BANGALORE Loss-making Great Atlantic & Pacific Tea Co Inc GAP.N, once America's biggest grocer, needs to slim its operations and sell assets to pay down debt and survive tough competition.
A&P, which operated nearly 16,000 stores in the 1930s, now has fewer than 400 -- mostly in New Jersey, New York and Philadelphia, and that number will have to fall further as A&P battles in a crowded market.
Rivals in the Northwest include Dutch Ahold's AHLN.AS Stop & Shop, Safeway's SWY.N Genuardi, Supervalu's (SVU.N) Acme Markets and Wal Mart's (WMT.N) Sams Club, among others.
"They're going to have to differentiate themselves and get their costs back in line," said Craig Rosenblum, partner at retail consultant Willard Bishop.
"The only way to get there is by being a much smaller, more focused chain. The store footprint is arguably a third too big for the volume it does."
A&P has been outpriced by rivals over the years and critics say it lacks a clear strategy, with too many retail banners -- it operates stores under six names, including Pathmark and Food Emporium -- and different store formats.
"If you look at the business model, there's a real lack of synergies across the different banners," said Natalie Berg, Global Research Director at retail analyst firm Planet Retail.
A&P shares have slumped about 90 percent since its 2007 buy of Pathmark, in which one of A&P's present owners, Ron Burkle, was a major stockholder. Sector index .GSPRETF has dropped by just over a third in the same period.
A&P's majority stockholders, Burkle and the German retail group Tengelmann, who combined own about 75 percent of A&P, have brought in new management led by former Officemax Inc OMX.N operations chief Sam Martin.
Last month, A&P, which has closed some underperforming stores, said it reduced darkstore rentals -- the rental paid on shuttered stores -- and cut jobs to save $10 million a year. It is looking to knock about $40 million off annual costs by 2012.
It is also negotiating with its existing banks and new lenders to add a new term loan to its facility.
But some see a need for potentially more drastic action.
"(The new package) will allow them basically to last until next year. It's not going to solve their big issues," said Citi analyst Susan Anderson. "I think they can last until June, when their main debt maturities come due."
Around mid-September, A&P's net debt was $1.48 billion -- roughly 8 times its market value. The company's property was worth $1.37 billion at book, but it's burning through $55-$65 million of cash every quarter.
"It's a very tough turnaround outside of bankruptcy court," said Joe Stauff, who analyzes distressed companies for Susquehanna International Group, noting the two large shareholdings.
"Our view is the company might be able to extend the timing associated with bankruptcy, but ultimately we think they will file for bankruptcy."
Yucaipa, Burkle's investment firm, will come out in good shape even if A&P files for bankruptcy, said a person with direct knowledge of the matter, but who asked not to be named due to the sensitivity of the issue.
The person said Yucaipa was in the "first position to take over the company" if it enters bankruptcy, since it owns a large portion of A&P's debt and preferred stock.
Susquehanna Financial Group and affiliates beneficially own 1 percent or more of A&P's securities.
S&P Ratings analyst Chuck Pinson-Rose, who has his lowest 'CC' rating on A&P's corporate credit, said this indicates a "reasonably high" probability of a Chapter 11 filing within a year.
Other options include a possible merger and a further cash injection from Tengelmann and Burkle.
However, rivals are likely to be reluctant to take on A&P's debts, and a capital injection last year did little to turn around operations.
Planet Retail's Berg said a logical next step could be for Tengelmann to sell up in the United States. "In Europe, they've been exiting the food business and there's limited synergies in the U.S. with their European businesses."
Tengelmann has divested some food holdings to focus on other areas such as its OBI do-it-yourself chain and KiK apparel chain.
"I could see (A&P's) chains being broken up and sold to different retailers operating in the Northeast," said Berg.
"Ahold would probably be a logical candidate..., you can't even rule out someone like Tesco (TSCO.L) coming in and acquiring stores."
Burkle's Yucaipa Companies declined to comment, and Tengelmann did not return calls seeking comment.
In response to an email request, A&P spokeswoman Lauren LaBruno said the company was "in constructive discussions with our labor partners and supply chain providers to further reduce our costs."
(Reporting by Abhishek Takle and Mihir Dalal in Bangalore, Editing by Ian Geoghegan)