When Tops Markets President Frank Curci and his top managers complete their deal to buy the supermarket chain later this year, it will close one ownership cycle and start the timer on another.
That’s the way it usually works in highly leveraged acquisitions like the one by Tops management now in the works, and the one led by Morgan Stanley Global Private Equity before it.
Here’s the typical scenario: A new owner steps in, buying a company in a deal that’s financed mainly with borrowed money. The new owners then set out to remake the business in a way that will make it more profitable, either by cutting costs, making changes to the operation that make it more efficient and productive, or by borrowing even more money to help the business expand into new markets.
All the while, the clock is ticking. The interest payments the new owner faces to finance the deal typically are a drain on the company’s operations, so time is of the essence in the push to put the business on stronger financial ground. And most deep-pocketed investors, like private-equity or venture capital firms, aren’t interested in sticking around for the long term. In their ideal scenario, they make their investment, back a management team that shares their vision to revamp the company, and if those efforts are successful, start looking for someone willing to pay an even higher price than they did for the business after just a few years in the owners seat.
That’s the way private-equity investment typically works, and it’s a scenario that has played out several times already at Tops, where the company went public in 1968, sold to an investment group in 1983, went public again in 1986 and was taken private once again a year later. Those private investors sold out to Dutch grocery giant Ahold in 1991, which held on to the business for 16 years, before selling out to the group led by Morgan Stanley.
After six years, which included one of the deepest recessions in the nation’s history, Morgan Stanley now is moving to cash out its investment through its deal to sell the supermarket chain to Curci and five other high-ranking Tops managers.
“Morgan Stanley is going through their exit strategy,” said Edward Hutton, a Niagara University finance professor who previously ran his own mergers and acquisition advisory firm. “Usually, private-equity doesn’t like to be there for more than five years.”
And once Curci and his partners take over, the process will start all over again, Hutton said.
With Tops already saddled with more than $650 million in debt and interest payments that top $70 million a year prior to the sale, the new owners once again will set out to find ways to make its grocery stores more profitable, which would yield more of the cash they need to handle their debt payments. Curci and his partners are not talking about the financing being used for the purchase, so the expected amount of debt is not known. “It works if you can grow the business and improve margins and improve the cash flow,” said Pete Grum, the president of Rand Capital Corp., a Buffalo venture capital firm.
Burt Flickinger III, the managing director at SRG Insight, a Connecticut retail consulting firm, said the acquisitions that allowed Tops to more than double its store count to 159 have left the supermarket chain with a solid base of stores stretching from Western New York to northern Pennsylvania and into northern New York and western Vermont. Tops also spent $150 million to upgrade its stores under Morgan Stanley.
That will ease the pressure on Tops’ new owners to expand through acquisitions and allow it to be more conservative in its investments going forward, as it tries to manage its debt burden and squeeze more profits out of its operations. The company lost $9.5 million during the first half of this year as same-store sales weakened by 0.5 percent.
“From an operating standpoint, Tops is a co-market leader with Wegmans in Western New York,” Flickinger said. “Given the tremendous debt load that Morgan Stanley has left, Tops can continue many initiatives to increase sales, but not all of them.”
If Curci and the rest of Tops’ new management group succeeds in making Tops more profitable, they likely will look to refinance the deal or cash out, by selling all or part of the business to other investors, or by raising new capital by selling stock to the public through an initial public stock offering, Hutton said. “I would think there’s a good chance they try to take the company public again,” he said.