Fidelity, AllianceBernstein Reap Payday After Winn-Dixie Rescue

(Bloomberg) -- Investment firms that took control of Winn-Dixie’s parent during its 2018 bankruptcy are poised to reap an $87 million payout after sticking with the supermarket operator through a multiyear turnaround and the Covid-19 pandemic.

Southeastern Grocers Inc. will pay a $2 per share special dividend to its owners, which include Fidelity Investments, AllianceBernstein Holding and Osterweis Capital Management, according to people with knowledge of the matter. The move follows a decision to shelve an initial public offering earlier this year.

Unlike some privately held firms that take on new crippling debt loads to enrich owners, Southeastern’s payout on Aug. 9 will be funded with existing cash, the people said. They asked not to be identified discussing confidential financial matters.

The payment caps off the revival of Jacksonville, Florida-based Southeastern, which owns the Winn-Dixie, Harveys Supermarket and Fresco y Más chains. Grocers were in tough shape before the pandemic, with several including Southeastern driven into bankruptcy by price wars, razor-thin margins and encroachment by discount giants like Amazon.com, Walmart and Target that used food as loss leaders. Some grocers wound up liquidating.

Home Cooking

Then came the pandemic, which provided an unexpected boost from stay-at-home spending as people cooked more of their own meals. This also helped Chief Executive Officer Anthony Hucker, who was appointed in 2017 to guide Southeastern through its 2018 bankruptcy and embark on a corporate overhaul that cut hundreds of stores and upgraded those that remained.

By last year, Southeastern was posting earnings before interest, taxes, depreciation, and amortization of about $590 million, the people said. That’s well above the $292 million profit in 2019 and $301 million in 2018.

“This company has improved dramatically from 2018,” S&P Global Ratings analyst Pasha Azadmard said in an interview. The firm raised Southeastern’s debt-issuing entity to B+ with a stable outlook in April.

Southeastern didn’t immediately respond to a request for comment, while representatives for Fidelity, AllianceBernstein and Osterweis declined to comment.

Upgraded Stores

Southeastern’s turnaround has been driven by store renovations and the resulting productivity increase, Azadmard said. It had about 700 stores at the time of its bankruptcy filing, but after selling off its Bi-Lo banner and getting out of the highly competitive Carolinas markets, about 450 remain.

Productivity measured in sales per square foot rose to about $390 in 2020, from $300 in 2017, according to S&P, which expects about $350 this year as sales normalize.

Southeastern was formed in 2012 when Lone Star Funds, its former owner, merged Winn-Dixie with Bi-Lo, a grocery chain it bought in 2005, and took the entity private. At the time of its bankruptcy filing, the company had around 51,700 employees.

To capitalize on its turnaround, Southeastern filed for an IPO in October, and said in January it was seeking as much as $141 million at $14 to $16 a share. Investors were prepared to pay only $12, which the company decided was too low, according to one of the people, and the offering was called off.

Future Sale

An eventual sale is the most likely path forward, although Southeastern is not in any active sale process or negotiations, the person said. Its concentration in high-growth Florida, as well as stores in Alabama, Georgia, Louisiana and Mississippi, could attract a larger grocer seeking a regional presence.

However, S&P analyst Diya Iyer said in an interview that the sector’s consolidation of a few years ago has slowed, and it was driven by chains trying to buy online order capability -- an area in which Southeastern is behind, she said.

“It’s a very significant risk,” Azadmard said. “One of the biggest things worth thinking about is that they lag in online sales.”

Earnings Outlook

Also unknown is whether Southeastern can sustain its newfound earnings growth. First-quarter profit dropped 30% to $129 million from a year earlier, but that was still an 18% increase from the first quarter of 2019, according to one of the people. Prices rose in 2020, which helped ease margins, but that theme has largely subsided, S&P’s Azadmard said.

On the plus side is Southeastern’s relatively light debt load. After slashing the $1.3 billion of obligations it carried into bankruptcy, Southeastern has only $325 million of first-lien notes, which trade above their face value.

S&P figures leverage at 1.9 times debt to earnings, and there’s room to go up to 4 times before triggering a credit downgrade. Southeastern may need it; S&P says store improvements could cost $250 million.

“Even though the store renewals are necessary for the company to remain relevant, the associated capital spending is significant,” according to the April report.

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