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AmeriServe's Cinderella Story

It's a Cinderella story -- that is, if Cinderella made her living distributing service items to fast-food chains, teetered on the edge of financial ruin due to an extreme cash flow problem, but was able to strike the unlikeliest of deals to end up living happily ever after.

Under this scenario, AmeriServe Food Distribution, Inc. plays the role of harried heroine. While the Addison, Texas-based company's ambitious acquisition strategy led it to amass $9 billion in sales in 1999, it also left it with skyrocketing debt. According to a report compiled by Deloitte Consulting, AmeriServe's management underestimated the costs of consolidation and forged ahead with aggressive plans despite negative financial and operating indications. In the process of consolidating its distribution centers and installing a centralized, Y2K-compliant computer system, AmeriServe experienced vendor payment delays. Customer service levels plummeted.

AmeriServe filed for bankruptcy protection on January 31, 2000, hiring various firms to provide financial advice and legal counsel. Jay Alix & Associates -- a firm that had been hired in November 1999 to help AmeriServe avoid bankruptcy -- was tapped to obtain debtor-in-possession financing as management consultants.

"There was a tremendous amount of uncertainty," said Peter Fitzsimmons, the Jay Alix principal serving as chief restructuring officer for AmeriServe. "There was no stability, so there was nothing to tell creditors regarding immediate prospects." Playing the part of Fairy Godmother was not easy in the highly competitive world of food service distribution and things soon got worse for AmeriServe. Vendors began to tighten credit terms and a few refused to make shipments other than on a COD basis. Those vendors even appealed to AmeriServe's largest customers, Burger King Corp. and KFC, Pizza Hut, and Taco Bell chain owner Tricon Global Restaurants, Inc., for help.

In their search for DIP financing, Jay Alix & Associates found interest from traditional lenders but recognized an unusual opportunity with Burger King and Tricon. "They weren't experienced bankruptcy financial lenders, but they had a vested interest in the outcome," Mr. Fitzsimmons explained.

Agreeing to work with AmeriServe just after the company filed for Chapter 11 protection, Burger King and Tricon were able to lower buying costs and secure the financing needed to keep AmeriServe running. This "very unusual" arrangement gave Burger King and Tricon ownership of AmeriServe's inventory and demonstrated the potential of creative compromise, Mr. Fitzsimmons said. While Burger King eventually did exit the agreement in May, reducing AmeriServe's volume by $2 billion, Mr. Fitzsimmons noted that Tricon "stepped up to the plate" and continued supporting AmeriServe until a buyout deal late last year.

Deloitte Consulting's involvement came in March 2000 when the bankruptcy court appointed the firm and Principal Holly Etlin as examiner for the case. Ms. Etlin said the U.S. Trustee's office was very concerned about a series of transactions occurring prior to the bankruptcy filing as well as AmeriServe's significant negative cash flow. "They were astonished as to how a company that large could melt down that quickly," Ms. Etlin said.

Although her June 2000 report identified substantial instances of mismanagement before the Chapter 11 filing, Ms. Etlin did not recommend the appointment of a trustee due to the fact that various solutions already were in development. The report added that the company appeared to be operating effectively under new management and that its efforts to look for a buyer could lead to a better result than liquidation.

Mr. Fitzsimmons agreed. "I have maintained that the examiner appointment was a good thing," he said, adding that the third-party report was effective in demonstrating that AmeriServe's extreme over-leveraging was a major factor in the bankruptcy filing.

Mr. Fitzsimmons noted that the report's commendation of AmeriServe's new management affirmed Jay Alix & Associates'support for new President and CEO Ron Rittenmeyer. He said the high level of communication between various parties in the case was essential to the eventual approval of a buyout completed in December 2000. "People don't always like what they're hearing, but feel more comfortable when they hear it though strong communication channels," Mr. Fitzsimmons said.

AmeriServe's Prince Charming came in the form of McLane Company, Inc., a subsidiary of Wal-Mart Stores, Inc. AmeriServe parent company Holberg Industries, Inc. sold McLane its U.S. distribution assets, including 17 distribution centers, for an undisclosed sum under a November 2000 agreement.

Tricon came out in favor of the agreement noting that the resolution did not require the company to take any ownership interest in AmeriServe. As part of the sale agreement to McLane, Tricon provided a glass slipper-like perk by extending its AmeriServe distribution agreement through 2010, a perfect fit for a distributor wanting to re-establish its position in the market.

"The result was excellent, given the condition of the company when it went into bankruptcy protection," Ms. Etlin said. She added, "The company could have easily completely liquidated because the business they're in is very competitive and their customers are willing to switch to other distributors. Kudos should be given to the turnaround management team. This could have degenerated into litigation for years and it didn't."

Reprinted with permission of the Beard Group, Washington, D.C.