SMG sweetens it offer in stock, bond buyback

Drug Store News, Feb 2, 1991

SMG sweetens its offer in stock, bond buyback

WOODBRIDGE, N.J. -- Supermarkets General's new holding company increased the price it is offering for bonds and preferred stock in a tender offer whose deadline has been extended for the fifth time.

SMG-II, the holding company, increased the cash offer for 13 1/8 subordinated debentures from 27 percent of their principal amount to 33 percent. The company also upped the offer for preferred shares to $7 per share from $5 per share, as it extended the deadline for a response to Feb. 4.

Part of restructure

The offer is part of a fiscal restructure aimed at reducing interest and dividend costs and improving SMG-II's balance sheet. The operator of Pathmark Drug stores was forced into a $1.8 billion LBO three years ago.

The deal will "almost eliminate" a deficit in equity in relation to long term debt. As of Nov. 3, that debt was $1.67 billion, with equity at minus $170 million, said Harvey Gutman, vp of retail development.

In raising the price, SMG-II also amended the amount of bonds and shares it is seeking to buy. It is now tendering for $110 million in bonds, down from the initial $155.5 million, and for 3.4 million preferred shares, up from 1.7 million.

The $80 million price of the restructured offer will stay the same, said Gutman. That's the amount a group of investors has proposed to infuse into the holding company in return for new (nondividend-paying) preferred stock.

Before the amended offer, the company was short of receiving the minimum tender response required by the potential investors, who include affiliates of Merrill Lynch & Co. and the Equitable Life Assurance Society.

As of Jan. 16, $28.6 million in bonds and 696,600 of the shares had been tendered. With the new offer the minimum is reduced. Now at least $70 million in bonds and at least 1.65 million shares of preferred stock must be tendered.

SMG-II has also negotiated new covenants with its banks after it had said it would fail to meet minimum performance requirements. Levels on operating profit, net worth and interest coverage have been adjusted "to levels conforming to management's current performance projection for (1990 to 1994)," it said in its third quarter report to the Securities and Exchange Commission.

Improved earnings

SMG-II showed improved operating earnings despite a weak economy.

Sales for its supermarkets and drug stores (and excluding its Rickel home centers) were $4.59 million for the nine months ended Nov. 3. That compares with $4.61 million for the nine months of 1989.

Operating earnings for nine months for the entire company were $122.5 million compared with $81.6 million in the period last year, as the gross profit grew to 25.1 percent, compared with last year's 24.3 percent.

Improved product mix and retail pricing, opportunistic buying, and reduced inventory shrinkage in the supermarkets and drug stores fueled the profit growth.