Vons Cos. on Monday accepted a $1.56-billion takeover offer from Safeway Inc., a deal that would create the nation’s second-largest supermarket chain and give Vons more clout to cut prices in an increasingly competitive industry.
Under the agreement, which is expected to clear regulatory hurdles, Vons would continue to operate its Vons and Pavilions stores under their current names and formats. Vons’ president would continue to manage the chain’s Southern California operation.
However, the new Vons would combine its buying power with that of Safeway, enabling it to acquire products more cheaply and become more competitive, said Safeway President Steve Burd.
“Every time you can reduce the cost of goods, it’s an opportunity to provide more value to consumers,” Burd said. “We’ll be better able to hold the line on prices. If there’s a competitive need to reduce prices, we’ll be better able to do that.”
The agreement ends a courtship that began Oct. 30 when Safeway Inc., which already controls 35% of Vons, offered to exchange 1.34 shares of Safeway stock for each share of Vons. Under Monday’s sweetened deal, Safeway is to exchange 1.42 shares for each Vons share.
Vons shares soared $4.625 to close at $53.50 on the New York Stock Exchange; Safeway shares inched up 12.5 cents to $38.50.
The value of Safeway stock has declined since the original offer, and the deal is now put at less than the $1.7-billion value of that bid. Ironically, Vons delayed its response to Safeway to obtain a better offer.
Vons could get a better deal, though, if Safeway’s stock rises before Vons shareholders vote on the agreement. Shareholders are expected to approve the deal by April.
April is also the month that Vons Chairman Larry Del Santo is scheduled to retire. Del Santo made his retirement plans before the Safeway bid.
Vons President Richard Goodspeed is to remain with Vons after the merger as manager of the Vons stores. Working with Safeway, he is expected to help Vons boost employee productivity.
Safeway has improved its own productivity by more clearly defining job responsibilities and reducing operating costs. The savings from such changes put Safeway in a position to return to Southern California, a market it left eight years ago when it sold its stores to Vons.
“Safeway is not the same company it was when it left Southern California,” said Burd.
Safeway, based in Oakland, pursued Vons because it is a well-run chain in the only major West Coast market without a Safeway presence, said Philip Mulqueen, an analyst at Salomon Bros. in New York. The acquisition would enable Safeway to boost earnings, he said.
“The combined company will have a stronger cost structure and that will allow Vons to be more competitive on pricing and service,” Mulqueen said.
Vons’ rivals agreed the merger will increase competition in the region.
“This is a positive for consumers in Southern California,” said George Golleher, chief executive of Compton-based Ralphs Grocery Co. “Southern California is already the most competitive marketplace in the nation. This gives Vons more leverage. It’s a combining of two of the finest management teams in the supermarket business.”
Jack Brown, chairman of Stater Bros., said a supermarket price war is unlikely. But he said Vons will be more competitive during any downturn in the regional economy because it will have the resources of Safeway, which is less susceptible to regional recessions because it operates in many parts of the country.
The combined company would have 1,377 stores and more than $22 billion in revenue, ranking second only to Cincinnati-based Kroger Co. on a national scale.
In Southern California, Vons ranks second to Ralphs. Safeway/Vons would also have to contend with competition from Lucky (owned by American Stores Co.), Hughes and Albertson’s; specialty chains such as Bristol Farms and Whole Foods Markets; and low-priced warehouse chains such as Food 4 Less (owned by Ralphs), Smart & Final and Price/Costco.
Vons was losing ground to its competitors when it began a cost-cutting program in 1993. Since then, it has eliminated about 700 non-store positions, reducing its administrative and support staff by about a third. It has used those savings to cut prices and regain market share.
Safeway is likely to prune duplicative operations at Vons’ headquarters in Arcadia, which would be converted into a Safeway division office for Southern California. About 600 of Vons’ 30,000 employees work there.