Improved Safeway Saves Vons Millions on Merger
In the latest wrinkle in the supermarket merger game, Vons Cos. disclosed Wednesday that the price it paid for Safeway’s Southern California operations was shaved by $36.5 million, to $371.5 million.
It saved the money because its deal with Safeway, first announced in December, 1987, called for Vons to pick up the profit or loss from Safeway operations in Southern California while the deal was being completed.
Despite observers’ view that Safeway was a laggard in this market, Vons ended up cashing in on a surprisingly improved performance in recent months by Safeway’s Southland stores. For the six months ended June 18, they showed pretax income of $10.6 million.
The Safeway results were disclosed in Vons’ 192-page proxy statement, which was made public Wednesday after weeks of review by the Securities and Exchange Commission.
The better-than-expected performance of Safeway’s Southern California stores reflects a “strong, improving trend” at the division, which benefited from closings over the past five years of about 80 struggling locations, according to Mary M. McAboy, Vons’ director of investor relations.
Analyst Jonathan H. Ziegler with Sutro & Co. in San Francisco said he is “very surprised by the strength of Safeway’s operating profit in the interim period.”
Ziegler added that key to Vons’ success, now that it has taken on a heavy debt load for the acquisition, will be whether it can enhance sales at the 162 Safeway stores it is in the process of upgrading and remodeling.
In the proxy document, Vons said its average sales per square foot in 1987 were about $704, compared to $447 for Safeway. Vons said its policy of implementing price cuts in Safeway stores will result in lower profit margins but greater sales volume per square foot.
Nov. 10 Meeting
Vons also said it expects to realize savings by consolidating operations and reducing expenses. For example, it anticipates annual savings of about $12 million as a result of its decision to close Vons’ bakery in favor of Safeway’s and to consolidate some milk plants. Moreover, it will save about $4.5 million a year on back-office expenses and $10 million annually in reduced advertising costs.
The Vons-Safeway merger is complete except for a technicality: For the deal to satisfy New York Stock Exchange rules, shareholders must first approve Vons’ issuance to Safeway of a note with a principal amount of $35 million, convertible into common stock. Shareholders of record Sept. 19 are expected to approve that measure at a meeting Nov. 10 in Monrovia.
As a result of the merger, Safeway is the largest shareholder of Vons, with about 20% of the outstanding shares. Once the note is converted, it will own about 30%.
In trading Wednesday on the NYSE, Vons shares rose 25 cents each to $10.625.
In other matters, Vons revealed for the first time in the proxy that it might be required to sell additional stores under an agreement in principle with state Atty. Gen. John K. Van de Kamp. Van de Kamp considered challenging the merger on antitrust grounds but instead chose to negotiate a settlement with Vons, details of which have not been disclosed. The Federal Trade Commission, in granting federal approval for the merger, required Vons to sell a total of 12 Vons and Safeway stores.
Vons also reported that it will pay $13.25 million for a May Co. store in Arcadia to be converted into the organization’s new corporate headquarters.
