Lucky May Sell Ailing Gemco Unit to Dayton Hudson

Lucky Stores is expected to announce today a $700-million deal to sell its troubled Buena Park based Gemco discount stores to Dayton Hudson, which is considered likely to reopen some of the units as Target stores.

Word of the impending sale prompted a New York investor who has bid $1.79 billion for the diversified supermarket company to ask for a meeting in hopes of heading off the sale.

In a letter to Lucky’s board on Wednesday, investor Asher B. Edelman said his financial adviser, Merrill Lynch, had been informed Tuesday night by Lucky’s investment banker, Goldman, Sachs & Co., that the company plans to sell the Gemco division, which operates 80 membership discount department stores in California, Arizona and Nevada. Edelman’s letter did not identify a buyer of the Gemco chain, but a source familiar with the deal said it is Dayton Hudson.

Edelman expressed dismay that Lucky is entering into an agreement for Gemco that he contends will cost Lucky between $100 million and $200 million in taxes.

“If this isn’t going to produce something for the shareholders but simply be a sale of a division . . . they should reconsider my bid, which would bring shareholders top dollar,” Edelman said in a telephone interview.

The company’s board on Monday rejected Edelman’s $35-a-share proposal as inadequate and instructed management to explore alternatives for restructuring the company “to realize shareholder values in the near term.” A sale of the Gemco division was thought to be a top priority.

In his letter to Lucky on Wednesday, Edelman said: “Frankly, we do not understand why the company’s directors are considering undertaking these transactions on a taxable basis when there are methods available to minimize taxes. . . . Before the board proceeds with this or any other transaction, I request that you meet with me promptly so that we can discuss means by which shareholders can realize value in the near term.”

Dayton Hudson, the expected buyer of Gemco, operates the fast-growing Target division, which has 37 stores in Southern California. A spokesman for the Minneapolis-based retailer said its policy is not to comment on acquisition rumors.

Lucky officials were said to be in meetings at the Dublin, Calif., headquarters and unavailable for comment. The price of Lucky shares continued to climb Wednesday on the New York Stock Exchange, rising 62.5 cents a share to $37.75 on volume of nearly 1.3 million shares.

Has Stopped Deliveries

A sale to Target would probably mean that the Gemco operation would cease to exist. Industry insiders said Lucky has already stopped deliveries to those stores and plans to hold liquidation sales soon.

Reached by phone, a manager at an Orange County Gemco store said employees had not yet been told about the stores’ fate and were continuing to conduct business as usual.

Without responding directly to the Gemco speculation, George Hite, a Target spokesman, said the company “very badly would like to have some additional stores in the San Diego area,” where it now operates seven Target stores.

Gemco has 22 stores in Northern California and 48 in the Southland that average 100,000 square feet. Industry observers speculate that if Target chose to sell or lease some Southland locations, supermarket companies such as Vons and Ralphs might be interested. Dayton Hudson has no Target stores in Northern California, operating only the Mervyn’s department store chain there.

Lucky, one of the nation’s largest food retailers, operates 1,468 retail stores, including Lucky and Food Basket in Southern California. The company’s other operations include Kragen Auto Parts stores, Hancock and Minnesota fabric outlets and Yellow Front specialty stores. It has distribution centers in Buena Park and Irvine, and between 25,000 and 30,000 of its 68,000 employees work in the Southland.

Emotional Reaction

Leaders of Gemco’s union work force reacted emotionally to the possible acquisition by Target.

“At this point, we don’t know what’s happening,” said Norman Bell, secretary-treasurer of the United Food & Commercial Workers Local 135, which represents 1,500 workers at eight Gemcos in San Diego County.

Nonetheless, Bell said he and his fellow labor leaders would strongly oppose any massive layoffs.

“We’re not going to just lie down and be destroyed,” he said. The workers “have a right to employment. They have a right to expect that when they’ve given . . . their blood and their sweat to the company, they should continue to have employment.”

On Wednesday, Bell’s union sent its 12,000 San Diego members a three-page letter outlining what might happen if Gemco is sold. The letter also addressed the still uncertain status of employees at Safeway Stores, which was recently sold to an investor group in a leveraged buyout.

The union expressed frustration at the lack of information from Lucky and Safeway. “We’re doing everything we can to let the people know what the ramifications are,” Bell said. Union officials will meet with Lucky executives today or Friday, Bell said, to “find out what direction they’re going.”

Bell has done battle in the past with Target, which in 1982 leased 33 former FedMart locations, including eight in San Diego. After being shut for about nine months for remodeling, the San Diego stores were reopened under the Target name with 2,200 non-union employees, prompting a “Boycott Target” campaign by Bell’s union.

San Diego County Business Editor Bill Ritter contributed to this story.