Pacific Lighting Planned at Length and Acted Quickly : Merger Seen as Coup for Thrifty’s Straus
Leonard H. Straus, Thrifty Corp.'s 71-year-old chairman, is a lifelong tennis enthusiast who still manages to play every day--and most of the time he wins, although he acknowledges that the years have made him somewhat less aggressive.
“I’m more of a tactical strategist now,” he says.
On or off the tennis court, strategy appears to be paying off for retailer Straus, who is keeping a higher profile than usual this week in the wake of the merger deal that he struck with Pacific Lighting. That company, parent of Southern California Gas, agreed Wednesday to swap stock worth about $885 million for Thrifty’s shares.
“The main principle we’ve pursued all these years was . . . trying to maintain our independence (and) the potential for growth as well as the integrity of our employees,” Straus said in an interview Thursday. “That’s why we’ve said forever that we weren’t for sale. It did not seem to us there was any (potential buyer) that could fit our needs.”
A telephone call recently from Paul A. Miller, chairman of Pacific Lighting, changed his thinking. Miller offered a proposal that, Straus said, “was impossible to refuse.”
Under terms of the acquisition, Straus and Thrifty President Richard G. Eils will retain their positions in the company and continue to pursue an aggressive expansion plan for the discount retail drug business.
In addition, Straus, who over the last decade has financed store renovations out of retained earnings, now finds himself in the unusual position of having a big pool of funds to tap. In announcing the agreement, Pacific Lighting said it has commitments from banks for about $1 billion in credit that could be used for Thrifty’s expansion.
One observer said that, for Thrifty, the deal is “the biggest coup since the Louisiana Purchase.”
Pacific Lighting’s investors, however, expressed their displeasure Thursday, when the stock dropped $2.50 a share to $49. That price would reduce the value of the deal to about $843 million. Analysts and the company have said the acquisition will dilute Pacific Lighting’s earnings in the short term.
That Pacific Lighting nonetheless is willing to pay such a premium for Thrifty, which had earnings of $32 million on $1.4 billion in sales last year, is a testament to Straus, whom analysts describe as an astute businessman who can be immensely charming and funny. Straus owes it all, in a sense, to his undergraduate roommate at Rutgers, Ray Stark, now a Hollywood film producer. Stark asked Straus, a New York native, to be best man at his Los Angeles wedding in 1940.
“During my stay out here, they introduced me to nine starlets nine nights in a row,” Straus recalled. The 10th night Straus was introduced to Dorothy Borun, whose family owned the Thrifty chain. “I fell in love with her, and with California, and realized that I could play tennis 12 months a year.”
After the war, when Thrifty made its initial public stock offering, Straus, a Harvard law school graduate, was asked to help secure leases on good locations as a better defense against competition. What started as a six-month assignment resulted in 40 years of employment, Straus said.
According to Evan Simonoff, executive editor of Mass Market Retailers, an industry publication in New York, Straus’ expertise was not so much in merchandising as in finance and real estate. He was “very good at going out into outlying suburbs and finding locations that eventually became high-volume stores.”
During the 1950s and ‘60s, Simonoff said, “anybody who was a fairly decent operator did not have to be all that creative to do well--particularly in Southern California, where the market was growing.”
Some Stores Went Downhill
However, after its period of expansion, Thrifty made the mistake of allowing some stores to go downhill. In 1974, the company reported its second decline in net income in 30 years. At that point, Straus started what he referred to as its merchandising renaissance.
“It was time for us to change our merchandising thrust to depart from dependence on imports and concentrate on national brands,” Straus said. The company went on a costly remodeling campaign and boosted inventories from a meager 1975 average level of $164,000 per store to the current $400,000.
Also, since 1974, all of the company’s stores, including the Big 5 sporting-goods chain, have been discounting merchandise on an everyday, across-the-board basis to win customers, Simonoff said.
The philosophy has paid off. Between 1974 and 1984, net income surged ahead at a 22% compounded annual rate. At the same time, net margin has expanded from 0.8% in 1974, a figure well below industry averages, to a respectable 2.3%.
Although Thrifty’s stores do not generate nearly the volume of an industry leader such as Longs Drug Stores of Walnut Creek, Calif., observers note that sales gains of older stores are outpacing those of Longs and Sav-On, a unit of American Stores that is Thrifty’s biggest competitor in Southern California.
If Straus has a regret, and he does not admit to many, it is that the company did not start the updating and remerchandising efforts sooner.
Humorous, Folksy Style
When Straus’ associates are asked to characterize him, the talk almost immediately turns to his love of tennis and his interest in civic affairs. The two have combined in the past. In 1980, he launched a campaign that successfully raised funds to build the Los Angeles Tennis Center at UCLA.
Straus is also known for his humorous, folksy style at the company’s annual meetings, which are attended by many elderly shareholders. He has been known to lead them in a rendition of “The Thrifty Fight Song,” sung to Notre Dame’s tune.
For now, Straus plans to continue an expansion that calls for the addition of 25 Thrifty stores each year and 10 to 15 new Big 5 stores. In addition, the company recently started buying small drug chains and converting their locations into Thrifty Jr. stores, which are about one-third the size of regular Thriftys. There are 27 now, and 13 more are expected to open by December. Plans call for at least 25 new ones a year after that.
Simonoff of Mass Market Retailers said the Thrifty Jr. idea is a good strategy. “If you look at how crowded and competitive that market is, there aren’t that many locations left where you can go in with a 20,000-square-foot store,” he said. “So opening smaller stores gives you a chance to penetrate a lot of urban and rural markets.”
Straus shows no signs of slowing down.
“I’ll never stop,” he said. “When you attain what you want, it’s a deep sense of exhilaration.”