Albertson's to Acquire Lucky in $11.7-Billion Deal

By JAMES F. PELTZ

Aug. 4, 1998 12 AM PT

TIMES STAFF WRITER

Albertson’s Inc. said Monday that it agreed to acquire American Stores Co., owner of the Lucky grocery and Sav-on drugstore chains, in the latest deal in a supermarket merger wave sparked by growing competition from discounters and a desire for greater cost savings.

The $11.7-billion deal would enable Albertson’s, founded 59 years ago with a single store in Boise, Idaho, to eclipse Kroger Co. as the nation’s biggest supermarket operator measured by revenue.

The addition of Lucky also would instantly give Albertson’s a much stronger presence in Southern California’s fiercely competitive grocery market, where Ralphs and Vons are currently the leading players.

“This helps Albertson’s a lot, in Southern California particularly,” said George Thompson, an analyst at Prudential Securities in New York.

Officials of both companies said the deal would lead to lower prices for consumers because the merged company would achieve cost savings from buying merchandise in greater quantities at lower prices. But some consumers and consumer advocates expressed concern that the merger could lead to higher prices and less choice for shoppers.

“We are worried because we don’t know what the prices will be,” said Maria Jimenez, a 41-year-old East Los Angeles mother who has shopped at a Lucky store in Boyle Heights for almost a decade. “We always come here for the prices.”

In any event, the merger faces antitrust scrutiny that could lead to Albertson’s being forced to sell some stores.

The merged company would have more than 2,470 stores in 37 states and annual sales of about $35 billion. Albertson’s runs 916 stores in 23 Western, Midwestern and Southern states, including about 175 in California. American Stores has 1,558 stores in 26 states, including 243 Lucky supermarkets and 278 Sav-on drugstores in Southern California.

For now, Albertson’s, Lucky, Sav-on and the other American Stores outlets will keep their names, though eventually Albertson’s and Lucky might adopt a single identity, said Teresa Beck, president of Salt Lake City-based American Stores.

Beck and Gary Michael, Albertson’s chief executive, also said they do not expect to close a significant number of stores--although they might have to divest some outlets to satisfy regulators’ antitrust concerns. Also, any job cuts would mostly come outside of California, primarily at administrative sites, they said.

“This is a great strategic fit because there isn’t much overlap,” said Michael, adding that about 75,000 of the combined companies’ about 215,000 employees work in California.

Many of those jobs are in Orange County. American Stores has regional offices and a distribution center for Lucky and Sav-on in Buena Park, and Albertson’s has a satellite corporate office and warehouse facilities in Brea.

A Wave of Consolidation

The wave of mergers reflects the stores’ belief that size is now crucial in the world of big-league supermarkets, where the competition and pricing are so cutthroat that earning 2 cents for every dollar of sales is considered an impressive feat.

In just the last two years, Safeway Inc. bought Vons, and the Ralphs and Hughes Family Markets chains were consolidated under the ownership of Fred Meyer Inc. of Portland, Ore. Also, Rite Aid Corp. bought the Thrifty Payless drugstore group.

By pairing up, the chains figure they can slash their redundant overhead and advertising costs and negotiate better deals with food and drug suppliers--thus enabling them to keep offering competitive prices, garner more shoppers and increase their sales.

“When you’re the biggest retailer, you get considerable discounts on purchasing all kinds of products,” said Mark Husson, an analyst at Merrill Lynch & Co.

Those goals are more urgent than ever, the stores contend, because they also face growing competition from other rivals such as club stores and mass merchandisers, including giant Wal-Mart, Target and Kmart.

Wal-Mart, for example, has been stealing sales from traditional supermarkets as it added Sam’s Club and Supercenter stores. It has opened more than 470 Supercenters, which join a Wal-Mart with a grocery store, since 1988. Its first Sam’s Club, a warehouse-style store that sells most items in bulk, was opened in 1983, and there are about 450 now.

To better compete, Albertson’s said it expects to wring $100 million of savings from its merger with American Stores in the first year, and $300 million by the third year, which “will be used to benefit our customers, giving them greater choice, better service and low prices,” Michael said.

Amid this scenario, American Stores was seen as a likely takeover target because its financial performance and stock price had sagged in recent quarters. American also operates the Acme and Jewel grocery chains, and the Osco drugstores.

Prudential’s Thompson said he was “a little surprised that Albertson’s stepped up” to make such a huge deal, but that “there probably isn’t a management around that studies the business as meticulously as [Albertson’s executives] do, so I have a great deal of confidence” in the merger succeeding.

First, though, the deal must get antitrust approval, which could require Albertson’s and American Stores to shed some outlets if regulators find areas where the combined stores impede competition.

In February, for example, Ralphs and Hughes agreed to sell 19 of their Southern California stores in an antitrust settlement with the California attorney general’s office.

“Albertson’s and Lucky both have a significant presence in California, and our office will be reviewing the merger to make sure competition will not be hindered here,” said Staci Turner, a spokeswoman for the attorney general’s office.

American Stores’ Stock Surges

The Federal Trade Commission, the U.S. agency that normally reviews major mergers in the supermarket industry, declined to comment on the Albertson’s-American Stores deal. The companies said they expect to complete the deal early next year.

American Stores’ stock soared in response to the deal, gaining $5.31 a share, to $28.50, on the New York Stock Exchange.

The deal calls for Albertson’s to exchange 0.63 share of its stock for each share of American Stores. Based on Albertson’s closing price of $48.50 a share Monday, the deal is worth $30.56 per share, or $8.3 billion, for American stockholders.

Albertson’s also plans to assume $3.4 billion of American Stores’ debt, giving the transaction an overall value of $11.7 billion.

Although it is not as big as Ralphs or Vons in Southern California, Albertson’s has long been a standout retailer, with sales, earnings and stock price growth that in many years have outpaced the industry average.

Albertson’s, which first arrived in Southern California in 1964, also isn’t afraid to buck industry trends. For instance, it is one of the few major chains that doesn’t have a frequent-shopper card offering discounts on selected items. Albertson’s contends that the cards are too costly, and prefers to appeal to consumers with its “everyday low price” strategy.

However, Lucky will continue offering its discount card, Michael said.

The merger proposal also has an ironic twist: It was the family of American Stores founder Samuel Skaggs that lent Joe Albertson the money to buy his first Albertson’s store in Boise.

Lucky, meanwhile, traces its roots to 1931; it was bought by American Stores in 1988.

Times staff writers Stuart Silverstein, Vanessa Hua and Susan Abram in Los Angeles and P.J. Huffstutter in Orange County contributed to this story. Times wire services also contributed.

* PRICE CHECK: Will the latest supermarket merger benefit consumers at the checkout lines? D1

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Market Merger

Albertson’s purchase of American Stores would make it the nation’s largest supermarket operator. Details on the two companies:

Albertson’s Inc.

Headquarters: Boise, Idaho

Chairman/CEO: Gary Michael

Chains owned: Albertson’s, Max Foods

Total stores: 916, including 22 Albertsons and two Max Foods in Orange County

Additional Orange County operations: Brea distribution center

Employees: 94,000, including 2,698 in Orange County

Fiscal 1998 sales: $15 billion