Challenging a Mega-Merger : Atty. General Says Shoppers Would Be Left Holding Bag : JOHN K.VAN DE KAMP

When California Atty. Gen. John K. Van de Kamp filed an antitrust suit last month to block the merger of the Lucky and Alpha Beta market chains, it came as no surprise to those who follow the supermarket industry or the career of John Van de Kamp.

After all, the attorney general had already asked the Federal Trade Commission to reject the $2.5-billion acquisition of Lucky by Irvine-based American Stores, Alpha Beta's owner. He had also opposed the acquisition of Safeway's Southern California markets by Vons, although no suit was filed in that case.

Van de Kamp's office has an aggressive record of scrutinizing what some have called the rash of mega-mergers among businesses. And it was instrumental in drawing up tougher guidelines for business mergers and acquisitions that were adopted 18 months ago by all 50 state attorneys general.

What did shock some was U.S. District Judge David Kenyon's decision, issued Thursday, to block the Alpha Beta and Lucky merger, perhaps the biggest ever in the supermarket industry, pending trial of the attorney general's suit--a trial that could take years and won't begin for at least six months, attorneys say. The decision, many in the industry believe, will effectively kill the merger long before the issues are decided at trial.

Van de Kamp's argument is that the merger would reduce competition and cost shoppers millions of dollars by permitting two powerhouse chains--American and Vons--to dominate Southern California.

But, he said after hearing of Kenyon's decision, "this is only an initial victory. Alpha Beta may well appeal the decision immediately. And we will have to prove in a full trial the damage to consumers this merger threatens. I look forward to that opportunity."

American Stores, indeed, has said that it intends to appeal the decision.

In an interview last week with Times staff writer Mary Ann Galante, Van de Kamp discussed why he brought the action against American and how and why mega-mergers must be scrutinized. He also answers critics who claim that his lawsuit against American was no more than political grandstanding, in preparation for Van de Kamp's expected 1990 candidacy for governor.

Q. Why did your office decide to file the case against American Stores after the Federal Trade Commission rejected your arguments?

A. We thought it was a substantial case where there really was nobody else. We had exhausted our ability to get other agencies to work on it. We did the same thing, by the way, in the Southern Pacific-Santa Fe merger a couple of years ago because that was before the Interstate Commerce Commission. The American merger had just such a significant impact on California. Just about every person who lives here is affected by the supermarket industry. It's a bedrock kind of an industry that affects everyone.

Q. Have you opposed other mergers?

A. Another case that we got involved in some years ago was the Getty-Texaco merger, where we did the same kind of thing. We worked through the FTC and did not get satisfaction. We had to file a lawsuit that is still pending before the California Supreme Court. We also have intervened before the Public Utilities Commission over the rates going to Pacific Gas & Electric Co. as a result of the Diablo Canyon power plant construction. We have a settlement that's now in front of the Public Utilities Commission that we think can save consumers a substantial amount of money over the life of that plant--the equivalent of close to a $2-billion disallowance in that case. And in a different kind of a forum, a different kind of case, we recently filed along with other attorneys general a suit against the insurance industry over what we believe to be boycotting of the California market. We will try to tackle these cases when there's no one else there. We've found the federal government does not have much inclination to take these kinds of things on. So we're left as the enforcement agency of last resort.

Q. Why isn't there that inclination on the federal level? And why did your staff assess the American case differently than the FTC?

A. I think we just have significantly different views about these types of mergers and their anti-competitive impact. It led the National Attorneys General about a year and a half ago to issue their guidelines with respect to mergers. We believe our guidelines are analogous of existing law and what business entities should be concerned about as they try to address legal issues, as opposed to Department of Justice guidelines that have become increasingly flaccid since the Reagan Administration took office.

Q. Flaccid?

A. The FTC rarely saw a merger that they didn't love. They looked at mergers almost exclusively on the basis of efficiency and economies, without looking to the ultimate impact on the marketplace and on competitive behavior. But the attorneys general from around the country virtually unanimously--Republicans and Democrats--developed their own guidelines, and I think we were within those guidelines in filing this particular lawsuit to block the largest corporate merger in the history of the grocery industry. I think if you look at the antitrust policy from the Carter Administration going back to the 1960s, you will see that existing law is much more akin to that, certainly, than to the Reagan Administration's policies. We shouldn't have to get into a case like this. We think existing law is fairly clear. And the FTC should adequately be able to deal with it--as should the Justice Department. That's not to say that once in a while, the Justice Department will not surprise us. We were quite surprised that they took a position opposed to the Southern Pacific-Santa Fe merger. That amazed everyone.

Q. It sounds as though your office's position signals a serious dissatisfaction with the FTC and its policy toward takeovers.

A. I think it can generally be said that we think the federal government has had a laissez faire policy toward these kinds of mergers. On the other hand, mergers have to be judged on a case-by-case basis, and I don't want to get overly broad in my labels.

