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ALBERTSON'S BUYOUT SUPERVALU, CVS TO EXPAND IN DEAL.

Byline: Staff and Wire Services

Monday's $9.7 billion buyout of Albertson's Inc. by smaller rival Supervalu Inc. will shake up the local grocery scene and propel a minor player in the Los Angeles drugstore market to the top of the category by the end of the year.

Supervalu Inc. will more than double in size and become the nation's second-largest traditional grocery store chain after claiming the lion's share of Albertson's. Now it needs to avoid a bellyache from swallowing its larger rival.

``This is a huge step for Supervalu, and we would not rule out some upfront indigestion, especially if the macro environment is not accommodating,'' Goldman Sachs & Co. analyst John Heinbockel wrote in a research note.

Minneapolis-based Supervalu and the drugstore chain CVS Corp. led an investment group that said Monday it will buy Albertson's for $9.7 billion in cash and stock. The group made a similar attempt to buy Albertson's about a month ago, but the deal collapsed.

Albertson's stockholders will get about $26.29 in cash and Supervalu stock for each Albertson's share. The buyers are also assuming about $7.7 billion in debt.

Only Kroger Co., parent of Southern California Ralphs markets, will be larger once Supervalu takes over 1,124 stores under the Albertson's, Acme Markets, Bristol Farms, Jewel-Osco and Shaw's Supermarkets banners. The expanded Supervalu will have 2,656 stores nationwide.

Though Albertson's had been on the block for some time, the sale still left much of the industry and its observers curious about the future of the 67-year-old chain. After the bruising strike and lockout that idled nearly 60,000 workers with the United Food and Commercial Workers in 2003, the chain struggled to regain its footing in the highly competitive Southern California market.

``The biggest problem Albertson's had in Southern California was labor, so there's some hope that Supervalu will have a better relationship with the unions,'' said Tom Burnett, director of Wall Street Access, a New York-based brokerage. ``Consumers are not going to notice any changes, though Supervalu has some wholesaler relationships that could drive down prices.''

Indeed, UFCW Local 770, which represents more than 3,000 workers at Albertson's and Sav-on in Los Angeles, cheered news of the sale. Though the bitter strike damaged years of relatively amicable relations between the employer and its labor force, Rick Icaza, the local's president, invited renewed cooperation.

``Supervalu has a reputation of being more worker-friendly than the previous Albertson's ownership,'' Icaza said in a statement. ``The members of UFCW Local 770 welcome Supervalu to Southern California and look forward to working with the new ownership in upcoming negotiations. We also look forward to working with CVS ... We are optimistic that the relationship will be positive, given the experiences of our brothers and sisters who work with them on the East Coast.''

That assumes the Eden Prairie, Minn.-based Supervalu will want to keep Albertson's whole. Jack Kyser, chief economist for the Los Angeles County Economic Development Corp., theorized it would more likely chop up the chain, allowing smaller companies and independent operators to fight their way into a region currently dominated by Ralphs and Vons.

``They're probably worth more dead than alive,'' Kyser said. ``Do they want to go in with Supervalu or take interesting offers on the real estate. I think they'd probably sell off the grocery operations in pieces, since you've got Wal-mart and the specialty stores lurking on the horizon.''

He speculated Colton-based Stater Bros. would be the most likely local purchaser, following the way it penetrated the county when Albertson's had to divest stores after it bought the Lucky chain. With an already-established presence in the region and good relations with the UFCW, Stater Bros. would have an easier shot than other chains, should Supervalu decide to split up its proposed purchase.

Stater Bros. president Jack Brown was traveling Monday and unavailable for comment. Albertson's shares rose $1.31, or 5.4 percent, to close at $25.42 on the New York Stock Exchange, while Supervalu shares rose $2.13, or 6.7 percent, to finish at $33.98 and CVS shares fell 11 cents to $26.96.

Supervalu will pay about $6.3 billion in stock and cash and assume about $6.1 billion in Albertson's debt for the 1,124 stores and in-store pharmacies under the Osco and Sav-on brands.

