UNITED STATES BANKRUPTCY COURT DISTRICT OF …

Case 18-10700-MFW Doc 17 Filed 03/27/18 Page 1 of 66

UNITED STATES BANKRUPTCY COURT DISTRICT OF DELAWARE

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In re:

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SOUTHEASTERN GROCERS, LLC, et al. :

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Debtors.1

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Chapter 11 Case No. 18? ________ ( ) (Joint Administration Requested)

MOTION OF DEBTORS FOR APPROVAL OF (I) PROCEDURES FOR STORE CLOSING SALES; AND (II) ASSUMPTION OF THE LIQUIDATION CONSULTING AGREEMENT

Southeastern Grocers, LLC ("SEG") and its affiliated debtors in the above-

captioned chapter 11 cases, as debtors and debtors in possession (collectively, the "Debtors"),

respectfully represent as follows in support of this motion (the "Motion"):

Preliminary Statement

1. A key component of the Debtors' financial and operational restructuring

strategy is rationalizing the Debtors' store footprint through a process that enhances the profile

and profitability of the overall business. For the past several months, the Debtors and their

advisors have engaged in a systematic review of each of their stores, analyzing their

performance, profitability, and market impact, as well as a comprehensive effort to renegotiate

1 The Debtors in these chapter 11 cases, along with the last four digits of each Debtor's federal tax identification number, as applicable, are: Southeastern Grocers, LLC (5190); ARP Ballentine LLC (6936); ARP Chickamauga LLC (9515); ARP Hartsville LLC (7906); ARP James Island LLC (9163); ARP Moonville LLC (0930); ARP Morganton LLC (4010); ARP Winston Salem LLC (2540); BI-LO Finance Corp. (0498); BI-LO Holding Finance, Inc. (9227); BI-LO Holding Finance, LLC (1412); BI-LO Holding, LLC (5611); BI-LO, LLC (0130); Dixie Spirits Florida, LLC (6727); Dixie Spirits, Inc. (2359); Opal Holdings, LLC (2667); Samson Merger Sub, LLC (4402); Winn-Dixie Logistics, LLC (2949); Winn-Dixie Montgomery Leasing, LLC (6899); Winn-Dixie Montgomery, LLC (2119); Winn-Dixie Properties, LLC (7105); Winn-Dixie Raleigh Leasing, LLC (6812); Winn-Dixie Raleigh, LLC (0665); Winn-Dixie Stores, Inc. (4290); Winn-Dixie Stores Leasing, LLC (7019); Winn-Dixie Supermarkets, Inc. (8837); and Winn-Dixie Warehouse Leasing, LLC (6709). The Debtors' mailing address is 8928 Prominence Parkway, #200, Jacksonville, Florida 32256.

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leases with landlords for lower profitability stores in order to preserve as many locations as possible (the "Lease Mitigation Process"). Historically, the Debtors' underperforming stores, among other things, are in regions over-saturated with competition (new and historical) and/or are too costly for the Debtors to operate. Accordingly, continued operation of such underperforming stores no longer remains viable. Indeed, before the commencement of these chapter 11 cases, the Debtors identified and commenced the wind down and liquidation of eighty-five (85) stores (the "Closing Stores").2 A list of the Closing Stores is attached hereto as Exhibit A.

2. In formulating the list of Closing Stores, the Debtors considered, among other factors, current occupancy costs, historical store profitability, recent and projected sales trends, the opportunity to capitalize on high "transfer sales" (i.e., sales that would flow to the Debtors other store locations within close proximity), the competitive landscape (including new entrants) in the geographic market in which each store is located, the potential to realize negotiated rent reductions with applicable landlords, specific circumstances related to a store's performance, and whether any firm offer for such store was obtained or likely available from third-parties. The Debtors estimate that, absent closure, the Closing Stores will collectively generate approximately $13.4 million in losses for the fiscal year 2018. Alternatively, by closing

2 Prior to the Lease Mitigation Process, the Debtors historically engaged in a similar, but less stringent review of their store footprint each year as part of their ongoing operational initiatives. During these reviews, it was not uncommon for the Debtors to identify underperforming stores that were too burdensome and cost-prohibitive to continue to operate. As a result, the Debtors liquidated and closed numerous stores in the years leading up to Petition Date, some of which remain subject to unexpired leases (the "Dark Stores"). Contemporaneously herewith, the Debtors have moved to reject thirteen (13) unexpired leases associated with the Dark Stores pursuant to that certain Omnibus Motion of Debtors Pursuant to 11 U.S.C. ?? 365 and 554 and Fed. R. Bankr. P. 6006 and 6007 for Authority to (I) Reject Certain Unexpired Leases and Subleases of Nonresidential Real Property and Abandon Certain Property in Connection Therewith Effective as of the Petition Date and (II) Implement Procedures for the Rejection of Certain Leases (the "Lease Rejection Motion").

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Case 18-10700-MFW Doc 17 Filed 03/27/18 Page 3 of 66

the Closing Stores, the Debtors estimate that they will realize approximately $11.7 million in savings for the remainder of the 2018 fiscal year.

