Pathmark shareholders will receive $9 in cash and 0.12963 shares of A&P stock for each Pathmark share. Based on Friday's closing stock price, the deal is worth $469.8 million in cash and $208.8 million in stock, plus the assumption of debt.
Shares of Pathmark surged 9%, rising $1.05 to $12.30 in morning trading on Nasdaq. Shares of A&P gained 37 cents, or 1.2%, to $31.23.
The deal values Pathmark at about 10-times earnings before interest, taxes, depreciation and amortization, analysts said. Including debt, the deal is worth $1.3 billion, the companies said.
Hints of A Deal
Industry watchers had expected a merger of the two New Jersey-based grocers for several months, and A&P had hinted that it was searching for a deal.
As far back as last May, A&P Executive Chairman Christian Haub said his company's improved performance could present the opportunity to participate "in the expected consolidation" of the grocery industry. At that time, Haub referred to what he saw as the "inevitable" rationalization of the grocery industry in the Northeast.
"Both A&P and Pathmark compete with a wide range of alternate formats in all markets -- but club stores -- including Sam's, Costco and BJ's -- are the most noteworthy," Friedman, Billings, Ramsey & Co. analyst Karen Short said in a research report.
Pathmark had been rumored as a possible target or merger candidate for years. In 2005, Yucaipa, a private-equity firm owned by billionaire grocery magnate Ronald Burkle, took a stake in Pathmark.
A&P's 410 stores include the A&P, Waldbaum's and Food Emporium chains.
Pathmark operates its 141 namesake stores in New York, New Jersey and Pennsylvania. Pathmark typically has larger store formats and historically has served lower-income level customers than A&P, analysts said.
Regulators May Require Some Stores Sold
To appease antitrust concerns, Short said the two companies maybe required to divest about 34 overlapping stores in areas such as Long Island and certain counties in New Jersey.
"Both A&P and Pathmark are unprofitable, so we believe each company could present a rational argument to the commission that consolidation must happen in order to return to profitability," Short said.
Under the terms of the deal, Tengelmann Group, A&P's majority shareholder, will be the largest single shareholder of the combined entity. Haub will continue as executive chairman and A&P President and Chief Executive Eric Claus will keep his post in the combined company.
The boards of both companies have unanimously approved the deal, and Yucaipa and Tengelmann have entered into agreements to support the transaction, the companies said.
A&P shareholders will control about an 86% stake in the combined company, and Pathmark shareholders will hold 14%.
For A&P, J.P. Morgan served as financial adviser on the deal. Yucaipa Advisors served as consultants and Citigroup Global Markets served as financial adviser to Pathmark.
