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Grocer's investors fight for crumbs

Winn-Dixie common-stock holders try to regain their place in line when the company assets are divided in bankruptcy court.

By MARK ALBRIGHT
Published January 30, 2006


As Winn-Dixie begins setting the table for its emergence from bankruptcy this summer, it's become evident the grocer's 36,000 shareholders may not have a chair.

A bankruptcy trustee in mid January unceremoniously disbanded the five-member equity committee appointed to represent shareholder interests during the upcoming wrangle. Today, attorneys for the unwelcome group will make a last ditch appeal to U.S Bankruptcy Judge Jerry Funk to get reinstated. Meanwhile, the Jacksonville supermarket chain and the bankers, vendors and bondholders on its creditors committee are sharing preliminary information about the reorganization plan being shaped for a March 20 release.

Ready or not, the Winn-Dixie bankruptcy case is barreling toward the stage that bankruptcy lawyers affectionately call the cram-down.

That's when creditors, bankers, bondholders, vendors, landlords and stockholders wrestle over how much of the company's assets are left to split up and who's going to eat how much of the shortfall. Shareholders are last in line. So usually they swallow the most, frequently forfeiting their entire investment.

"Normally, we would be in there scraping for any thing we could get," said Chad Bowen, a Tampa lawyer among the legal team for Winn-Dixie shareholders. "But with Winn-Dixie it's unlikely we'll get anything if we're not even allowed at the table when this all gets hammered out."

Because the committee's legal bill was paid by Winn-Dixie, shareholders -- including investment funds, speculators and Winn-Dixie retirees -- face hiring their own lawyers to fight from the outside.

"Yes, I'm irritated," said R.T. Moore, a 64-year-old Jacksonville investor who bought 10,000 shares two years ago when the stock was cheap and he thought Winn-Dixie was on the rebound. "After the way we're being treated, I sure won't be shopping at Winn-Dixie again."

Equity committees are not that common in bankruptcy cases. But trustees, who oversee day-to-day case decision-making under a judge's supervision, have discretion to appoint them in large and complex cases. With 10,000 creditors, hundreds of shopping center landlords and 36,000 shareholders arguing over 24 interrelated Winn-Dixie corporations in the case, trustee Elena Escamilla figured this case was big enough. She changed her mind five months later. Her action to disband the committee has been put under seal by Funk, but a reading of the court file shows most of the reasons were hardly a secret.

Other creditors angling for their own place in line resisted having an equity committee from the start. They claimed it cost too much, would complicate a settlement and drag the proceedings out by getting into fault-finding. Indeed, equity committee lawyers noted they wore out their welcome as soon as they formally asked to hire an independent examiner. The outsider would investigate whether past management, including Jacksonville's founding Davis family, which controls 36 percent of Winn-Dixie and appoints three of its nine directors, could be liable for any of the missteps that helped land Winn-Dixie in bankruptcy.

One question in the pleadings: Why did the company keep paying dividends even as it ran up huge losses? In the four years leading up to the bankruptcy, Winn-Dixie paid out $400-million in dividends as shareholder's equity plummeted from $4-billion to zero.

By taking out the common shareholders in the bankruptcy, the shrunken company could be taken private easier.

Winn-Dixie's stock was booted from the New York Stock Exchange in February when the company filed for bankprutcy protection, but it's still traded on the pink sheets. That's for those clinging to their shares in hopes they someday can be parlayed into cash or exchanged for stock after the bankruptcy. Those shares closed Friday at 66 cents, down 5 cents.

Funk wrote that he sealed the motions to keep the equity committee from learning Winn-Dixie trade secrets or confidential business plans. Attorneys for the creditors committee argued that any allegations about the performance or previous management was innuendo and speculation.

Ironically, at the same court hearing the equity committee was dumped, Winn-Dixie chief executive Peter Lynch was handed a $1.5-million bonus for 2005 and is eligible for a $2-million bonus on top of his $900,000 annual salary should he stay through 2006.

Winn-Dixie has shrunk dramatically from a peak of 1,110 stores to 587 at the end of 2005. The company's dated food plants are up for sale. Lynch also cut $101-million in annual administrative expenses, negotiated $1.8-million in reduced rent and sold the company aircraft fleet for $33-million.

"Peter Lynch has said the hard work is done and this is the right footprint for this company going forward," said company spokesman Michael Freitag.

Other industry experts, however, wonder if it's enough.

"The tragic thing is this chain has yet to prove it can compete against Publix, Wal-Mart or even regional chains like Sedano's in Miami," said Burt Flickinger III, a retailing consultant. "They're still bleeding red ink. Before coming out bankruptcy, they should at least put up a couple of consecutive quarters of improved operating profits."

Mark Albright can be reached at albright@sptimes.com or 727 893-8252.

[Last modified February 2, 2006, 12:22:36]


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