Snyder's aligns with creditors in Phar-Mor bid

Drug Store News, May 20, 2002 by James Frederick

MINNETONKA, Minn. -- Setting up what could be a struggle for control of the assets of bankrupt but still-prized Phar-Mor, Snyder's Drug Stores/Drug Emporium is pushing ahead with plans to acquire more than 30 of the off-price chain's stores and its 605,000-square-foot distribution center near Youngstown, Ohio.

Snyder's signed a non-binding letter of intent in late April with the official committee of unsecured creditors, one of the groups of creditors involved in PharMor's Chapter 11 reorganization process. The pact calls for a wholly owned subsidiary of Snyder's to buy core assets of the chain, as well as inventory, for $61.4 million.

Members of Snyder's management team, along with the unsecured creditors committee, "are currently in discussions with representatives of Phar-Mor's management team to determine whether Phar-Mor will join the committee in supporting such an acquisition," Snyder's president and chief executive officer Gordon Barker noted in a letter to vendors. He added that Snyder's remains "uncertain" about whether Phar-Mor's management--particularly co-chairmen and co-chief executive officers Melvyn Estrin and Abbey Butler--will eventually support the offer. The two have made a rival id for Phar-Mor assets, prom p ting what could become a bidding contest for the company.

Even if Phar-Mor and its creditors agree to the final terms of the contemplated acquisition by Snyder's, "such acquisition will still be subject to approval by the bankruptcy court" Barker added. He confirmed that Snyder's has made several bids for certain Phar-Mor assets, and "may well" change the terms again to sweeten the deal in light of a rival offer. "We have signed documents from the official unsecured creditors ... they're behind us," Barker said. In addition, he said, Phar-Mor's lending banks--acting as secured creditors who will be first in line for any proceeds from the sale or liquidation of assets--may also support his company's bid.

"We are fairly certain that [the banks] are very happy" with the deal, he told Drug Store News.

Roiling the issue are Estrin and Butler, who have agreed to remove themselves from negotiations with the creditors' committees to avoid conflicts of interest while their bid is considered. The two agreed to recuse themselves "to remove any taint that as bidders they would not be objective," said John Ficarro, Phar-Mor senior vice president.

One Phar-Mor attorney, Michael Gallo, was quoted in the Youngstown Vindicator May saying both bids "are still alive," and predicting that Phar-Mor's management and the unsecured creditors would decide soon on the validity of both offers and present a joint proposal to the court within seven days." However, all parties acknowledged that Phar-Mor retains the right to consider other bids.

In an exclusive interview April 30 at the NACDS Annual Meeting, Barker and John Greer, Snyder's executive vice president and chief operating officer, sketched out the broad outline of Snyder's acquisition and consolidation strategy for Phar-Mor. Barker said his company was interested in acquiring "more than 30, and less than 40" of the off-price stores, and has determined which of those units would fit its own expanding marketing and operational umbrella.

"We have a list ... but we've not yet given that list to the judge; we're not required to yet," he said. "In terms of geography, basically [the target stores] are in 0 10, Pittsburgh and Philadelphia, plus a smattering of good locations in seconctary markets ... like Kokomo, Ind."

The list also includes Phar-Mor stores in southern New Jersey, Barker added.

Those locations overlap in Philadelphia with Snyder's Drug Emporium outlets, giving the chain a fill-in opportunity and boosting its marketing capacity and economies of scale in one of the nation s biggest drug store arenas. Equally important, many of the Phar-Mor locations are m contiguous markets that allow for a gradual expansion of market reach in areas that can still be easily served by a distribution center.

The quest for a DC is one big factor in the chain's bid for the heart of Phar-Mor's business. Phar-Mor's DC, operated by its Tamco subsidiary, fits well with the chain's expansion and operating strategy and is highly automated, according to Barker an dGreer. Barker also acknowledged that Snyder's has a back-up plan to acquire a distribution center, and has possible facilities in the Columbus, Ohio, area or near Peopria, Ill., that it could pursue should the prospective Phar-Mor deal run into delays.

Another advantage in the deal, said Barker, is the strong financial performance being turned in by the Phar- or unit s on its wish list. He described the 30-plus units as "four-wall, cash-flow positive," and indicated they will quickly bolster Snyder's profitability.

Belief in off-pricing

Barker also expressed his continuing confidence in the deep-discount drug store format--particularly on a store-for-store basis--despite its well-publicized decline at the hands of Wal-Mart and other competitors. "I think [the format] was probably more powerful before the proliferation of Wal-Mart and the supercenters. However, I think our recent history with the Drug Emporiums has certainly reinforced our belief. Based on their locations, there is some serious business to be had here."