20 million bankruptcy loan and a $75 million starting bid for a bankruptcy auction.

The New Jersey-based company, which also owns Balducci’s Food Lover’s Market, ultimately completed a Chapter 11 reorganization and sold the two grocery chains as going concerns.

“Both lenders and private equity firms are showing renewed interest in the grocery sector that we haven’t seen in some time,” said Scott Moses, a managing director and head of grocery and restaurants at banking and financial advisory firm PJ Solomon.

Consumer spending on groceries jumped 25% from February to March in response to the initial Covid-19 shutdowns, according to FMI-The Food Industry Association. Independent grocers reported total store sales up 13.3% in the first half of 2020, the National Grocers Association found.

The pandemic has helped some grocers, like Save A Lot Food Stores Ltd., entirely avoid bankruptcy.

Save A Lot Food Stores announced in April that it received $350 million in new capital and shed $500 million of debt through an out-of-court restructuring with existing lenders.

“My expectation is that we’re going to have fewer Chapter 11s in the immediate term because companies are healthier,” said Moses, whose firm assisted in the KB’s, Lucky’s, Fairway, and the Save A Lot restructurings.

Increased grocery demand is likely to continue in the long term as a result of ongoing unemployment, reduced restaurant capacity, and millions of new amateur chefs, he said.

Restaurants Struggling

The contrast with the restaurant industry is stark.

The National Restaurant Association has forecast that at least 110,000 restaurants—17% of all restaurants in the U.S.—have closed in 2020, putting the industry on track to lose $240 billion this year.

Bankrupt restaurants in turn have had trouble finding buyers for their assets.

California Pizza Kitchen Inc. canceled its bankruptcy auction in October after failing to get any bids.

CraftWorks Parent LLC, the owner of Logan’s Roadhouse and Old Chicago Pizza & Taproom, saw its planned $138 million sale to lender Fortress Credit Co. LLC fall apart after Covid hit, and was forced to drop its price by $45 million.

Those slumps in restaurants and other hard-hit industries like retail and hospitality are driving investors to look elsewhere.

Retail grocers provide a hedge to other businesses that are more susceptible to recession, said Corey Jewell, chief financial officer of Hulsing Enterprises LLC. “It really fits well from a portfolio perspective,” he said.

Hulsing, a Kansas-based property manager, bought three Earth Fare stores and the rights to the grocer’s brand at a March bankruptcy auction. Hulsing has since re-opened 11 shuttered stores and intends to open another 17 now-closed locations in the next couple of years, Jewell said.

“There was a pause in investment in a lot of areas,” he recalled. “Everybody took a breath. We didn’t.”

Beyond Stores

That fresh investor interest also is spreading to industries that support food retail.

When Florida-based trucking company Comcar Industries Inc. filed for bankruptcy in May, it was losing money and a proposed sale to its ex-CEO was on shaky ground.

Then Montreal-based transportation firm TFI International Inc., looking to expand its U.S. business, unexpectedly entered Comcar’s bankruptcy auction. TFI drove up prices and bought several Comcar units, including one that hauled refrigerated goods, packaged food, and agricultural products.

“The auction ended up being more robust than the debtor expected when the case was filed,” said Michael Sweet of Fox Rothschild LLP, which represented Comcar’s creditors in the case. “People realized you’ve still got to move stuff.”

KB had a similar experience with an unexpected bidder at its auction for Kings Food Markets and Balducci’s. ACME Markets Inc., a division of Albertsons Companies Inc., drove up the price by nearly 30%, ultimately winning the auction with a $96.4 million bid.

“We always believed that if we could get to the bankruptcy court steps with a buyer in hand, we would increase the probability of attracting a higher and better offer,” Indelicato of Proskauer said. “Without Covid, we very well may have run out of time.”

To contact the reporter on this story: Leslie A. Pappas in Wilmington, Del. at lpappas@bloomberglaw.com

To contact the editors responsible for this story: Laura D. Francis at lfrancis@bloomberglaw.com; Roger Yu at ryu@bloomberglaw.com

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