A&P reaches Pathmark deal

The Great Atlantic & Pacific Tea Co. Inc., the owner of Super Fresh, said yesterday that it had agreed to buy rival Pathmark Stores Inc. in a deal worth up to $1.3 billion, including the assumption of debt. The cash and stock portion of the deal was $689.7 million.

The combined company would have 54 stores in the eight-county Philadelphia region with more than $1 billion in annual sales, making it the third-largest supermarket chain here behind Acme Markets Inc. and ShopRite Group P.L.C.

The Pathmark banner - which has a strong presence in urban neighborhoods - will remain, said executives at Great Atlantic, which is best known for its A&P stores.

"We don't plan to eliminate any stores. Their stores are highly productive," Christian Haub, executive chairman of A&P, of Montvale, N.J., said during a conference call with analysts. Pathmark is based in Carteret, N.J.

The deal is subject to review by the Federal Trade Commission and shareholder approval.

A&P said it expected the merged companies to cut $150 million in annual expenses within two years, but industry observers were skeptical about the combination of the two struggling chains.

"It will be a challenge, given that neither one has a leadership position," said Richard George, a professor of food marketing at St. Joseph's University, whose Haub School of Business is named after Erivan K. Haub, Christian Haub's father.

Christian Haub was optimistic that the proposed deal would pass a review by the FTC, which examines mergers from an antitrust perspective.

Dutch company Royal Ahold N.V. tried to buy Pathmark in 1999, but backed out after the FTC demanded the sale of a large number of stores to maintain competitive markets.

"The market has changed so dramatically in the past eight years," Haub said. "Food is not predominantly bought in just supermarkets anymore," he said.

Haub cited the emergence of Trader Joe's Co. Inc. and Whole Foods Market Inc., the proliferation of dollar stores, and the merger of drugstore chains as factors that have changed the market. Furthermore, he said, the region served by A&P and Pathmark is one of the few where all three major warehouse clubs - Sam's Club, Costco Wholesale Corp., and BJ's Wholesale Club Inc. - compete.

An antitrust expert said he was confident that the FTC would look at the proposed acquisition carefully. "The FTC will want to know what new chains or additional food retailers have come into Long Island and North Jersey," said James Fishkin, a partner in Dechert L.L.P.'s Washington office who worked at the FTC for 15 years before entering private practice in 2002. He worked on the FTC review of Ahold's proposed purchase of Pathmark.

Karen Short, an equity analyst with Friedman Billings Ramsey Group Inc., estimated that A&P might have to sell 25 to 35 stores to gain antitrust approval. She said the focus would be on North Jersey and Long Island.

The merged company would become the largest operator of supermarkets in Philadelphia, with 14. That would surpass ShopRite, which has 11, and Acme, which has 10.

Overall, the deal forms a chain with $11 billion in sales and 550 stores, mostly from Connecticut to Washington. Pathmark shareholders will receive $9 a share in cash and 0.12963 shares of A&P for each Pathmark share. A&P is also assuming or retiring Pathmark debt, bringing the total value of the acquisition to $1.3 billion, the company said.

Shares in both companies rose yesterday. Pathmark's shares gained $1.21, or 10.8 percent, to $12.46, while A&P's shares were up $1.64, or 5.3 percent, at $32.50.

Last year, A&P bought six Clemens Family Markets Inc. and converted them into Super Fresh stores, marking the chain's first growth in the region in about a decade. "They've slowly been picking up," said Eric Claus, A&P's president and chief executive officer.

The Great Atlantic & Pacific

Tea Co. Inc.

Headquarters: Montvale, N.J.

Founded: 1859.

Stores: 410 in nine states, mostly from Connecticut to Maryland.

In the Philadelphia area: 29 Super Fresh and three Food Basics stores.

Total employees: 42,872.

Sales: $5.2 billion for the nine months ended Dec. 2.

Profit: $34.1 million for the nine months.

Pathmark Stores

Headquarters: Carteret, N.J.

Founded: 1968.

Stores: 141 in New Jersey, Pennsylvania, Delaware and New York.

In the Philadelphia area: 22 stores in the eight local counties.

Total employees: About 27,000.

Sales: $3.0 billion for the nine months ended Oct. 28.

Loss: $20 million for the nine months.

SOURCES: A&P, Pathmark.

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