Yucaipa will stack up hefty debt load if it buys Ralphs.

But analysts reckon savvy management can handle it

Yucaipa Cos. may pay a premium for Ralphs Grocery Co. and take on a cumbersome debt load in the process, but the merged entity should be able to handle it, supermarket industry sources say.

Century City-based Yucaipa Cos., which owns the Alpha Beta, Boys, Viva and Food 4 Less supermarket chains, is nearing an agreement to buy Compton-based Ralphs Grocery Co. for $2.5 billion, according to published reports. As of late last week, talks were continuing.

This price is much higher than what other supermarket companies have sold for in the past, analysts say.

Furthermore, the merged entity may have as much as $3 billion worth of debt on its books, sources say. This figure comes from adding the debt the two companies already have on their plates -- roughly $1.5 billion -- to an almost equal amount that Yucaipa may borrow to pay for the acquisition.

But the merged entity could handle the load because it would generate enough cash flow to pay the interest on it. Also the new entity's management would be very experienced and capable of operating a highly leveraged company, analysts said.

Spokesmen at Yucaipa and Ralphs declined to comment.

Several analysts and other experts noted Yucaipa would be paying a steep premium for Ralphs, if the $2.5 billion tab being reported is correct -- a $1.5 billion price tag plus assumption of about $1 billion of debt.

Supermarket companies typically sell for six or seven times their cash flow, said Chris DeYoung, an analyst with New York-based Lehman Bros., an investment banking firm.

But the $2.5-billion figure being quoted is more than 10 times Ralphs' $230 million of cash flow during fiscal 1994 ended Jan. 30, said Thomas Meyers, director of research with Conseco Capital Management Inc., an Indianapolis-based investment advisement firm.

Meyers added that only during the 1980s, at the peak of the leveraged buyout craze, did he see a few grocery companies selling for as much as nine or 10 times cash flow.

Also, the merged company could end up with a heavy debt load, sources said.

Food 4 Less Supermarkets Inc., the Yucaipa subsidiary that operates its grocery chains, already has $518 million worth of long-term debt, according to public documents.

Its $175 million worth of senior notes are rated "B1" by Moody's Investors Service, and its $145 million worth of senior subordinated notes are rated "B3." These are ratings given to bonds that typically have a higher risk of default than do bonds rated in the "A" range, said Fran Schulman, a senior analyst with New York-based Moody's, a debt rating service.

Moody's gave a "B2" rating to $450 million of the $1 billion of Ralphs' debt, in the form of senior subordinated notes. This rating also is given to bonds that typically have a higher risk factor, Schulman said.

Moody's gave the Food 4 Less and Ralphs debt these ratings because they are highly leveraged, Schulman said.

Aside from picking up Ralphs' $1 billion of debt, Yucaipa reportedly would pay $500 million in cash and $1 billion in notes for Ralphs. Yucaipa may borrow all of this money, resulting in $1.5 billion more in debt, said a source who wished to remain anonymous.

Yucaipa may have an agreement with New York-based Citicorp to finance part of the $1.5 billion it needs for the purchase, according to published reports. Other sources could be financier George Soros, who has become a leading investor in distressed commercial real estate, or Apollo Advisors, an investment firm based in Century City, the anonymous source said.

Apollo is a shareholder in Food 4 Less Supermarkets and is headed by Leon Black, former head of mergers and acquisitions at Drexel Burnham Lambert Inc.

Spokesmen for Soros and Apollo declined to comment.

Although several analysts said the merged entity would be highly leveraged, they also said debt-servicing would be manageable.

Gary Giblen, a retailing analyst with the New York-based investment banking firm Paine Webber Inc., gave a hypothetical example of how the merged entity might handle interest payments.

He said the merged entity would have to generate $300 million in operating cash flow annually to pay off interest on the $3-billion debt load if that interest were set at 10 percent, for instance. Ten percent would actually be a conservative interest rate, according to the anonymous source.

Food 4 Less reported $100 million in operating cash flow during the fiscal year ended June 26, 1993. Combining that with Ralphs' $230 million in operating cash flow brings a total of $330 million, more than what would be needed to service the debt, Giblen said.

Furthermore, the combined entity would have a very strong management team that could handle the debt load, Meyers said.

Ralphs has one of the best management teams in the country, he said, adding that the team at Yucaipa also is capable.

To raise some cash to pay off debt, the merged entity might sell some of its smaller, unprofitable stores. Many are Alpha Beta outlets, said the anonymous source. Also, there's likely to be some stores sold to eliminate duplication of stores in some markets, where Ralphs and Food 4 Less outlets are close to one another.

But many Alpha Beta stores are 30,000 square feet or less, too small to be useful for the larger chains, the source said. New grocery stores average 40,000 to 50,000 square feet.

However, independent grocery chains might be interested in buying outlets, Giblen said.