3. In the months leading up to the commencement of these chapter 11 cases, the Debtors, in consultation with their professionals and advisors, designed streamlined procedures to sell or otherwise dispose of the inventory and furniture, fixtures, and equipment ("FF&E" and, together with applicable inventory, the "Store Closing Assets") at the Closing Stores, in each case, free and clear of all liens, claims, interests, and other encumbrances (the "Store Closing Procedures," and the liquidation sales, the "Store Closing Sales").

4. The Debtors also conducted an extensive prepetition and sales process to sell as many of the Debtors' underperforming stores as possible. As a result of these efforts, the Debtors successfully negotiated and executed eight (8) lease sale transactions for the sale of thirty-nine (39) stores to certain third-party purchasers, the sale of thirty-three (33) of which remains subject to approval by the Court (the "Sold Stores").3 As certain of these sale transactions only contemplate the sale of unexpired leases and FF&E, the Store Closing Procedures will also apply to the Sold Stores to the extent applicable. A list of the Sold Stores is attached hereto as Exhibit B (the Sold Stores, together with the Closing Stores, the "Stores").

5. Before commencing any store liquidations, the Debtors and their advisors, including the Liquidation Consultant (defined below), formulated a comprehensive store closing schedule. Store Closing Sales at the Stores began on or around March 15, 2018, and are expected to be completed by April 30, 2018. The Debtors expect to promptly close or

3 Contemporaneously herewith, the Debtors have filed a motion seeking approval of certain procedures to authorize sales transactions for underperforming stores, including the Sold Stores (the "Sale Procedures Motion"). Prior to the Petition Date, the Debtors consummated a sale transaction for the sale of six (6) stores.

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consummate a pending sale transaction for each store pursuant to the Store Closing Procedures upon completion of the Store Closing Sales.

6. To maximize the value of the Store Closing Assets and effectuate an orderly liquidation process, the Debtors also seek authority to assume a liquidation consulting agreement dated February 20, 2018 (the "Liquidation Consulting Agreement") between Southeastern Grocers, LLC and a joint venture comprised of Hilco Merchant Resources, LLC ("Hilco") and Gordon Brothers Retail Partners, LLC ("Gordon Brothers" and, together with Hilco, the "Liquidation Consultant"). With the help of the Liquidation Consultant, the Debtors estimate that the sale of the Store Closing Assets in the Stores will yield approximately $60 million in gross proceeds.

7. The relief requested in this Motion is integral to maximizing value for the Debtors' estates and their economic stakeholders. It will permit the Debtors to continue implementing the Store Closing Sales at the Stores, and it will establish fair and uniform Store Closing Procedures to assist the Debtors and their creditors through the Debtors' transition to a leaner, more profitable enterprise.

Background 8. On the date hereof (the "Petition Date"), the Debtors each commenced with this Court a voluntary case under chapter 11 of title 11 of the United States Code (the "Bankruptcy Code"). The Debtors are authorized to continue to operate their business and manage their properties as debtors in possession pursuant to sections 1107(a) and 1108 of the Bankruptcy Code. No trustee, examiner, or statutory committee of creditors has been appointed in these chapter 11 cases.

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9. Contemporaneously herewith, the Debtors have filed a motion requesting

joint administration of their chapter 11 cases pursuant to Rule 1015(b) of the Federal Rules of

Bankruptcy Procedure (the "Bankruptcy Rules").

10. On March 15, 2018, the Debtors executed a restructuring support

agreement (the "Restructuring Support Agreement") with (a) holders of approximately eighty

percent (80%) of the outstanding principal amount of the Debtors' 8.625%/9.375% Senior PIK

Toggle Notes due 2018 (collectively, the "Unsecured Notes"), of which approximately 68% are

held or controlled by the members of an ad hoc group (the "Initial Consenting Noteholders")

and approximately 12% are held or controlled by LSF7 Bond Holdings Ltd. (together with the

Initial Consenting Noteholders, the "Consenting Parties"), and (b) the prepetition equity

sponsors (the "Sponsors"), which own or control in excess of ninety-nine percent (99%) of the

prepetition equity in SEG (which directly or indirectly owns or controls one hundred percent

(100%) of the prepetition equity in the other Debtors). Pursuant to the Restructuring Support

Agreement, the Consenting Parties and the Sponsors agreed to vote in favor of and support

confirmation of the Joint Prepackaged Chapter 11 Plan of Reorganization of Southeastern Grocers, LLC and Its Affiliated Debtors (the "Prepackaged Plan")4 that, upon implementation,

provides for the Debtors to emerge from these chapter 11 cases substantially de-levered with

overall debt levels decreased by over $500 million.

11. The Prepackaged Plan provides for a restructuring transaction pursuant to

which:

Each holder of an Allowed ABL Facility Claim will receive Cash in the full amount of its Allowed ABL Facility Claim from the proceeds of the Exit ABL

4 Capitalized terms used herein but not otherwise defined shall have the meanings ascribed to them in the Prepackaged Plan or the Carney Declaration (as defined below).

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