Great Atlantic & Pacific Shunned Over Pathmark Bid

The Great Atlantic & Pacific Tea Co. Inc. (GAP) is seeing its shares down 4% to $31.85 after it reported yesterday that it is trying to acquire Pathmark Stores (PTMK) for some $653 million. PTMK is also trading down 1% at $11.83.  In fact yesterday may have been the worst possible day to coincidentally announce the merger.  The stock had actually been up on the hopes of a merger, but after reviewing the balance sheets and after looking at the comparable debt levels it is not really a surprise as to why the shares are lower.

This deal is not being viewed positively at all by the street, and perhaps it is because of the ancient history where this company grew so large in the first half of the 1900’s that it could not keep up with itself and nearly imploded.  It is only a fraction of the size of its glory days and perhaps Wall Street thinks it shouldn’t try to go back to change history.  Standard & Poors has even placed its "B-" debt rating on Negative Credit Watch based on the excess leverage and burdens, and that is already at Junk Bond Status.

GA&P has at least gotten its earnings back to positive but depending on how much cash this chewed up, it could greatly bite into all of its liquidity ratios to the point that it would be cutting it very close.  GA&P has roughly 410 stores and Pathmark has roughly 141 food stores. GA&P has a market cap of $1.33 Billion and Pathmark has a market cap of $617 million.  The deal is reported as being cash and stock at an approximate $12.50 level and since the stock of PTMK is at $11.80 it doesn’t look like the street believes  this is a shoe-in merger.  The last consideration is that the merger still only values Pathmark at about half of its level 5 years ago.

Jon C. Ogg
February 27, 2007

Jon Ogg is a partner in 24/7 Wall St., LLC and he can be reached at [email protected]; he does not own securities in the companies he covers.