CVS of Woonsocket, R.I., is purchasing about 700 stand-alone Sav-on and Osco Drugstores and a distribution center in La Habra, Calif., for $2.93 billion in cash. It will also acquire real estate interests in the drug stores for $1 billion.

For CVS, which re-entered the Los Angeles market two years ago, the deal would suddenly make it a gigantic player in a crucial market. The chain pulled out of the region in the 1990s, but slowly added presence to build 19 stores in Southern California. After lagging behind Rite-Aid, Walgreens and Longs Drugs, it suddenly adds 350 stores, making it number one in the Los Angeles and San Diego markets.

With approval from shareholders and regulators, CVS will convert the stand-alone Sav-on stores by the year's end and absorb the majority of its more than 13,000 Southern California employees.

``We're going to focus on being the easiest pharmacy for our customers to use,'' said Eileen Howard Dunn, vice president of corporate communications for CVS. ``We'll communicate to the customers that the quality they've come to expect from Sav-on will continue. This is a premium asset we're glad to have and a great opportunity for us longer term.''

The other purchasers, led by Cerberus Capital Management, will acquire 655 stores in Dallas/Fort Worth, California, Florida, the Rocky Mountains and the Southwest. The group plans to operate the stores under the Albertson's name.

Larry Johnston, chairman, CEO and president of Albertson's, said the sale ``increases shareholder value by capturing strong value for the ongoing business enterprise, monetizing valuable real estate assets, and affording shareholders the opportunity to benefit from a substantial continuing ownership interest in a powerful, growing, and vibrant new company.''

Following the transaction, approximately 65 percent of the new Supervalu will be held by existing Supervalu stockholders, and approximately 35 percent will be held by Albertson's stockholders.

The purchase has been approved by the boards of all the companies involved. If shareholders and regulators also approve, Supervalu sales will expand from $19.5 billion in 2005 to a projected $44 billion for fiscal 2006.

That growth will be manageable because Supervalu only bought into markets where Albertson's was number one or two in market share, said Jeff Noddle, Supervalu chairman and CEO. ``That growth infrastructure is in place,'' he said.

Supervalu's new stores will retain their old brand names and will be managed regionally. ``We believe that local people know their local customers,'' Noddle said. ``People in Chicago are going to make the decisions for the people in Chicago.''

He said the company's predictions indicate the combined operations will generate enough cash flow to steadily pay down the new debt, although he expected Supervalu's credit rating to be downgraded in the short term.

``We are going to do the same things going forward that we did in the last five years to de-leverage the company,'' he said. ``We enter this very confident, and I think we have a fairly good reputation for managing these things.''

Supervalu spokeswoman Yolanda Scharton said the purchase will expand the company beyond its current base in the East, Southeast and Midwest. ``With all this, it's all states, coast-to-coast and border-to-border,'' she said.

The company currently employs about 57,000 people. The Albertson's properties in the deal have about 144,000 workers. She said it was too soon to say how many of them would remain with the combined companies, but added, ``we believe the vast majority of these employees will remain with us.''

Due to a recently-adopted ordinance in Los Angeles, workers will stay on a guaranteed 90 days after the sale concludes. Aimed at protecting higher-paying union jobs, the Los Angeles City Council passed the ordinance in January, forcing supermarkets to retain employees with more than six months of service for at least three months, then re-evaluate them to determine whether they'd continue to work for the new owner.

Already the largest drug store chain in the nation, CVS said it will operate 6,100 stores across 42 states and the District of Columbia after the deal closes, which is expected this summer.

Dave Rickard, chief financial officer of CVS, said about 350 of those stores were in prime locations in California, which would have taken decades to acquire piecemeal. As it stands, the company will have access to an area that is growing fast, aging and relatively wealthy and at what it considered a good price. ``It's just a terrific demographic for us,'' he said.

Rickard said the company will gain about 27,000 employees on top of its existing 180,000. Rickard said he expected CVS would retain most of them.

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Photo:

(color) Albertson's has agreed to a $9.7 million buyout by an investment group led by Supervalu and the drugstore chain CVS.

Ric Francis/Associated Press
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Title Annotation:Business
Publication:Daily News (Los Angeles, CA)
Date:Jan 24, 2006
Words:1529
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