Allegheny Beverage Corp. said yesterday that profit projections for its Service America food-service subsidiary had been cut -- a move that raised questions about the company's ability to sell the business for $500 million.
On Monday, Allegheny shareholders gave preliminary approval for the sale of Service America to Servam Corp., a company formed by a New York investment banking firm and Service America senior management. The subsidiary is the sole remaining company owned by Cheverly-based Allegheny.
Allegheny officials said they were informed yesterday that Servam officials have lowered estimates of Service America's income based on current company results and projections for the rest of the year. The projections were made in connection with Servam's arrangements to finance 100 percent of the purchase of Service America.
"We do not know what it means," said John E. Baker, chief financial officer of Allegheny, when asked whether the move means that Servam may lower its proposed $500 million purchase price for Service America or back off the deal altogether.
Baker said Allegheny had not been able to discuss the impact of the revised projection with Servam officials.
He said, however, that he could not make the assumption "that they're backing away from the sale."
Officials of Servam could not be reached for comment yesterday. The corporation was formed by the investment banking firm of Morgan Lewis Githens & Ahh Inc. and senior members of Service America's management.
Allegheny officials noted that if Allegheny's own lenders consider the lower projections to adversely affect the sale of Service America, the lenders will not be obligated to make further advances under Allegheny's $17 million revolving credit line.
The company recently received an extension on its line of credit, which was to expire Thursday. The company has repeatedly said that if the sale of Service America is not completed by Oct. 31, the new deadline for its credit payment, it will be unable to pay the $15 million due.
In addition, other loans may come due if the company defaults on its credit line.
Company officials have said that if the sale of Service America goes through they plan to look for other business opportunities rather than to liquidate.
Allegheny began as a Baltimore Pepsi-Cola bottler and developed through sales and acquisitions into a diversified service company that last year was one of the largest companies in the Washington area.
However, its acquisition of Service America for $225 million left it burdened with debts so large that it began to sell off all its subsidiaries to repay the debt.
The company reported losses of $59 million in fiscal 1986 and $2.8 million for the quarter ended June 27. Officials said, though, that Service America has been profitable.