Allied Merger Caps a Busy Year for Vons Management

Partying was the last thing on Roger E. Stangeland’s mind New Year’s Eve, although he had plenty to celebrate.

The chairman and chief executive of Vons Grocery Co. instead was sleeping off the effects of days of travel and negotiations that culminated in a surprise announcement late Wednesday that the company, which went private just a year ago, would become publicly traded through a merger with a Detroit supermarket chain.

“I had been armpit deep in lawyers,” Stangeland said Friday in a telephone interview. “I really hadn’t been to bed since Sunday night, (so) I slept on New Year’s Eve. No revelry.”

He’s pleased with the agreement with Allied Supermarkets of Detroit, which marks a renewal of a combination that the companies originally announced in September then called off a month later.

Complex Plan

Under the complex plan announced Wednesday, Vons, which operates 190 stores in California and Nevada, will merge with Allied then sell the Detroit company’s operations--the Great Scott! and Family Drug retail stores and the Abner Wolf distribution company--to the current management.

The companies estimate the value of the deal at $700 million in cash and stock.

“It’s the sale of the two businesses in Detroit to a new company and the merger of Vons into the old Allied corporate shell,” Stangeland explained. “We presume we will succeed to the listing on the New York Stock Exchange under a new symbol. The management of Vons will remain intact and remain here without changes in title or responsibility.”

The deal capped an eventful year for Vons, an El Monte-based company that started the year off with a bang by completing a management-led buyout worth about $750 million and converting the company to private ownership. During the year, Vons, which since 1969 had been a subsidiary of Household International, then sold three other non-food units that had been purchased with the grocery store operation, using some of the nearly $500 million in proceeds to pay off part of the massive debt incurred in the buyout.

Other Acquisitions

It also acquired Pantry Stores, an upscale chain of 10 small, service-oriented groceries; opened several Pavilion stores, 60,000-square-foot food and drug stores, and announced plans for the first major Southland chain of stores geared to Latino customers. The first of those stores, called Tianguis, is scheduled to open in a week and a half in Montebello.

“That’s not bad corn-pickin’ for a year,” said Stangeland, an Illinois native.

Stangeland said Vons set about months ago to devise a recapitalization plan that “had the right balance” of debt and, in fact, considered a public offering but decided that market conditions were unfavorable.

“So we thought it would be nice to find an existing public company that had a balance sheet that fit our needs,” he said. “We were looking for a company with a lot of cash and not a lot of debt.”

Allied appeared to fill the bill, but its management insisted on several points that Vons decided “didn’t meet our needs particularly.” Most important was their intention to keep the Detroit operation.

When Warburg, Pincus recently approached Vons to say that the problems might be worked out, Vons was interested, Stangeland said.

“It was a real rush to the finish line,” he said. “We wanted a definitive agreement” by year-end to ensure that Allied’s tax-loss carryforward of about $21.3 million would qualify for more favorable treatment under 1986 laws.

New Debt Structure

Although Stangeland declined to talk in specific dollar figures, he said all of the company’s existing debt will ultimately be repaid and “a new structure of debt will be created to replace it,” presumably at much lower interest rates.

Current shareholders of Vons appear to benefit handsomely from the new agreement. They will divide a total of $132.1 million and receive about 0.8 of a share of stock in the newly named Vons Cos. for every current Vons share.

Led by the largest investors--Warburg Pincus Associates, with 14% of the new company; management, with about 10%, and others--the Vons holders will own about 13.3 million shares of the new company, with Allied holding 14 million. Allied management will also pay $46 million for its operations and assume more than $20 million in debt.

(Allied Supermarkets is unrelated to Allied Stores, a major operator of department stores.)

Although Allied’s stake in the new public Vons is larger, it will have no board representation. The new company will have seven board members, including Stangeland and two representatives of Warburg Pincus.