Alpha Beta Owner Says Takeover Bid for Lucky Could Go to $1.9 Billion
American Stores, owner of Alpha Beta supermarkets, launched a $1.7-billion takeover offer for Lucky Stores on Monday in a bid to become perhaps the nation’s largest food and drug store company.
Within hours after making the $45-a-share offer, American Stores Chairman L. S. (Sam) Skaggs fired off a letter to Lucky saying his firm is prepared to hike its bid to $50 a share, or $1.9 billion, if the two companies can reach agreement “without undue delay.”
There had already been expectations of a higher bid. The stock was trading above $45 a share last week, and on Monday the price rose 87.5 cents to close at $48.625 on the New York Stock Exchange.
“I can’t say I’m totally surprised,” said Jeffrey Atkin, a partner of Kunath, Karren, Rinne & Atkin, a Seattle money management firm. “I consider it reasonable at that price,” he said of the new offer. “I wouldn’t say Sam Skaggs is stealing the company or overpaying for it.”
Lucky, meanwhile, continued to show no enthusiasm for the deal. It had no comment on the Skaggs letter, and earlier in the day, it urged stockholders to hold on to their shares until the Lucky board makes a recommendation.
Lucky--the nation’s sixth-largest food retailer, with 500 stores in California, Arizona and Florida--responded to American Stores’ initial offer last week by noting that it had an anti-takeover provision in place. Analysts took the response to mean that the Dublin, Calif.-based chain would oppose the takeover.
Lucky’s reluctance was also noted in Monday’s letter sent to Lucky board members. Skaggs said he and Lucky Chairman John M. Lillie had met March 21 to discuss the merger.
“Unfortunately,” Skaggs wrote, “your representatives have not accepted our invitation to enter into such discussion.”
Salt Lake City-based American Stores, also the owner of Sav-on Osco drug stores, is the nation’s third-largest food and drug retailer with stores in 40 states and more than $14 billion in sales. American Stores shares closed Monday at $54.875, down $1.75 in trading on the New York Stock Exchange.
Under the takeover proposal, which expires April 22, American Stores would combine its Alpha Beta supermarkets in California and Lucky stores under the Lucky name and under Lucky management.
American Stores also announced that it would sell off Lucky’s Arizona stores as part of its takeover. Analysts said such a sale could save American the millions necessary to expand the size of its Arizona operations.
By selling off Lucky’s Arizona stores, American Stores could save $75 million to $100 million to build needed stores, says John B. Kosecoff, a retail analyst at First Manhattan Co., a brokerage firm. Currently, Lucky has 22 stores in Phoenix and 15 in Tucson. Kosecoff estimates that Lucky needs at least 40 stores in Phoenix alone to make the chain competitive in that market and to take advantage of lower costs reaped by a larger operation.
“Those have been the poor stepchildren of the California operations,” Kosecoff said of Lucky’s Arizona stores. “It’s a very expensive operation.”
Supermarket analyst Edward Comeau of Wood Gundy Ltd., a brokerage firm, speculated that American Stores might consider selling off Kash n’ Karry stores in Florida that Lucky owns. The stores in Florida, like those in Phoenix, have been hurt by a flood of new competitors attracted by a rapidly growing market.
Many have speculated that Lucky’s management would resist a takeover and buy the company themselves through a leveraged buyout. Under such a plan, management would borrow money to buy the company, using the firm’s assets as collateral.
But Kosecoff considers a leveraged buyout unlikely. “A leveraged buyout would shoulder them with a high level of debt,” Kosecoff said.
Such heavy debt might impair Lucky’s ability to respond to a price war in Southern California, he noted, where the chain has prided itself on offering the lowest prices.
Adds Comeau: “If Lucky does a buyout, it’s not going to have the (money) to expand at the rate it wants to in Southern California.”
This is the second time within two years that Lucky has faced a takeover. About 16 months ago, corporate raider Asher Edelman scuttled his campaign to take over Lucky after the company shut down its Gemco stores and adopted an anti-takeover plan. Lucky also agreed to pay Edelman’s legal bills in return for dropping his bid.
