Lone Star Feasted On Grocery Chain That's Fighting For Its Life
Shed no tears for Lone Star Funds, the private-equity firm that invested about $150 million in a buyout of the Bi-Lo grocery chain in 2005.
By some accounts, Bi-Lo is close to default, putting in jeopardy about $1 billion of debt and 50,000 jobs at Winn-Dixie, Harveys, Fresco y Mas and its namesake stores. But Lone Star has already come out ahead, even after committing more capital. The firm has paid itself at least $800 million since 2012, regulatory filings show, and collected still more in management fees.
Led by chairman and founder John Grayken, Lone Star has followed the private-equity business model: Borrow money to buy a company and load it with debt. Use the debt to pay yourself and - with interest rates at rock bottom - issue more debt and pay yourself more.
From the start of 2013, private-equity owners have taken $100 billion in debt-funded payouts, according to data compiled by LCD, a unit of S&P Global Market Intelligence. During the same period, private-equity-owned companies defaulted on $49.2 billion worth of loans, the data show.
“Just because there’s a private-equity sponsor doesn’t mean you’re going to get a lifeline from that sponsor,” said Bill Popper, research director at New York-based Clearview Trading Advisors Inc.
“In fact, if they’ve taken debt-funded dividends, it’s more of a noose. The company ends up strangled by that relationship.”
Six Times Ebitda
Lone Star has supplied additional capital to Bi-Lo over the years, according to regulatory filings. Bi-Lo filed for bankruptcy in 2009, wiping out the buyout firm’s equity, and Lone Star kicked in $150 million when the grocer exited Chapter 11. In 2012, Lone Star invested $275 million to help fund the purchase of Winn-Dixie.
Lone Star didn’t respond to requests for comment. Neither did Bi-Lo’s parent company, Southeastern Grocers.
Borrowing may benefit company owners, but it burdens their companies. As of March, Bi-Lo’s debt was almost six times higher than its Ebtida, or earnings before taxes, interest, depreciation and amortisation, according to Moody’s Investors Service.
The average of a junk-rated company is about five times Ebitda, according to S&P Global. Better-performing grocery chains such as Kroger have ratios closer to three times. Bi-Lo’s leverage level makes it tough to borrow more, and means bonds already issued are rated below investment grade.
The outlook for US grocers is grim. A price war fuelled by a record run of food deflation has weighed on results. The threat of e-commerce is raising concerns that the weakest - including the most-indebted - won’t survive.
Bi-Lo bonds due next year trade at 32 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The grocer’s secured bonds due in 2019 trade at around 93 cents, according to Trace.
So far, Lone Star has shown no willingness to chip in more capital as it talks to creditors, according to people with knowledge of the discussions who asked for anonymity because the talks are private.
The supermarket chain’s bondholders are considering a debt-swap proposal that would give them Bi-Lo ownership stakes. Bi-Lo is mulling whether to execute that swap out of court or in court as part of a Chapter 11 process, the people said.
The bondholders have hired Morrison & Foerster and Moelis & Co. to represent them. Bi-Lo has been advised by by Evercore Partners Inc. The three firms declined to comment.
Amazon’s purchase of Whole Foods Markets has fuelled pessimism about grocery companies. The e-commerce titan is expected to use its supply-chain prowess and margin-busting prices to turn up the competitive pressure in the industry.
While Kroger and Walmart have the scale to fight a price war, smaller regional chains like Bi-Lo, with its high level of debt, could struggle.