Alpha Beta Owner Bids to Buy Lucky for $1.7 Billion

The owner of Alpha Beta supermarkets Tuesday surprised the food industry with a $1.7-billion takeover offer for Lucky Stores.

Under the proposed deal, the company’s 240 Alpha Beta stores throughout California would become Lucky supermarkets, reflecting Lucky’s success in establishing itself as the area’s low-price leader.

If successful, the purchase would create perhaps the nation’s largest supermarket operator and continue the recent wave of dramatic changes among Southern California grocery chains.

In the last few months, Vons has agreed to buy Safeway Stores’ 171 Southland locations, and Boys Markets has agreed to a buyout by a company controlled by a wealthy Mexican family. Moreover, Ralphs Grocery has been put up for sale as part of a strategy by its owner, Federated Department Stores, to avoid an unwanted takeover by a Canadian developer.

Lucky’s stock price soared on news of the offer, but a cool response from Lucky management suggested that it may be girding for its second major takeover fight in less than two years. The response came even though American Stores invited Lucky management to stay in place at the Dublin, Calif., headquarters.

Industry observers speculated that a purchase of Lucky by American Stores, which owns Sav-on Osco drug stores in addition to Alpha Beta, would not necessarily spell bad news for food shoppers, despite a reduction in the number of major grocery operators.

“One would expect the Alpha Beta operations, under Lucky management, to change to an everyday-low-price position,” said John B. Kosecoff, an investment analyst with First Manhattan Corp. in New York.

Kosecoff noted that Alpha Beta stores, which registered a small decline in sales in the most recent fiscal year, could benefit from Lucky’s management and well-defined pricing strategies. “Given that consolidation in California is likely in any event,” he said, “this particular combination looks favorable for consumers’ interests.”

Roger E. Stangeland, chairman of Vons Grocery in El Monte, said the proposed Alpha Beta-Lucky and Vons-Safeway combinations, along with Ralphs, would still leave “three very large, potent competitors slugging it out pretty darn hard” in Southern California.

‘Two-Tier System’

But Tom Pirko, president of Bevmark Inc., a Los Angeles consulting firm, raised concern that such further consolidation would create a “two-tier kind of grocery system,” with immensely powerful megamarkets going up against small local groceries, specialty stores such as Irvine Ranch, Farmers Market and Trader Joe’s, and convenience stores.

With profit margins shrinking because of fierce competition, he noted, “the only way to beat the game is wipe out competitors and stabilize the market.”

A combination of American Stores, with 1,590 stores and 130,000 employees in 39 states, and Lucky, with 481 stores and 39,000 workers in California, Arizona, Nevada and Florida, would create a powerhouse with more than $21 billion in annual sales. (Lucky operates 340 stores in California, including 25 under the Food Basket name in San Diego. It is the largest food company in California.)

Even excluding the sales of American Stores’ drugstore operations, the merged company would perhaps top Cincinnati-based Kroger and Oakland-based Safeway, the current industry leaders, analysts said.

Earnings Decline

Earlier this month, American Stores, based in Salt Lake City, reported a 17.4% decline in earnings for the fourth quarter ended Jan. 31. For the year, net earnings rose 6.8% to $154 million on sales of $14.3 billion.

Lucky reported that 1987 earnings from continuing operations rose to $119.4 million from $49.7 million the year before. Sales for 1987 totaled $6.9 billion.

American Stores Chairman L. S. (Sam) Skaggs expressed high regard for Lucky management in a letter dated Monday that he reportedly delivered personally to John M. Lillie, his counterpart at Lucky. “We recognize that one of Lucky’s strengths is the quality of its management and the successful nature of its marketing strategies,” Skaggs said in the letter, released Tuesday.

Despite the conciliatory tone, industry analysts were uncertain how Lucky would respond to the proposal.

“I think Lucky wants to stay independent,” said Jonathan H. Ziegler, with the Sutro & Co. investment house in San Francisco.

Turnabout Possible

Ron Rotter, with the Los Angeles investment firm of Morgan, Olmstead, Kennedy & Gardner, speculated that Lucky might resort to a turnabout takeover attempt of American Stores.

Several analysts said the $45-a-share offer was a low-ball bid that American Stores would be prepared to raise. Estimates of the per-share price Lucky might bring--should other bidders surface or American Stores feel compelled to sweeten its offer--went from $49 to the mid-$50 range.

The stunning bid by American Stores reminded observers of the company’s approach to Jewel Cos., a Chicago-based food chain it took over in 1984. Skaggs proved a tenacious suitor, winning the approval of shareholders over the Jewel board’s objections.

Skaggs, the grandson of a Baptist minister who founded the company in Idaho in 1915, is highly regarded for his shrewd acquisitions, analysts said. Members of the Skaggs family have been instrumental in establishing a number of well-known retail chains, including Osco and Longs Drug Stores.

Federal Scrutiny

Like Vons’ purchase of Safeway, American Stores’ acquisition of Lucky would face scrutiny by the Federal Trade Commission for possible anti-competitive effects, observers said. A ruling in the Vons deal is not expected until May or June.

J. Michael Holt, vice president of investor relations for American Stores, said the company expects to begin an offer for Lucky’s 38.6 million outstanding common shares “within a week.”

Should it pursue the bid without the approval of Lucky’s board of directors, American Stores would have to contend with a provision put into place after Lucky successfully reorganized itself to avoid a takeover by New York raider Asher B. Edelman in 1986.

As part of that overhaul, Lucky closed its struggling Gemco membership department store chain, spun off some specialty retail operations to shareholders, sold other businesses and bought back $575 million of its own stock. Since then, it has won kudos on Wall Street for turning in record operating earnings by concentrating on its core food business.

Provision Cited

In its only response Tuesday to American Stores’ bid, Lucky noted that the anti-takeover provision limits the voting power of any holder of more than 10% of its shares. In no case would a holder with more than 10% of the company’s shares cast more than 15% of the total votes on a particular question.

A merger between American Stores and Lucky would probably spell the end of both companies’ efforts to buy Ralphs, almost ensuring that the Compton-based company would be bought by its own management team.

Analysts speculated that the bid by American Stores was as much defensive as offensive. The company’s operating margins have sagged recently, and it has frequently been mentioned as a possible takeover target. American Stores reportedly is third in the running in the billion-dollar bidding for Ralphs behind Lucky and Ralphs management.

Lucky, too, has been viewed as vulnerable. Since its corporate overhaul, the company has bolstered its standing in the Southern California market. For the November-December, 1987, period, Lucky passed longtime leaders Ralphs and Vons in so-called shopper traffic in Los Angeles and Orange counties. Lucky emerged with 18.2% of customer traffic, compared to Ralphs’ 16.7% and Vons’ 15.5%. Alpha Beta ran a distant fourth, with 9.7%.

In composite New York Stock Exchange trading, shares in Lucky Stores soared $14.50 to $46.75, with more than 4.2 million shares changing hands. Lucky was the day’s most active issue. American Stores shares tumbled $2.25 to $58.25.

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