Household International to Sell Vons, Other Units
Vons Grocery Co., one of the leaders in the hotly competitive Southern California market, is not expected to stray from its current course after its sale to a group of investors, analysts said Wednesday.
“It’s going to be pretty much business as usual with Vons,” said Frank J. Barkocy, an analyst with Merrill Lynch in New York.
The sale of the grocery chain, which operates 176 supermarkets in California and Nevada, by Household International was part of a leveraged buy-out of Household’s merchandising unit that was valued at about $700 million.
El Monte-based Vons was generally given high marks by analysts for its management style and performance. Roger E. Stangeland, the current chairman and chief executive, is part of the buying group and will become chief executive of a new company to be formed from the merchandising unit, the parent company announced Tuesday.
In addition to Vons Grocery, the buy-out includes the unprofitable T.G.&Y.; general stores in 26 states and franchise operations such as Coast-to-Coast hardware stores and Ben Franklin variety stores. In a leveraged buy-out, investors finance an acquisition largely by borrowing against the assets of the company being purchased.
Stangeland has been at the grocery company’s helm for a year, steering it toward a bigger-is-better strategy. Next Wednesday, Vons plans to open its largest supermarket ever, a 75,000-square-foot store in Garden Grove that has been dubbed Pavilions. The store, which is about twice as big as Vons’ larger stores now, will offer the one-stop shopping typical of some of its competitors’ newer stores. The Garden Grove store will have a wine cellar, coffee corner, video-rental section, drop-off photo center and demonstration kitchen.
Vons has been in a neck-and-neck race with Ralphs for highest market share in Southern California this year. Like other chains, it is trying to devise strategies to win customers.
The “grocery-warehouse” concept is one element of a new three-part strategy for Vons, according to Anthony Pearce-Batten, an analyst with the investment firm of Legg Mason Wood Walker in Baltimore. The company is also adding higher-margin product lines, such as cosmetics, pharmaceuticals, liquor and delicatessen items, and is focusing more on the Latino market.
Vons is “obviously the jewel of the whole deal,” a spokesman for Household International said Wednesday. In 1984, Vons accounted for $2.49 billion of the merchandising unit’s $5.4 billion in revenue and $23.6 million of its $49.6 million in net income.
‘A Good Performer’
“Vons has been a good performer, but the T.G.&Y.; subsidiary, which has a larger capital investment, has been a poor performer,” said Larry Eckenfelder, an analyst with Dean Witter in San Francisco. Eckenfelder expects that the sale “might lend a little more stability” to Household International but won’t materially affect its bottom line. He is not changing his per-share earnings estimate of $4 to $4.05 for this year and $4.85 for 1986.
Neither Stangeland nor William S. Davila, Vons president and chief operating officer, could be reached for comment Wednesday.
Late Tuesday night, Household, whose focus will now be on its finance and manufacturing operations, signed a definitive agreement for the merchandising subsidiary’s purchase. The buying group includes some of the unit’s management, drug wholesaler FoxMeyer Corp. and Donaldson, Lufkin & Jenrette Securities, a New York investment banker.
10% Ownership Position
The buyers agreed to give Household a cash amount equal to the book value at the time that the deal closes, which is expected to be before year-end, plus $125 million in subordinated notes and a 10% ownership position in the acquiring company. At the end of 1984, Household Merchandising had a book value of $565 million.
Household International is expected to realize a one-time fourth-quarter gain of $40 million to $50 million from the buy-out. Last year, the company earned $234 million on $8.3 billion in revenue.
