Yucaipa Sues to Bid Again on Safeway Subsidiary

Safeway Inc. faces a lawsuit for allegedly trying to avoid a supermarket-sized case of corporate embarrassment.

The Los Angeles-based investment arm of billionaire Ron Burkle, Yucaipa Cos., sued Safeway in Los Angeles Superior Court on Monday, claiming that the nation’s third-largest grocery store owner conducted an “anyone but Yucaipa” campaign when it put its problematic Dominick’s Finer Foods subsidiary up for sale last fall.

The suit claims that Pleasanton, Calif.-based Safeway refused to seriously consider selling the 113 Dominick’s stores to Yucaipa. Safeway bought the chain from Yucaipa in 1998 for $1.8 billion -- and Yucaipa would have snatched it back for a fraction of that.

According to the suit, Yucaipa offered $300 million in cash and $50 million in preferred stock.

Safeway wrote down the value of Chicago-based Dominick’s to $315 million in a regulatory filing two weeks ago.

In arranging the chain’s sale, the suit claims, “Safeway intended to use Yucaipa as a ‘stalking horse’ to gain union support for the ‘anyone but Yucaipa’ company who would ultimately be chosen by Safeway to purchase Dominick’s.”

Yucaipa, which had ties to the union dating from its time as Dominick’s owner, signed an agreement during the auction promising to encourage Dominick’s labor leaders to back the chain’s sale, expecting that it would be the winning bidder.

It didn’t work out that way. Safeway, which operates under the Vons name in Southern California, reportedly reached a preliminary agreement to sell Dominick’s to SuperValue Inc. of Eden Prairie, Minn., in late June.

Neither company has said anything publicly about the reported deal.

Without elaborating, Safeway spokeswoman Melissa Plaisance said Tuesday that there was an unnamed buyer and that it was safe to assume that Yucaipa didn’t submit the winning bid.

The lawsuit demands that Safeway reopen the bidding in a “fair and impartial way.”

Plaisance said that wouldn’t happen, adding that the suit had no merit and that “there is no basis in fact or law for Yucaipa to obtain any relief.”

Lehman Bros. analyst Meredith Adler said Safeway may have been more comfortable selling to another grocery company rather than an investment firm.

“I don’t think this is about ego,” Adler said. “I think that Safeway wants to maximize the price it gets.”

Burkle is no stranger to fights over supermarket chains.

He made much of his money wheeling and dealing in the grocery business, in the process becoming one of the wealthiest residents of Southern California.

He started his career as a bag boy at his father’s grocery store, built his investment firm buying and merging large grocery chains such as Alpha Beta, Food 4 Less and Ralphs Grocery Co. before investing and selling stakes in Kmart Corp. and a number of technology firms.

A prominent contributor to Democratic Party causes, Burkle hired President Clinton last year as a senior advisor to Yucaipa. The firm’s portfolio of companies includes Golden State Foods, the largest supplier to McDonald’s Corp. restaurants, and Alliance Entertainment Corp., a distributor of recorded music.

Yucaipa purchased Dominick’s in 1995 for $693 million and sold it to Safeway for more than double that.

Almost from the start, Safeway had trouble with the Chicago market, and found that the chain was beset by high costs compared to its local competition and by a fractious union relationship.

Safeway decided to dump the unit in November and started soliciting bids from a number of companies, including Yucaipa. In return, the United Food and Commercial Workers Union agreed not to launch a strike.

The Yucaipa lawsuit claims that “Safeway refused to allow Yucaipa to participate in the bidding process unless it pledged to use its best good faith efforts to procure collective bargaining agreements with Dominick’s unions regardless of whether or not it wound up acquiring the chain.”

Yucaipa said it was the only bidder required to make such a pledge, which it now likens to extortion.

Not so, said Safeway’s Plaisance.

“Safeway conducted a fair bidding process and gave Yucaipa every opportunity to compete,” Plaisance said. “And after failing to be selected as the winning bidder Yucaipa is seeking to avoid its contractual obligations.”

Yucaipa said Safeway threatened to sue the firm if it “did not send letters to the unions stating it was no longer interested in Dominick’s and supporting Safeway’s selected purchaser.” Yucaipa said that is why it wants the court to void the agreement Yucaipa signed promising to intervene with the unions.

The firm also is asking for monetary damages and an injunction requiring Safeway to reopen the bidding.

Two weeks ago, the supermarket chain said its second-quarter profit fell 48% to $161 million, in part because of a $69.8-million charge to reflect the lower value of the Dominick’s chain. Safeway’s revenue in the quarter improved slightly, rising 3% to $7.7 billion.

Safeway shares fell 42 cents to close at $20.82 on the New York Stock Exchange on Tuesday.