Lucky Backs $2.4-Billion Bid by Investment Firm
Lucky Stores, attempting to thwart a hostile takeover bid by the owner of the rival Alpha Beta supermarket chain, said Thursday that it has agreed to a $2.4-billion buyout by an investment firm.
The proposed buyout by Gibbons, Green, van Amerongen would keep Lucky’s management in place and preserve the chain’s independence.
But the deal immediately raised questions about how Lucky, by taking on a pile of debt, can continue to expand and offer consumers low prices.
Moreover, it seems unlikely to end the pursuit of Lucky by American Stores. Lucky’s stock price on Thursday surged as investors anticipated a bidding war. Lucky stock was the day’s most active issue on the New York Stock Exchange, climbing $5.375 to $61.50 as more than 3.3 million shares changed hands.
Might Go Higher
Under the proposed deal, a company formed by Gibbons Green, a 19-year-old firm that helped pioneer some of today’s most fashionable buyout techniques, would pay $61 a share in cash and stock for Lucky’s 38.9 million outstanding common shares.
While investment analysts noted that the agreement with Gibbons Green comfortably topped American Stores’ formal offer of $45 a share, or $1.74 billion, they noted that the Salt Lake City operator of supermarkets and drug stores has now indicated that it would pay more.
In a statement issued Thursday, American Stores disclosed that it had proposed a $60-a-share takeover in a letter delivered to Lucky on Wednesday. That deal would come in two stages, with stockholders receiving $60 a share for 85% of Lucky shares and $60 in stock for the rest.
American Stores Chairman L. S. Skaggs also stated his willingness to go higher than $60 a share “if Lucky can convince American Stores that the values . . . justify a higher price.” Skaggs did not elaborate on the stock portion of his proposed $60-a-share offer.
He wrote: “I want to reiterate my belief that American Stores should be able to exceed the price any other buyer is prepared to pay for Lucky, given American Stores’ financial strength and the substantial business advantages” that would result from a combination of Lucky and Alpha Beta.
The agreement with Gibbons Green calls for a tender offer for Lucky shares to begin on or before May 4. Presuming that all shares are turned in, each share would be exchanged for a package of $56 in cash and preferred stock with an apparent market value of $5. The preferred shares’ stated value is $7, but both analysts and Gibbons Green estimated its true market value at only $5 because dividends would be paid in stock, not cash, for the first five years.
A purchase of Lucky would be by far Gibbons Green’s largest buyout transaction and its first venture into retail supermarkets. The investment firm helped pioneer the leveraged buyout, the now commonly used practice in which a company’s assets are used as collateral for financing a takeover.
The previous biggest acquisition by Gibbons Green was of Bath Iron Works for $580 million. With offices in New York and Los Angeles, it previously has completed purchases of 23 companies for a total of $3.3 billion, including Coca-Cola Bottling of New York, Purex, Ekco Housewares, Foodmaker, Rival Manufacturing and Budget Rent-a-Car.
The firm also manages three buyout funds, which have access to $600 million held by insurance companies, pension funds, university endowments and offshore investors.
No Changes Indicated
The partners include Lewis W. van Amerongen and Edward W. Gibbons in New York and Leonard I. Green in Los Angeles.
In a statement Thursday, Van Amerongen of Gibbons Green said: “We are enthusiastic about the prospects of Lucky Stores. We believe it is the pre-eminent supermarket company in the areas of its operations, including several regions of the United States.”
He added that the firm intends to keep Lucky’s management and employees and maintain the company’s headquarters in Dublin, Calif.
John M. Lillie, Lucky’s chairman and chief executive, said: “We believe that the transaction . . . is very beneficial to our stockholders and allows Lucky to continue with its plans for growth.”
No Lucky officials were available to elaborate on the prospects for continued growth, but industry analysts wondered whether the buyout might prove a handicap.
“One would presume that various properties would be sold by Lucky in order to reduce the debt burden of a leveraged transaction such as this,” said John B. Kosecoff, an analyst who follows the company closely for First Manhattan Co. in New York. “Moreover, it calls into question Lucky’s 25-year stance as a low-price leader” because the debt would “inhibit such a low-price leader from being able to respond to competitive pricing conditions.”
In recent years, Lucky has established an image as being an everyday low-price leader. The chain maintains that it forgoes such costly promotions as unlimited double coupons so that it can keep prices down.
Battle Isn’t Over
Lillie’s comment, Kosecoff said, indicated that the company expected to have enough capital available after paying off debt to buy sites and open new stores. “That ability has historically not been evidenced in (leveraged buyout) situations,” Kosecoff said. In previous buyouts, including Safeway Stores and Supermarkets General, “real estate activity by the companies dried up almost immediately” because they were short of funds.
Industry executives and analysts puzzled over American Stores’ next step, but no one considered the company out of the running.
“The battle’s not over,” one Wall Street source said. “I would expect American Stores to do something. They’ve said they are willing to go over $60. Why stop here? It doesn’t make sense.
Talking to FTC
“It’s a big company with great synergies with Lucky Stores, and they want it bad, (although) it is a huge price.”
One executive of a Los Angeles supermarket chain speculated that American Stores is attempting to get preliminary antitrust clearance for a merger to strengthen its negotiating position with Lucky’s board. “There have been several American Stores people in Washington dealing with the (Federal Trade Commission),” he said. Such preliminary approval “might be the key to whether American Stores could make an offer that could be realistically dealt with by the Lucky board.”
He and others suggested that American Stores might go to court to block a deal between Lucky and Gibbons Green.
GIBBONS GREEN: BIG DEALS
Major deals in which Gibbons, Green, van Amerongen has successfully led a group of investors in the acquisition of a company; dollar figures in millions.
Year Target Value ’86 Bath Iron Works $580.0 ’86 Budget Rent-A-Car* 501.0 ’85 Foodmaker* 450.0 ’87 Ladish* 236.0 ’86 Rival Manufacturing 118.3 ’85 Beatrice Cos.’ food 116.0 service equip. unit ’87 Wells Aluminum 102.0
*Management participated in buyout.
Source: IDD Information Services
