DATE: Wednesday, September 10, 1997         TAG: 9709100570

SECTION: FRONT                   PAGE: A1   EDITION: FINAL 

SOURCE: BY STEPHANIE STOUGHTON, STAFF WRITER 

DATELINE: NORFOLK                           LENGTH:  146 lines

RICHFOOD HOLDINGS TO BUY OUT FARM FRESH CHAIN SHOPPERS SHOULD SEE NEW LIFE IN STORES THAT HAVE HAD TO STRUGGLE.

Farm Fresh Inc. said Tuesday it has agreed to be purchased by Richfood Holdings Inc. in a deal that could allow the weakened grocer to flex its muscle for the first time in years.

``I truly believe that this announcement is the best news I've heard for this company in the last 10 years,'' said Ron Johnson, chief executive officer of Norfolk-based Farm Fresh. ``It's an opportunity for Farm Fresh to emerge as a real powerhouse in this marketplace.''

As part of the deal, Richfood, a Richmond-based wholesale food distributor that supplies Farm Fresh, will pay $250 million or more for the 47-store chain. Johnson is expected to resign to take a position with a Mississippi grocer.

Farm Fresh's headquarters will remain in Norfolk, and the companies said it does not intend to lay off any of the grocer's 5,000 employees.

With Richfood's big bucks, shoppers should see new life in a grocery chain that, laboring under a mountain of debt, has been forced to close stores, delay renovations and forgo expansion. Earlier this year, Farm Fresh lost its No. 1 market position in Hampton Roads to competitor Food Lion.

Customers can expect Richfood, the biggest food distributor in the Mid-Atlantic, with $3.4 billion in annual sales, to pump millions of dollars into Farm Fresh within the next several years.

Already, the company has set aside $80 million to $90 million to remodel older supermarkets and will spend more money to build new stores.

``Consumers will see new, fresh, clean formats,'' said John E. Stokely, Richfood's president and chief executive officer.

The move is good news for both companies, retail analysts said. Richfood's investors apparently agreed; the distributor's stock closed at $24.50 Tuesday, up $2.81.

Richfood probably would have lost valuable distribution territory if Farm Fresh, its No. 3 customer, had been purchased by another grocer, analysts said.

For Farm Fresh, the fifth-largest employer in Hampton Roads, the future looked even hazier. Last year, two debt-rating agencies said they believed the company would have problems making interest payments beginning in April 1998. That's when a portion of the debt carried by the grocer's parent, FF Holdings Corp., was to have been paid in cash.

``Farm Fresh would have run out of cash very shortly,'' said Kenneth M. Gassman Jr., a retail analyst with Davenport & Co. in Richmond. ``I think the end would have happened before five or 10 years.''

But competitors probably aren't rejoicing at Farm Fresh's good news.

Officials at Scarborough, Maine-based Hannaford Brothers Co. had said privately that they expanded into Hampton Roads mainly because of the market's growth - but also because they smelled blood in Farm Fresh.

``I think they're having a bad day today,'' Farm Fresh's Johnson, smiling, said of his rivals.

A spokeswoman for Hannaford could not be reached Tuesday. But an official at Winn-Dixie Stores Inc., which also has been expanding in Hampton Roads, said the market will get even tougher if Richfood gives Farm Fresh a cash infusion.

``If that happens, it will just make things even more competitive in a competitive business,'' said Ivan Hardesty, a market director for Winn-Dixie.

Under the terms of the deal, Farm Fresh is expected to file a pre-packaged bankruptcy reorganization within the next several months. If the court agrees, Farm Fresh may be able to walk away from some debts.

The purchase price consists of $220 million in cash and about $30 million in assumed leases. It also includes 1.5 million warrants, or rights, to purchase Richfood common stock at $25 within a five-year period.

Richfood will buy almost all of the operating assets of Farm Fresh, as well as most of its operating liabilities.

But the food distributor has no intention of taking on lease obligations for previously closed stores and six stores that will be shut down as a result of the deal. Neither company would specify the locations.

The buyout, expected to close by early next year, also does not cover about $95 million in debt at FF Holdings, Farm Fresh's parent.

The purchase agreement is far from final. It still must be approved by FF Holdings' senior note holders, government regulators and a bankruptcy judge.

At some point during the transition, Johnson, who helped turn around Florida grocer Kash n' Karry Food Stores, is expected to depart.

Johnson would not discuss his future. But industry sources said he will follow Michael Julian, Farm Fresh's former chief executive, to Jitney-Jungle Stores of America Inc. of Jackson, Miss. Johnson will become the chain's chief operating officer, sources said.

In the meantime, Richfood has been hunting for someone to head its new Farm Fresh division, which will operate as a separate unit.

Farm Fresh owns stores under its own name, as well as Rack & Sack warehouse stores and the ``3 stores, 1 roof'' location in Chesapeake. ILLUSTRATION: Color photo

NHAT MEYER/The Virginian-Pilot

Jung-Ran Choi, of Norfolk, loads groceries into her car at Farm

Fresh on East Little Creek Road on Tuesday afternoon. This is one of

the Norfolk-based company's 47 stores which will change hands.

Graphics

FOR SHOPPERS, MORE OPTIONS

Richfood is expected to pump millions of dollars into Farm Fresh,

and shoppers should see the difference: Farm Fresh had been forced

to close stores, delay renovations and forgo expansion. Earlier this

year, it lost its No. 1 market position in Hampton Roads to

competitor Food Lion.

Farm Fresh's headquarters will remain in Norfolk. The companies say

they do not plan to lay off any of the grocer's 5,000 employees.

The Virginian-Pilot

FARM FRESH INC.

Sales

Earnings

SOURCE: Farm Fresh Inc.'s 10-K annual report filings to the

Securities and Exchange Commission.

TIME LINE

A look at what led to Tuesday's announcement that Farm Fresh has

been acquired by Richfood Holdings Inc.

September 1986 - Area's two largest grocery chains, Farm Fresh

and Giant Open Air Markets, merge.

September 1988 - Publicly traded Farm Fresh purchased by FF

Holdings Corp., which is owned by New York-based Citicorp's venture

capital unit and senior management, in a leveraged buyout.

April 1991 - Farm Fresh signs an eight-year pact to buy food from

Richfood Holdings Inc., a Richmond-based wholesale food distributor.

December 1993 - Farm Fresh buys 15 Richmond-area Safeway stores.

July 1995 - Farm Fresh retreats from Richmond, selling its The

Grocery Store chain to Hannaford Brothers Co.

November 1995 - Competition intensifies in Hampton Roads as

Hannaford Brothers begins to open supermarkets. Harris Teeter Inc.

opens its first local store in Virginia Beach in June 1996.

September 1996 - Debt-rating agencies express concern about Farm

Fresh's future.

December 1996 - Farm Fresh announces that it has hired an

investment banking firm to help it explore ``strategic

alternatives,'' including a possible buyer. Richfood expresses

interest.

February 1997 - Farm Fresh's CEO, Michael Julian, announces his

resignation. Ron Johnson, who helped turn around Florida grocer Kash

n' Karry Food Stores, replaces Julian.

June 1997 - Farm Fresh, the market leader in Hampton Roads, is

elbowed out of the No. 1 spot by Food Lion, according to industry

publication Food World.

September 1997 - Richfood Holdings announces plans to acquire

Farm Fresh Inc. for $220 million plus warrants for the purchase of

Richfood's common stock.

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