Bankrupt Fresh & Easy Neighborhood Market Inc. is headed to an Oct. 15 hearing to approve an affiliate of private equity firm Yucaipa Companies LLC as the lead bidder for the majority of the grocery chain’s assets.

El Segundo, Calif.-based Fresh & Easy filed for Chapter 11 bankruptcy protection in the U.S. Bankruptcy Court for the District of Delaware in Wilmington on Sept. 30. The grocery chain operates in California, Nevada and Arizona. Founded in 2006 as a subsidiary of Cheshunt, England-based Tesco plc, Fresh & Easy aims to sell healthy and wholesome foods. The chain expanded quickly – opening 200 stores by 2012 – but was never profitable. The company was hurt by the 2008 economic recession. Currently, Fresh & Easy operates 167 stores. In 2006 and 2007, Tesco invested more than $610 million to build the business.

Judge Kevin Carey has already approved the company’s first day motions, giving it the ability to use the existing cash management system, pay utilities, pay prepetition wages, maintain customer programs, continue insurance programs and pay prepetition taxes, court documents show. Carey approved those motions, and a motion to jointly administer Fresh & Easy’s case with affiliates, on Oct. 1.

Fresh & Easy filed a bidding procedures motion on Sept. 30, with Yucaipa affiliate YFE Holdings Inc. as the stalking-horse, or lead, bidder.

Yucaipa, through YFE, would acquire about 76 percent of Fresh & Easy’s total assets and assume “significant liability and contracts of the business,” according to court documents.

If YFE is the winning bidder, the company would get 150 stores, $36.32 million in non-cash working capital and $20 million of working capital in cash, plus substantially all of the Fresh & Easy’s intellectual property. The company would also assume up to $130 million in liabilities, including leases and letters of credit.

A Tesco affiliate plans to help fund the deal by providing YFE with a $120 million loan, secured by Fresh & Easy’s property. A Tesco affiliate would receive up to 22.5 percent of YFE’s equity as part of the deal.

If YFE is not the winning bidder for the assets, the company would receive a $1.5 million breakup fee, plus up to $750,000 in expense reimbursement. Competing bidders would need to submit bids by Nov. 7. If the bidding procedures are approved without changes, an auction would be held Nov. 13.

The deal would keep about 4,000 of Fresh & Easy’s 4,187 employees’ jobs.

Fresh & Easy owes more than $738 million to Tesco for intercompany loans. On top of that, Fresh & Easy estimates that it owes about $18.4 million to vendors in court papers.The company’s annual expense for leases on the stores is $72 million, with leased equipment expenses running about $3.5 million.

Tesco has continued to provide funds to support Fresh & Easy, though the company averaged $22 million in losses per month and struggled through the 2008 economic downturn.

In September 2012, Tesco hired Greenhill & Co. Inc. to explore a strategic review of the businesses, including the possibility of a sale. 

In December 2012, Tesco and Fresh & Easy, with Greenhill, started to evaluate sale opportunities both in terms of price and the possible effect of the sale on stakeholders. In January, the group developed a list of about 65 potentially interested parties, and began soliciting interest. Of those asked, 45 signed nondisclosure agreements, and 16 indicated interest in various assets. Four parties were interested in buying the whole company, according to court documents. The group determined YFE made the best offer.

Tesco plans to continue funding Fresh & Easy through the bankruptcy case, according to court documents.

Mark Collins, Lee Kaufman, John Knight, William Romanowicz and Amanda Steele from Richards Layton and Finger PA are debtor counsel. Lisa Laukitis and Paul Leake from Jones Day LLP are also debtor counsel.

The deal was announced before Fresh & Easy sought bankruptcy protection, on Sept. 10. 

This is not Yucaipa’s first time getting involved with a grocer’s bankruptcy case. In 2012, the firm was part of a $490 million investment in Great Atlantic & Pacific Tea Co. that helped the supermarket chain get out of bankruptcy.

The bankruptcy comes amid a year ripe with deals among grocery stores, especially those aimed at health-conscious consumers. In April, Fairway Group Holdings Corp. (Nasdaq: FWM), backed by private equity firm Sterling Investment Partners, held a successful initial public offering, and in August, Sprouts Farmer Market Inc. (Nasdaq: SFM), backed by Apollo Global Management LLC, also enjoyed a healthy public debut. For more on deals in the better-for-you food space, see “Snack Time.” 

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