Proxy fight looms in struggle for control of Pic 'N' Save chain.

Proxy fight looms in struggle for control of Pic'N'Save chain

David H. Batchelder and Lewis B. Merrifield squared off last week in the struggle for control of discount retailer Pic'N'Save.

Batchelder is the corporate raider best known as a former strategist for T. Boone Pickens. In what is his first solo effort at taking over a company, he vowed a proxy fight against Merrifield, the chairman and chief executive officer of Pic'N'Save, who responded with announcements designed to win the loyalty of shareholders.

Batchelder last week took his strongest stance to date, admonishing Merrifield for asking shareholders to pick his newest strategic plan and save the company from Batchelder's forthcoming but still unspecified buyout bid.

Merrifield announced a slight and equally vague detour from the company's aggressive expansion plans. He said that the emphasis in Pic'N'Save's board room will be firmly fixed on profitability for shareholders.

The possibility of a proxy fight loomed last month when Batchelder disclosed in a Securities and Exchange Commission filing that his Girard Partnership Ltd. had completed the $25 million purchase of 6.6 percent of Pic'N'Save stock. Batchelder said in the filing that he would ask shareholders to force the board of directors to solicit buyers for the company. If he succeeds in the proxy fight, Batchelder said, he intends to follow with his own bid for the company.

Pic'N'Save responded by questioning whether Batchelder's partnership could find enough financing to buy the $475.2 million Dominguez-based chain.

All was quiet until new salvos were fired last week.

Batchelder strengthened his vow of a proxy fight for control of the 190-store retail chain, again announcing that he would try to force the sale of the company to his partnership or another buyer. Confident that management's effort to head him off is too little, too late, Batchelder said that the proxy vote at the June 20 shareholders meeting would pave the way to acquisition.

"Ultimately shareholders own the company and they will decide the issue," said Batchelder in a phone interview from the offices of his La Jolla investment firm. "I think that the private market will more properly value Pic'N'Save than the public market. . . .It's really not management's decision to make."

Meanwhile, Merrifield said that Pic'N'Save management had already made some decisions for the shareholders, promising to slow expansion plans and improve profitability throughout the Pic'N'Save chain.

As recently as March in the Business Journal, Merrifield had stated that the company's southeast expansion was moving ahead at full throttle. In 1989 Pic'N'Save opened 35 stores and about 20 more are expected to be opened this year. The closing of less profitable stores is likely this year and the rest of Pic'N'Save's expansion plans are on the back burner, Merrifield said.

"This is an effort to increase shareholder value into bottom-line performance," said Merrifield. "The name of the game is to maximize shareholder value."

Merrifield's announcement was designed to increase shareholder loyalty in Pic'N'Save's current management, said Sarah Stack, a retail analyst with Los Angeles-based Bateman Eichler, Hill Richards Inc.

"It is certainly a counter-offensive," said Stack, "and it is against an unknown weapon at this point."

Batchelder's Girard Partners has said it merely wants "to cause the board to solicit acquisition offers for Pic'N'Save." Of course, it would make an offer for the company.

Batchelder said that he is in contact with major investors about Pic'N'Save, though he would not name names.

Analysts and Pic'N'Save management said Batchelder's promised proxy fight may be hot air.

Pic'N'Save is not a likely leveraged buyout target, they said. With total assets of $307.7 million and negligible real estate holdings, Pic'N'Save is committed to leases of $157 million through the year 2018. Analysts said collateral for a leveraged buy-out of Pic'N'Save is scarce.

"We haven't seen a significant amount of equity from Batchelder's group and we know that the retail market and the highly leveraged transaction market is really in a shambles at this point," said Merrifield. "It is a difficult market to finance any highly leveraged transaction."

Critics have said that Batchelder's follow-through is less than grand. In his career as an adviser to Marvin Davis and Pickens, Batchelder has participated in runs on at least 13 companies, including Los Angeles-based Unocal Corp. in 1985. The only acquisitions he completed for Pickens were the $800 million friendly merger with Pioneer Corp. in 1986 and National Lampoon in 1989.

Batchelder has criticized Pic'N'Save management for diminishing profits, down 34 percent last year to $30.9 million on revenues of $475.2 million, from 46.9 million in net income and revenues of $401.7 million the year before. Since 1986, when Pic'N'Save began its aggressive expansion that doubled the number of its stores in less than four years, profits and the price of common have been taking markdowns on a year-to-year basis -- fodder for Batchelder in his bid to force a sale.

"We feel as though we're being compared to 1986, when we were an entirely different company," said Merrifield. "We had a poor year last year. But, even in the worst of years, Pic'N'Save has had a return on investment that is ranked head-and-shoulders above any other retailer in the close-out business."

According to a retail industry research report by First Chicago Corp., Pic'N'Save ranked first in the discount store category with a 13.67 percent return on total assets in 1989, outpacing Wal-Mart at 11.17 percent return on total assets and the industry average of 4.62 percent.

Merrifield said that Batchelder's run has caused concern among employees and vendors. Meetings have been held to explain the situation to them, he said. He also said that meetings will be held with representatives of institutional investors this month in an attempt to build a defense in the face of Batchelder's run.

"We're telling them about the prospects of this business." Merrifield said. "What I'd really like shareholders to do is live and breathe Pic'N'Save for a couple of days so that they can get an idea of how we are fine-tuning the business and intensifying our effort to enhance shareholder value."