December 28, 2011 – In a deal announced Dec. 19, 2011, privately-held supermarket giant BI-LO Holdings signed a definitive merger agreement to acquire publicly traded rival Winn-Dixie Stores for $560 million, creating one of the largest supermarket operators in the US. The combined entity, which will retain the Winn-Dixie name, will have a total of 690 stores and 63,000 employees across eight states in southeastern US. Since emerging from Chapter 11 in November 2006 with a $725 million revolving credit line, Winn-Dixie has seen its sales decline an average of 1.9% annually over the past 3 years and has posted a net loss in four of the past eight years. Interestingly enough, BI-LO recently emerged from its own period in Chapter 11 in May 2010, and BI-LO’s private backers appear ready to deploy cash to expand by acquisition.
It’s relatively uncommon for a public company to get acquired by a privately-held one. Typically, a take-private transaction is the result of a private equity led Leveraged Buyout, or a Management Buyout, making the WINN DIXIE acquisition by its privately-held rival BI-LO a true rarity in private company M&A.
PrivCo, the Private Company Financial Data Authority, has broken down the deal and found the key drivers for the take-private, namely:
A Tale of Two Bankruptcies
Prior to the acquisition, BI-LO underwent an intensive restructuring process under its current management of Lone Star Funds. After selling off hundreds of store locations, BI-LO filed for Chapter 11 bankruptcy protection in May 2009 due to a large maturing debt obligation and poor financing environment due to the economic downturn. With a bridge loan from GE and a cash infusion from Lone Star, BI-LO emerged from bankruptcy in May 2010.
In a similar fashion, after being publicly held for over 50 years, Winn-Dixie filed for Chapter 11 bankruptcy protection in February 2005. The company filed for bankruptcy in order to tackle financial and operational challenges that have faced the grocery industry. As a result, Winn-Dixie shuttered over 40% of their stores in the 21 months of bankruptcy and restructuring phase ending in November 2006. Winn-Dixie exited bankruptcy with a $725 million revolving loan facility from Wachovia Bank (now Wells Fargo), issuing $54 million in shares to the public. To date, restructuring, remediation and impairment provisions for the company have reached a total of $16 million.
Winn-Dixie’s Recent Retrenchment
Although Winn-Dixie built up more than $200 million in capital reserves since its restructuring in 2006, the company remains weak and it has continued to retrench and shrink, with inventories and receivables declining from $245 million and $798 million in 2005 to $71 million and $580 million in 2011 respectively. From a cash-flow perspective, Winn-Dixie has posted net decreases in working capital over the past four years as the company divested non-core assets and closed non-profitable stores.
In terms of revenue, sales have declined an average of 1.9% per year since 2009. Although costs and expenses as a percentage of revenue have remained relatively stable, Winn-Dixie has posted a net loss in four of the past eight years due to extraordinary costs and losses from discontinued operations. The company reported a $70 million loss in 2011 after three straight years of marginal profits since its restructuring.
M&A activity in the grocery business has skyrocketed to a four year high. The industry is extremely competitive and margins are low, with industry leaders posting a mere 2-3% profit margin. Winn-Dixie finds itself squeezed between low-cost behemoth Wal-Mart, high-end Wholesale Foods, and industry veteran Publix. Stuck in the middle, participants such as Winn-Dixie and BI-LO are pushed to consolidate in order to remain viable.
SEE PRIVCO'S FULL PRIVATE COMAPNY FINANCIAL REPORTS ON COMPARABLE COMPANIES IN THE SUPERMARKET INDUSTRY:
Given the push to consolidate, the BI-LO – Winn-Dixie merger looks to bring benefits to both sides of the transaction. The combined entity, which will retain the Winn-Dixie name will have a total of 690 stores and 63,000 employees across eight states in southeastern US. As a result, the boon of brand unity will boost the company’s marketability and present an opportunity to more easily enter adjacent markets.
The proposed merger will have considerable synergies that make the transaction viable. Most importantly, the combined entity will gain economies of scale that will give the company leverage to negotiate with supplier over food prices. With thin margins, this is an incredibly important benefit. Moreover, the combined company will benefit from regional expansion, as store locations do not overlap. In addition to easing the transition, this means that store closures will not be necessary, thereby maximizing operational efficiency. Finally, Winn-Dixie has the advantage of being self-distributing, whereas BI-LO outsources distribution to its grocery stores.
Bargain Bin Prices:
Although the acquisition price represented a 75% premium to Winn-Dixie stock’s closing price on December 16, 2011, the Price to Revenue and Price to Book multiples come in at a little under half of Winn-Dixie’s comparable publicly traded competitor, Safeway. Nevertheless, when approached from a cash flow perspective, the acquisition seems properly priced, hitting the middle range of its comparable multiples on other M&A multiples measures. See PrivCo’s M&A Deal Table below for more information.
|Enterprise Value||Price to Sales||Price to Book||Price to Free Cash Flow|
|Winn-Dixie Stores, Inc.||560 MM||0.08||0.65||10.82|
|The Kroger Co.||20832.66 MM||0.15||2.72||12.35|
|Publix Super Markets, Inc.||10686.5 MM||0.43||1.96||7.77|
|Safeway, Inc.||11.015 MM||0.14||1.35||10.85|
|Whole Foods Market, Inc.||11362.05 MM||1.2||4.04||22.36|
*Winn-Dixie values based on acquisition price
Deal Conclusions: PrivCo analysis shows that the merger, although unusual in structure, is likely to generate benefits to both companies by allowing the merged company to consolidate operations, reduce costs, obtain lower bulk inventory purchase rates, and more effectively compete in the saturated grocery industry. The combined BI-LO – Winn-Dixie entity will be well positioned to dominate the smaller players in the industry while maintaining relative immunity to price competition from the larger players. The merger also allows the combined entity the flexibility to market itself as either a premium or discount grocer, based on market demand and distribution in the southeast. If the company continues to focus on core assets and core markets under disciplined management, there is a good chance of a profitable turnaround.