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Sunday, 25 May 2014 22:00

SpartanNash merger hinged on deal structure, ability to secure ‘monster’ revolver

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Dave Staples, CFO, SpartanNash Dave Staples, CFO, SpartanNash PHOTO: KATY BATDORFF

When Byron Center-based Spartan Stores Inc. merged with Nash Finch Co. of Minneapolis last fall, the way the deal was structured helped position the newly formed SpartanNash Co. to immediately take on the task of integration without worrying about being overleveraged.

The “transformational” $1.3 billion all-stock transaction created a diversified grocery wholesale, retail and military commissary company with pro forma annual sales of $7.5 billion that could potentially hunt for additional deals in an increasingly consolidating industry.

An integral piece of the deal was a “monster” $1 billion revolving loan facility that CFO David Staples negotiated with Wells Fargo Bank and Bank of America to pay off the debt from both companies.

“Paying off debt was a key part for both sides of the merger,” said Staples, who was honored as the winner of the MiBiz CFO of the Year Award in the corporate category.

But securing the revolver required quite a bit of negotiation with Spartan’s longstanding banks, which needed to get creative to design a package that worked, he said.

“It was an interesting process,” Staples said. “We asked the banks to put their thinking caps on and figure out a (financial package) that could get the money necessary for the deal because we didn’t want to go out to the market to try and secure any sort of high-yield financing.”

Additionally, structuring the deal as an all-stock merger provided the most efficient, cost-saving model to combine the two companies, Staples said. As a result of the merger, Spartan Stores shareholders own approximately 57.7 percent of the equity of the combined company, while Nash Finch shareholders own approximately 42.3 percent.

At the time of the close, SpartanNash had a consolidated indebtedness of approximately $600 million, according to regulatory filings on the merger.

Considering the liabilities of both parties, a typical acquisition would have created an overleveraged operation that would have been unable to act on its growth strategy, Staples said.

“We would have had hundreds of millions in incremental debt if it were a true acquisition (and not a) merger using stock as the currency,” he said. “What this structure allowed us to do was execute the vision we had.”

The deal also took on an extra layer of complexity in the 11th hour when a third party made an unsolicited bid to acquire Nash Finch, which delayed the talks between the two sides for about a month, Staples said.

Besides negotiating the mechanics of the deal, Staples secured Spartan’s investment banker and financial advisers, negotiated the terms with the advisers for the due diligence and integration process, led the finance staff through the regulatory filings, and helped finalize the new dividend policy post-merger.

A platform for growth

Talks between the two companies date back nearly a decade, including a proposed acquisition of Spartan initiated in 2011 by Nash Finch. Although that deal fell apart as the financials of the acquisition unraveled for Nash Finch, the companies continued to have conversations because each company brought a lot to the table for a deal, Staples said.

“Really this was just a transaction that made a ton of sense,” Staples said. “When you put the two entities together, you really see how the geography fits and there is not a lot of overlap. There wasn’t a lot of operational synergy in this transaction, but this was really much more about building a base and building a platform for the future.”

The effort to build a new platform comes amid a period of expected further consolidation in the supermarket industry. With the merger, leadership at SpartanNash want to position the company as bigger player in the market for future acquisitions.

“We really see the wholesale distribution (and) retail industry as a consolidating industry. The U.S. isn’t growing substantially so the food market will have minimal growth,” Staples said. “This move here, we believe, will put us in a position to be in that game and to really be a consolidator going forward.”

While Spartan was financially solid before the merger, it leaned heavily on its distribution operations, which had been “the crux” of the company for roughly the last 100 years, Staples said. Even though Spartan was able to gain new accounts in Indiana and Ohio, the upper Midwest region didn’t offer the upside growth the company wanted, so it set its sights on growing its geographic presence, which the Nash Finch merger helped it achieve, Staples said.

One of the challenges Spartan had before the merger was its ability to gain footholds in a broader regional market, said Karen Short, director and research analyst covering the food retail sector for Deutsche Bank’s markets division.

“They’ve been a small regional player for a while, and with other (mergers and acquisition activity) in the past, the desire has mostly been about increasing retail revenue as a percentage of total sales,” Short said. “Part of the best-case scenario now is they can start buying retail stores that are supplied by competitors.”

In addition to new retail and distribution opportunities, part of the SpartanNash deal that helped significantly diversify the new company is the addition of Nash Finch’s military distribution operation that serves commissaries around the world.

With that additional business, the primary divisions of the company — retail, distribution and military contracts — each comprise roughly a third of all revenues, a diversification that gives SpartanNash more balance, Staples said.

“That opened up so many more doors for us … and it’s a huge part of the culture that the Nash entity brought to us,” Staples said of the military distribution business. “We have a lot of new areas we’ve been given access to that we look to take advantage of going forward.”

The company expects sales to reach between $7.90 billion and $8.04 billion for the 2014 fiscal year.

To the extent that the new company will have more scale after the deal, its larger size should also translate into a lower cost of goods and make SpartanNash a more attractive supplier to retailers by building off its strong distribution network, analyst Short said.

“At the same time, the merger could also make (SpartanNash) more attractive for acquisition too,” she said.

Integration focused

Even before the merger closed in November, the companies realized they had no small task in front of them in integrating the two operations. In deciding everything from whom the CEO of the company would be to where its headquarters should be based, the new board of directors had a lot of give and take in discussing the social issues that cropped up in the transaction, Staples said.

The plan divided the company into 13 key functions. The Integration Management team, which was set up to oversee the process, selected a vice president from each company to head the effort. Those teams plan to meet roughly once per week over the course of the integration process that is expected to take three years, Staples said.

As it works on the integration, the company is also eyeing expansion opportunities, particularly in western states, and continues to prioritize growth in Minnesota and building off its large presence in Omaha, Staples said.

He added that the company isn’t likely to move on any new deals until roughly 12 months to 18 months after the merger.
“(Integration) is an immense undertaking with hundreds of people involved,” Staples said. “It’s been a great process, and we think we’ve developed a strong plan and a well-thought-through plan that lets us know where we stand going forward.”

MiBiz Managing Editor Joe Boomgaard contributed to this report.

 

Dave Staples

  • Organization: SpartanNash
  • Annual sales: $7.5 billion (pro forma)
  • Transformational moment: Before coming to Spartan, Staples was hired by Kmart during the company’s turnaround to divest its roughly $2 billion big box home improvement division known as Builders Square. “I wanted to be a part of that process … and it was my job to sell that,” Staples said. “That, I think, really prepared me for deals of the (SpartanNash) magnitude and really doing deals in general.” The Builders Square sales were the first big-dollar deals that were all his, Staples said. “You learn deals by doing deals,” he said. “It’s the type of thing that gets me excited about transactions and that’s one of the more enjoyable things about being at SpartanNash now: being able to do those types of deals.”
  • Mission critical: “Being a CFO is really just being part of a team.” At this point in his career, the job becomes more about providing guidance as opposed to accomplishing tasks by himself, he said.
  • Academic degree: Bachelor of Science in Accounting, Michigan State University; has a CPA license
  • Community involvement: Board member at Grand Rapids Symphony and the Michigan Chamber of Commerce
  • Company advisers: Deloitte for accounting; Warner, Norcross & Judd for legal services; Wells Fargo and Bank of America for banking
Read 11516 times Last modified on Tuesday, 10 June 2014 07:45

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