Q. Is your opposition in this case a warning of more stringent antitrust enforcement in California?

A. It is a warning that this office will continue to look out for consumers when we can and be active when we can, and when we can really make a difference. Sure.

Q. Are you saying that Californians keep getting the short end of the stick as the FTC continues to allow mergers of giant companies?

A. On occasion. On this one, we believe that if it happens it ultimately will lead to a less competitive marketplace, which will cost California's consumers an estimated $400 million a year in higher food prices.

Q. How do you arrive at that conclusion?

A I think what we've been able to find out is that Lucky's management is good. That's one of the reasons that Skaggs brought them in. He was having trouble with Alpha Beta stores. He wanted Lucky's management and Lucky's has had a low-price record in California, a very competitive record. At the same time, despite all that, they claim that they'll continue Lucky's pricing policy. Lucky's pricing policy is always dictated by the extent of the competition. And so as competition diminishes, we expect Lucky's prices to go up--that's only natural--regardless of the quality of their management.

Q. Yet American has contended that blocking the merger will cost consumers some $50 million a year because of the internal costs of running two separate chains without being able to combine them for efficiency. How do you respond to that argument?

A. There may be efficiencies that are brought into it. That will, of course, maximize their profits even more because we're talking about prices. We're talking about their ability to raise prices. And that is dependent on the level of competition. They're not in this to give money away--or to pass on these benefits to the consumers. The merger would certainly make them more competitive. And give them an ability to better control the marketplace. Another thing that hasn't been discussed very much is the tremendous impact this will have on farmers and providers. Because of their ability to buy en masse, a combined Lucky and Alpha Beta will have a tremendous amount of leverage on the farming community. In other words, while a merger would benefit the new, merged organization because it perhaps can make better deals--which don't necessarily flow through to consumers--the merger also may have some counterproductive impacts on farmers, who are facing rough years. If the merger goes through, the question is whether internal savings get passed on to consumers. That could happen in a competitive marketplace. But what you're doing here, of course, is reducing the competition in the marketplace. So, if anything, the savings would tend to go into the pockets of the market owner.

Q. If that is the way you feel, why didn't your office pursue Vons and Safeway when that acquisition was announced?

A. Because we began negotiating a settlement, and I think it can be said that we have at least an agreement in principle with respect to that merger that may not be perfect, but it's relatively satisfactory. It deals with many of our concerns. I think it can be said that in the agreement in principle--which I'm not at liberty to disclose at this point--a number of factors are considered and worked out that we think limit the anti-competitive aspects of that merger.

Q. Can you discuss the concerns you had with that merger?

A Without getting into the agreement, I think it can be said that we were concerned as to whether or not Vons could enter the Northern California market, where Safeway now is a major chain, and wouldn't be unduly hampered from doing so by the Safeway executives on its board. We are obviously concerned about the number of markets that would be under one ownership as a result in the merger. And also about future expansion that could continue, over a period of years, to limit competition even further.

Q. So does the tentative agreement limit future expansion?

A Well, I'm just telling you about some of our concerns. And I think that in a sort of balanced way, we've gone some distance in meeting some of those concerns.

Q. The feeling among many in the supermarket industry is that your office filed against American and not Vons because Vons Chairman Roger E. Stangeland is more politically savvy than American Chairman L.S. "Sam" Skaggs. That Skaggs runs a very closed, private ship and would be less likely to negotiate. Was American offered the same opportunity to negotiate as Vons?

A. Yes, we've had discussions with both groups and American indicated that there was no reason to talk. Of course, they put out $2.5 billion and I guess they felt they had a strong case. We disagreed with that, obviously, and I think the judge has, at least up until this point. Skaggs certainly is represented by a fine lawyer, and I would have to believe that they discussed the possibilities and reached their own judgment as to what could be done. And I gather that Skaggs ultimately decided that he was going to take the risk.

Q. Some in the supermarket industry have accused you of political grandstanding--that you brought the antitrust action against American because you plan to run for governor. How do you respond to that?

A. That's nonsense. This would be done regardless of that. You have to look at the results. Was it grandstanding to have a $2-billion settlement in the PG&E; case that benefits consumers? Is it grandstanding to stop airline false advertising? One of the reasons that we're elected to hold these jobs is to enforce the laws of our particular state. And we're doing that with fairly limited resources to the best of our ability. Somebody has to stand up for consumers. If that's regarded as political, so be it. But the bottom line is the result. That's the most important thing. That sort of charge is always lobbied against any public official I've ever seen. It's a cheap kind of an attack. If we were grandstanding and had gone in without any kind of substance, Judge Kenyon would have denied the request for an injunction outright. He understands that there is something very significant at issue here. And I think you could look at our suit. The papers have to speak for themselves. It's not just a political statement. That's baloney.

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