High Court Will Weigh California Challenge to Supermarkets Merger

In a major test of states’ power over corporate mergers, the Supreme Court said Monday that it will decide whether California can prevent the combination of Lucky and Alpha Beta supermarkets.

The high court’s acceptance of the case delays for at least several months American Stores’ plan to merge the two chains under the Lucky banner.

American Stores has argued that postponing the merger is costing Californians as much as $50 million a year because the chains cannot take advantage of operating efficiencies that would allow them to reduce prices by that much.

Attorneys for the state, on the other hand, have contended that the integration would reduce competition and end up costing consumers $440 million a year in higher overall grocery prices.

American Stores, based in Salt Lake City, would not comment on the high court’s decision to hear the case. In a recent letter to shareholders contained in its second-quarter report, the company said: “We remain confident that the ultimate outcome of the legal proceedings will be approval and completion” of the integration.

Monday’s development appeared to disappoint investors. The price of an American Stores share fell $2.50, to $57.50, although the recent upheaval in the stock market made it difficult to measure how much the court’s announcement affected the price.

In June, 1988, American Stores, owner of Alpha Beta, sought to form California’s largest supermarket chain by purchasing the Lucky stores for $2.5 billion.

But before the two operations could be merged under the Lucky banner, as was American Stores’ plan, state Atty. Gen. John K. Van de Kamp filed an antitrust suit contending that the combination would “lessen competition” and “irreparably harm” consumers.

In March, however, the U.S. 9th Circuit Court of Appeals ruled that since the American Stores purchase of Lucky had been completed in June, 1988, it was too late for Van de Kamp to seek a break-up of the two.

The question before the Supreme Court is a narrow one: Can a plaintiff other than the U.S. government use the federal antitrust laws to force an already-merged corporation to split up?

The federal Clayton Act forbids business moves that “may substantially . . . lessen competition.” The appeals court agreed that the Lucky-Alpha Beta merger probably violated the law, but said Van de Kamp’s only option was to seek legal orders limiting future store purchases by American Stores.

Responding to an appeal from attorneys for California, Justice Sandra Day O’Connor in August ordered Alpha Beta and Lucky to keep operating separately. Under Monday’s order, the justices will hear arguments early next year in California vs. American Stores (89-258). A ruling can be expected by July.

Whatever the outcome, the case will return for trial in Los Angeles. The attorneys for California have not yet proven that the merger violates the Clayton Act; the case has moved forward solely on the basis of the state’s assertion that it does.

The dispute also raises the larger question of whether aggressive legal officials acting on behalf of a state can make up for lax antitrust enforcement in Washington.

“I’m heartened that the Supreme Court will decide the urgent question this case presents,” Van de Kamp said in a statement Monday. Meanwhile, the two chains must operate separately, he noted, and he added: “Even more importantly, by granting my petition the Supreme Court has demonstrated the national importance of our efforts to put teeth back into the antitrust laws.”

Under the Ronald Reagan Administration, the Justice Department rarely challenged corporate mergers. Many conservative economists say that bigger companies are more efficient and more competitive than smaller ones.

Liberal economists, as well as Democratic officials such as Van de Kamp, hold that a merger of giant corporations in fact lessens competition and will lead to higher prices.

Even though Lucky became the No. 1 supermarket chain in California by keeping prices low, attorneys for the state have said that merging Lucky with Alpha Beta would likely result in a less aggressive pricing policy.

Last year, attorneys for the Federal Trade Commission examined the proposed merger of Lucky and Alpha Beta and agreed that it would give American Stores control of about a fourth of California’s retail grocery market. Nevertheless, the federal attorneys concluded that such a level of concentration did not violate antitrust law.

Lucky now has 337 stores in California; Alpha Beta has 210. Their combined sales are expected to total about $8.5 billion this year.

“What is going on in the Supreme Court has to do with the Clayton Act and not so much with American Stores,” said John B. Kosecoff, an analyst with First Manhattan Co. in New York. “But American Stores is caught in this quagmire.”

Ken Stevens, a partner at the Los Angeles office of consultants McKinsey & Co., agreed that the company is paying a high price for the legal delays.

“With American Stores having to run (the chains) separately for so long, they’re conceptually way behind in realizing the economies of the combination,” he said. Stevens speculated that American Stores might consider raising prices in parts of the country where the grocery business is less competitive to help boost its overall income and defray the legal expenses.

David G. Savage reported from Washington, and Martha Groves reported from Los Angeles.