Save-A-Lot Debt Goes for Half Off as Grocery Rivals Squeeze Sales

(Bloomberg) -- Competition in the cutthroat grocery business is spoiling Onex Corp.’s 2016 purchase of Save-A-Lot Inc., with sales shrinking, leverage soaring and its debt sinking deep into distress.

Save-A-Lot is working with investment bank PJ Solomon Securities LLC to bolster itself, according to people with knowledge of the situation. The company is talking to several parties including the Lidl discount chain and other grocers about asset sales, investments or partnerships and other potential options, said the people, who asked not to be named discussing a private matter.

Law firms specializing in restructuring debt have started reaching out to represent lenders, the people said, but no firm has been retained by a group. The preliminary discussions began as a precaution after the most recent downbeat earnings report and haven’t turned into formal negotiations with the company, according to the people.

The discount grocer is struggling to win customers as Germany’s Lidl and Aldi invest in new U.S. stores and remodel while keeping prices low. With same-store sales and revenue suffering, Save-A-Lot’s debt jumped to more than 20 times its adjusted Ebitda at the end of June, people with knowledge of the results said.

Representatives for Save-A-Lot, based in suburban St. Louis, declined to comment. Toronto-based Onex, PJ Solomon and Lidl also declined to comment. The engagement of PJ Solomon was previously reported by Reuters.

Onex bought the 1,300-store chain less than three years ago for $1.4 billion. The deterioration in the business since then has spooked investors, sending prices on its loans to fresh lows.

On Aug. 8, Onex reported that Save-A-Lot’s trailing 12-month adjusted Ebitda slumped to $35 million, about half the $70 million reported in the previous quarter. Recent quotes on Save-A-Lot’s $722 million first-lien loan have since fallen to the low 40’s from the 50’s immediately following the release, according to people familiar with the pricing.

Discount Rivals

Save-A-Lot is one of the largest discount grocers in the U.S, with corporate-owned and independent stores in 36 states, according to its website. But results have languished since the Onex deal, and its debt has risen. The chain had more than $820 million of net debt outstanding, comprised primarily of a loan due in 2023, and $24 million of cash at quarter-end, the people said.

The stiff competition, weak liquidity and cash burn earned a CCC grade in a March report from S&P Global Ratings, which said that a pro-active restructuring seems increasingly possible. The distressed price of the loan might also tempt the company or Onex to buy the debt back at less than face value, S&P said.

Turnaround Efforts

Still, the company has some breathing room because of debtor-friendly provisions of its loans.

“The debt at Save-A-Lot is covenant light, so there is no financial maintenance covenants attached in the term loan,” Christopher Govan, Onex’s Chief Financial Officer, said on a conference call in May. “There’s no maturities until into the 2020s.”

In a effort to revive the business, the company poached Kenneth McGrath, a market veteran from Lidl, in 2017. As chief executive officer, McGrath has closed weaker stores and reduced headcount.

Save-A-Lot has “under-performed expectations,” Matt Ross, managing director at Onex, said on a conference call this month, pointing to the intense competition in the food and retail market.

Read More: Save-A-Lot May Become Victim to Changing Food Retail Landscape

“The goal posts have moved materially there and it’s requiring more and taking longer than expected, but management continues to develop and launch new programs to re-position the company and we continue to support them in those efforts,” he said.

Save-A-Lot may have to slash prices to attract and retain customers, according to Jennifer Bartashus of Bloomberg Intelligence.

“It’s much harder to win back business you’ve lost, customers tend to have a long memory,” she said in an interview. “You may have to drop the price of a gallon of milk just to drive traffic.”

Aldi, for example, expanded its market share among U.S. discounters to about 60% from 56% in 2016, while Save-A-Lot’s share fell to 23% from 28%, according to Euromonitor. Competition is heating up not just from from rival discounters, but also big-box retailers like Walmart Inc., Bartashus said.

“Larger players are gobbling up smaller players, or smaller players are just ceasing to exist,” she said. “It’s like watching a slowly sinking ship.”

To contact the reporters on this story: Katherine Doherty in New York at kdoherty23@bloomberg.net;Lauren Coleman-Lochner in New York at llochner@bloomberg.net

To contact the editors responsible for this story: Rick Green at rgreen18@bloomberg.net, Nicole Bullock

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