Situation Overview

Carl Marks Advisors was engaged by one of the top 10 cooperative food distributors in the U.S., with annual sales of approximately $2.5 billion. The Company distributed food and non-food products, including private-label products, to nearly 500 customers and employed more than 2,200 people in multiple distribution centers in several mid-Atlantic U.S. states. The Company had sought to expand distribution coverage into the New York City Metropolitan area through the acquisition of a New Jersey based independent (not a cooperative entity structure) wholesale food distributor. The New Jersey division’s revenues represented approximately half of the Company’s $2.5 billion combined annual sales. However, the expected synergies and cost benefits of this acquisition were never fully realized. The failed integration led to a substantial loss of customers and revenue over the subsequent three year period as the distinctly different customer philosophies and leadership cultures clashed.

Due to the team’s extensive experience and successful track record working with organizations in the grocery, retail, and consumer products sectors, Carl Marks Advisors was initially engaged as a financial advisor to assess the impact of a revised supply agreement with a major customer. As the business issues of the Company became more evident, Carl Marks Advisors’ role grew to include serving as Chief Restructuring Advisor to lead the Chapter 11 bankruptcy filing and 363 auction processes.

Unique Challenges

In response to the Company’s financial decline, the co-op Board of Directors decided to sell the New Jersey division in order to shed this underperforming asset and stabilize the legacy co-op company for the benefit of its members. At this time, the Company engaged Carl Marks Advisors as Chief Restructuring Officer (CRO) to assess strategic alternatives. A thorough assessment of the market revealed that the New Jersey division alone was not of interest to strategic buyers.

As a result of putting the New Jersey division up for sale, the vendor community began demanding cash advances as protection against the Company’s potential liquidity issues. After a collective withdrawal of terms by several top vendors, the Company was unable to maintain product availability and lost many retail customers. This accelerated shrinkage of the Company’s working capital and the disproportionate decline of the New Jersey-based operating unit as customers sought alternative product sources.

As CRO, Carl Marks Advisors in conjunction with the Company’s other advisors, recommended marketing and selling the entire entity, including the legacy co-op business, in order to entice strategic buyers seeking new markets via acquisition. Ultimately the board agreed, given the limited options and constricted liquidity, compounded by the impending Hoiliday season.

As the Company was put up for sale and the vendor community learned of the plans to sell, demands for cash advances spiked and significantly increased the liquidity demands on the Company. This necessitated an expedited auction and sale process.

Results

Carl Marks Advisors managed the Company through the process of marketing the business and the selection of a stalking horse bidder for the Company’s assets. The team at Carl Marks Advisors also negotiated debtor-in-possession financing and led the Company through the filing of bankruptcy for protection under chapter 11 of the Bankruptcy Code.

Carl Marks Advisors maintained operations, supported the sale due diligence process for interested parties, and strived to sustain value during the bankruptcy. The result of an efficient auction was the sale of the Company, approximately 51 days after filing for bankruptcy protection, for nearly 50% over the stalking horse bid. The buyer worked with the independent grocers of the former co-op to establish a structure which retained some membership incentives while maintaining high customer service and distribution fill rates to the independent grocers.

Key Takeaways

  • Cooperatives in the grocery sector face a growing threat as large competitors enter the smaller and less densely populated geographic markets co-ops have traditionally served. As consolidation in the industry continues, big retail grocery players are leveraging scale and purchasing power. Meanwhile, co-ops are facing increased pressure to adapt to the changing demands of end customers and offer competitive pricing structures to sustain customer loyalty.
  • Large grocery vendors are very sophisticated. Typically, if one vendor demands a cash advance as protection when concerns about distributor liquidity issues arise, there is a rapid domino effect of other vendors making similar demands. Distributors should account for this potential sharp increase in liquidity pressures in their cash management strategies.
  • Understanding and accurately monitoring PACA liabilities is critical as lenders will ensure that reserves are adequate to protect the lenders’ exposure though a sale or bankruptcy filing.
  • The equity value of a co-op is rarely market based. Valuations typically do not take into account the impact from competitors and deferred investments. Ultimately, the liquidity event is the sale of a co-op and the pool of buyers is limited to a few strategic buyers looking to penetrate new markets. The sale process can expose the true value of a co-op as the market speaks for the first time – often yielding disappointing results for co-ops. Values realized are likely to continue to decline as cooperatives do not have sufficient capital to reinvest in the businesses in order to enhance margins and service levels.
  • Working with the Board of Directors of a co-op can be a complicated dynamic. Boards are primarily focused on optimizing the short term cash flow that maintains the distributions their businesses depend on. A third party financial advisor can provide valuable outside perspective to help avoid making shortsighted decisions that maintain the status quo but limit future options and profitability.