Vons to Buy Safeway’s 172 Stores in Southland : $408-Million Deal Will Be Completed by Next Summer; Some Markets Will Be Closed

Safeway, which has supplied Californians with groceries for more than half a century, announced Thursday it is leaving Southern California and selling its 172 stores here to Vons.

In a deal valued at $408 million, Vons said it plans to close some existing Safeway stores as well as some Vons supermarkets.

But the company did not say how many or which stores would be closed or how many workers might be affected. The remaining Safeways would become Vons markets.

$325 Million in Cash

In its aggressive move to become California’s biggest supermarket chain, Vons Cos. has agreed to buy the Safeway stores and most of its other Southern California operations for $325 million in cash and $83 million in Vons stock.

Under the deal to be completed by next summer, Safeway, the world’s largest supermarket chain, would end up with 30% of Vons stock. The deal must also be approved by Vons shareholders.

In purchasing the 172 stores from Safeway, Vons would nearly double in size. Vons now has 193 stores. By comparison, Lucky Stores has 179 markets in Southern California; Alpha Beta has 192, and Ralphs has a total of 128 stores, including its Giant stores.

In addition to the supermarkets, the El Monte-based Vons will take over Safeway’s distribution and processing operations in Santa Fe Springs and Los Angeles.

“We want to be the leading food and food-drug retailer in Southern California,” said Roger E. Stangeland, Vons’ chairman and chief executive officer. “This is a landmark transaction that makes us the sixth or seventh largest food retailer in the world.”

For shoppers, the merger could bring about lower prices at checkout counters--at least for a while--as competing supermarket chains try to woo Safeway customers into their stores.

With eight major chains and scores of independents scrambling for Southern California’s consumer dollars, the elimination of Safeway will create intense competition, lower prices, more promotions and more advertising, industry sources said.

But analysts warned Thursday that whenever a major player such as Safeway leaves a market, consumers ultimately could see bigger grocery bills.

“The eventual outcome would reduce competition--which could mean higher prices over the long haul,” said Ronald Rotter, a supermarket analyst in Los Angeles with Morgan, Olmstead, Kennedy & Gardner.

In leaving competitive Southern California, Safeway joins a string of grocery stores that have vanished in the last 10 years, including names like Fazio’s, FedMart, Market Basket and Thriftimart. It was only a year ago that Lucky closed its Gemco discount stores that included grocery departments.

For Vons, a decision on which stores to close is still months away, Stangeland said. Vons will not make any decision until spring, after government authorities have decided whether there are any antitrust ramifications that would prevent the deal from being completed.

Several sources close to the chain have said that Vons expects to close about 50 stores in the Southern California division of Safeway, which extends from the Mexican border north through San Luis Obispo County.

‘Significantly Less’

Stangeland, however, said “it will be significantly less than 50,” adding: “Our goal is to keep as many stores open as possible. We’re buying the business to run the stores.”

Safeway will retain the 224 stores in its Northern California division.

A spokeswoman for the United Food and Commercial Workers, which represents a majority of Safeway employees, said Thursday that the union will negotiate with Vons about the future of Safeway’s work force.

“We’ve got a lot of members working at Safeway who have a lot of time in the industry,” said Andrea Zinder, research director of UFCW Local 770. “Obviously, we’re concerned that they be employed, have seniority and that their benefits be continued . . . (and that) there be no reduction of hours (and no) layoffs.”

The union will “make a concerted effort among all Southern California locals to protect the jobs of our members,” Zinder added.

Under the agreement announced Thursday, Vons will pay $325 million in cash, including the payment of certain debts, plus 11.67 million shares of Vons common stock for Safeway’s stores, plus its dairy processing plant, an ice cream manufacturing plant, a bakery and its grocery, frozen food and produce distribution warehouses.

Safeway will retain only one subsidiary that owns a cheese processing plant in Corona, a meat service center in Vernon, and soft drink bottling works and a household chemical bottling company in Los Angeles.

Market Transactions

As a result, Safeway Stores will own 30% of Vons’ common stock and may acquire up to 5% more of Vons’ shares in market transactions, according to the joint release.

Vons expects to finance the cash portion of the purchase through bank credit, issuing new debt, or a combination of both. Vons projected that with the equity provided by the Safeway operation, its debt level as a percent of capitalization will not significantly change.

Stangeland said that Vons will try to expand its short-term borrowing “to the fullest extent possible” to finance the transaction, then “we’ll rely on our investment bankers,” led by Drexel Burnham Lambert. While bankers have not yet agreed to extend Vons additional credit, Stangeland said the chain is “highly confident” that financing will be obtained.

The merger had been rumored among the grocery and retail industries for months and is a logical move for Vons, which regularly vies with Ralphs for the position of most-shopped chain in Southern California.

For Vons, the purchase is ideal, Stangeland said, because Safeway offers a good fit. “They have a particularly good concentration of stores in areas where we don’t”--such as Orange County and West Los Angeles, he said.

“When you combine two businesses, you achieve some cost effectiveness,” Stangeland added. “There are some savings, some synergies that . . . could result in one of the most cost-effective food retailing networks in the country.”

The deal, meanwhile, provides Safeway with badly needed cash.

Although Safeway is the world’s largest supermarket chain, operating 1,682 stores in the United States and Canada, it has consistently been a poor performer in Southern California. While the chain does not release earnings of its individual divisions, Safeway had a net loss last year of about $14 million.

Safeway has been heavily in debt since a $4.2-billion takeover last November by Kohlberg Kravis Roberts & Co., a “white knight” investment firm that agreed to buy the grocery chain, rescuing it from a hostile takeover attempt.

Safeway’s chairman, Peter A. Magowan, in a prepared release, said he is confident “that this combination will create an even stronger company. We look forward to being Vons’ largest shareholder. And as such, Safeway will continue to benefit from future profitability that our Southern California stores will bring to Vons.”

Retail food industry sources, meanwhile, agreed that Safeway’s sale will intensify the competition for consumers’ dollars.

Top executives with three competing chains--Lucky Stores, Boy’s Markets and Stater Bros.--said they may be interested in buying any Safeway locations that Vons decides not to keep.

“Every time you lose a competitor, the other surviving chains certainly intensify their competitive situation and try to attract as many Safeway customers as they can,” said Jack H. Brown, chief executive of Stater Bros. “For a period of time, it’s very possible the other major chains will try and woo the Safeway customer through additional advertising, promotions and price advertising.”