In an intriguing diversification move, Pacific Lighting, parent of Southern California Gas, agreed Wednesday to buy Thrifty Corp., which operates California's biggest chain of drug and discount stores, for stock worth about $885 million.
Executives of the two big Los Angeles institutions cheerfully announced the merger at a late afternoon news conference that put an end to a day and a half of speculation about Thrifty's plans.
Although Pacific Lighting is primarily known as the parent of Southern California Gas, about a third of its profits come from other holdings, including oil and gas exploration and land development. It has signaled its intentions to diversify further in order to protect itself from the volatility of the energy business.
Anticipating public concern that revenue from gas customers might be used to finance the deal, Paul A. Miller, chairman and chief executive of Pacific Lighting, stressed that the "acquisition of Thrifty does not in any way at all involve the gas company."
'Enthusiastic' About Fit
Miller cited Thrifty's "excellent management, solid track record and potential for growth" in explaining why his company had decided to go after the drugstore chain, which in the past has exhibited a fierce desire to remain independent.
"I'm very enthusiastic about how our two companies fit together," he said. The merger "will accelerate growth for both of us."
Thrifty Chairman Leonard H. Straus, who is regarded as a highly successful, if occasionally irascible, manager, expressed "delight and enthusiasm" about the combination.
"Thrifty's integrity, identity and huge potential will be honored and enhanced," he said. "We still feel independent, and that's why we feel so fortunate."
On Tuesday, the retailer had briefly halted trading in its stock to note that it was discussing a merger with a "major New York Stock Exchange company." Financial analysts, scratching their heads to come up with a logical partner, had offered guesses ranging from K mart in Troy, Mich., to Safeway Stores in Oakland.
That the answer ended up being a century-old company much closer to Thrifty's home, if not its core business, caught observers by surprise. But they agreed that the move--linking two big companies that have grown up with Los Angeles--makes sense, particularly for Pacific Lighting.
Acquisition in Service Sector
"It has been looking for over a year now for a business that is non-energy related--something in the service sector--and has been willing to spend up to $1 billion," said Sarah A. Stack, an analyst with Bateman Eichler, Hill Richards in Los Angeles who follows both companies.
In trading Wednesday before the announcement was made, Thrifty stock rose 50 cents a share to $38 with 754,100 shares trading hands. Pacific Lighting climbed 37 1/2 cents to $51.50 a share on volume of 29,600 shares.
Under the agreement, which is subject to approval of both companies' shareholders, Thrifty shareholders would receive 17.2 million shares of Pacific Lighting common stock. Each share of Thrifty, of which there are about 20 million outstanding, would be exchanged for 0.802 share of Pacific Lighting common. The deal would increase the number of Pacific Lighting's outstanding common shares to 58.7 million.
Based on Pacific Lighting's closing price Wednesday, the deal is worth about $885 million.
Straus and Thrifty President Richard Eils will remain in control of the 67-year-old retailer, which has grown from a family-run store to an empire of 555 Thrifty drug and discount stores, 27 Thrifty Jr. stores and 89 Big 5 sporting goods stores.
It also has part interests in the Crown Books and Trak Auto West chains.
For the fiscal year ended Aug. 31, 1985, Thrifty reported net income of about $32 million on sales of $1.4 billion. In calendar 1985, Pacific Lighting reported earnings of $156 million, or $3.80 per share, on revenue of $5.1 billion.
James R. Ukropina, Pacific Lighting executive vice president and general counsel, said his company believes that Thrifty has "great potential for growth."
But "what happens in the short term might be some dilution," he said. "It may lessen our reported earnings per share . . . around 10%."
Analyst Stack had projected Pacific Lighting's 1986 earnings at $4.80 per share but now foresees $4.30 per share with the addition of Thrifty.
Pacific Lighting said it expects non-utility businesses to account for 50% of its earnings by the end of the decade.
In explaining the rationale behind a stock-for-stock merger, Straus said the main advantage for Thrifty shareholders is that taxes would be deferred. "Our shareholders will pay no taxes whatever until they sell shares," he said.
Ukropina said Pacific Lighting has already received agreements from holders of about 51% of Thrifty that they will swap their shares.
The acquisition is not subject to approval by the California Public Utilities Commission. William Ahern, head of the PUC's public staff division, said the only circumstances under which the regulatory body would step in is if it determined that Pacific Lighting was using gas company resources to help pay for Thrifty. "We'll be watching," Ahern said.
Pacific Lighting, in a prepared answer to the question of whether revenue from the utility's rate payers would be used to buy the drugstore chain, said: "Of course not."
Times staff writer Donald Woutat contributed to this story.
PACIFIC LIGHTING AT A GLANCE
Pacific Lighting was founded in 1886 to rent gas lights to businesses. It acquired Southern California Gas in 1929, and in the 1960s it began to diversify into real estate development and oil and gas exploration.
1985 1984 1983 Revenue (in billions) $5.08 $4.78 $4.59 Net income (in millions) $156.0 $138.6 $167.5
Assets (as of March 31): $3.8 billion Employees: 12,550 Shares outstanding: 41.5 million 12-month price range: $39.37 1/2 -- $57.50 Wednesday's close: $51.50, up $0.37 1/2
HOW THRIFTY WILL FIT
1985 operating revenues
Utility 65% $4.797 billion Oil and gas exploration and production, pipelines, alternative energy, financial services: 12%
$849 million Land development 4% $322 million Retailing (Thrifty) 19% $1.41 billion