Lucky Rejects Edelman’s Offer as Inadequate : Company to Restructure; Analysts See Gemco as Likely Spinoff Candidate

Lucky Stores, target of an unwanted takeover bid by New York investor Asher B. Edelman, said Monday that its board has unanimously rejected his $35-a-share offer as inadequate and instead wants to restructure the company.

Reached in New York, investor Edelman expressed disappointment and said he told Lucky in a letter that he would be willing to raise the price if the board agreed to meet with him and “provide information that would make that sensible.” He added: “I have no ballpark figure of how much more I’d be willing to pay. I would have to see the facts.”

Wall Street observers have speculated that Lucky, which operates about 1,500 food and specialty stores, primarily in the West and South, might sell off some operations to thwart the $1.79-billion bid by Edelman and his investor group.

A likely candidate to be spun off, analysts say, is Lucky’s money-losing Gemco chain of 80 membership department stores.

Edelman’s View on Gemco

Asked whether he would be inclined to sell that unit if he were in control of Lucky, Edelman said: “It’s quite likely, yes.” Analysts have placed the chain’s value at anywhere from $550 million to $800 million. A knowledgeable source estimated the value at the upper end of that range, noting that Gemco’s long-running leases would command on the open market today twice what Lucky now pays.

In announcing its rejection, Lucky, which is based in Dublin, Calif., said the board was advised by two investment bankers--Goldman, Sachs & Co. and Salomon Bros.--that the amount was inadequate.

Lucky’s move Monday indicates that it believes a restructuring can enhance shareholder value, analysts said. “Obviously, their feeling is that they’ll take some moves that will result in significantly greater value than the company has been valued at before,” said Jeffrey Atkin, who follows the company for Kunath, Karren & Rinne, a Seattle money-management firm.

Before the recent run-up in the price of Lucky’s stock, he noted, analysts had placed the company’s worth at about $31 a share. In trading Monday on the New York Stock Exchange, Lucky, the second most active issue with nearly 1.9 million shares traded, closed at $36.875 a share, up 75 cents.

Atkin added that Lucky might consider selling its specialty stores in addition to Gemco, even though those divisions for the most part are healthy. The specialty unit includes Kragen Auto Parts, Hancock fabric stores and Yellow Front general merchandise stores. In Southern California, the company operates food stores under the names Lucky and Food Basket.

Some Wall Street observers sense that Edelman is interested primarily in Lucky’s real estate and has no intention of becoming a retailer. But John Kosecoff, an analyst with First Manhattan in New York, said: “We have an individual who has to be prepared to operate the business if he owns it. While he might want to realize the gain on his investment, he has to be prepared to be a hands-on manager.”

Kosecoff added that the stable cash flow of Lucky’s food store business would make it relatively easy for Edelman to pay off any debt incurred in a takeover. Edelman has lined up funding from two unnamed New York commercial banks.

The gain in Lucky’s stock price on Monday indicates that the market “is discounting the possibility of any greenmail here,” Kosecoff said. “The concern . . . would be that somehow the company would be coerced to pay Mr. Edelman greenmail and hope that it wouldn’t be further attacked by possible raiders.”

(In takeover jargon, greenmail is the premium paid by a target company to a potential buyer, usually to buy back stock, in exchange for the investor’s promise not to pursue the company. Often, after such greenmail is paid, the company’s stock price falls. Edelman holds a small stake in Lucky.)

By announcing plans to restructure, vague though they may be, “the company has taken a more affirmative stance” that reassured investors, Kosecoff said.