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The biggest supermarket deal ever.

Whatever happens in the grocery industry in the remainder of 1984, it is not likely to overshadow the stunning news of American Stores' acquisition of Jewel Companies. After all, when the fourth largest chain buys out the sixth largest to become third largest, that represents change of major proportion.

When, upon examination, it turns out that the fourth largest chain is already a stellar performer--placing first among major food retailers in five-year trends in sales growth, earnings per share and return on equity, while placing second in return on capital--the news becomes monumental. The acquisition was no hasty move made to inject life into a flagging corporation, but a calculated move made from strength. Brute strength, in fact, that gave the industry a rare look at how corporate "hard ball" is played.

Twice before--in 1966 and again in 1978--L. S. (Sam) Skaggs, the chairman of American Stores who engineered the buyout, thought he had a deal with Jewel that would meld Skaggs' companies' expertise in drug/combination stores with Jewel's skill in food store operations and finance.

As Skaggs wrote, in the early stages of the negotiations, to W. R. Christopherson, chairman of Jewel, "Unfortunately, in both circumstances the proposed combination did not occur...I believe that we are both in a unique position to achieve what your predecessors and I were unable to achieve."

After the obligatory suggestion that the transaction "serves the interest of both companies' shareholders, employees and customers," Skaggs proffered a bouquet of carrots: Christopherson would become chairman of the new company and remain in Chicago; Jewel's president Richard Cline would become co-president with Thomas Field, president of American Stores; the new company would be named American-Jewel; and consultancy contracts would be granted to selected executives who might be departing.

Pointing out that American-Jewel could benefit from "the addition of talented people, which I assume you have in abundance," Skaggs then got to the nub of the matter: "Due to the geographically complementary nature of our food and drug operations, a combined entity would have much greater geographical diversity. The combined company...would have both the financial and management strengths and staying power to initiate and sustain development in the southeastern United States--particularly Florida--to permit the development of combination stores through new entry rather than via acquisition."

Christopherson wrote back to say that his understanding of previous negotiations did "not jibe" with Skaggs'. Jewel's board of directors frantically sought a corporate suitor more to its liking.

Skaggs then applied the stick. Drawing upon $80 million in credits secured from 13 banks, as well as $100 million of its own funds, American Stores sweetened its bid to Jewel stockholders, increasing the stock offer it made three weeks earlier by $5, to $75 per share of common stock. Three-quarters of the stock was tendered in a short time and, on June 14, Jewel capitulated.

Christopherson and Vice Chairman Lawrence Howe resigned. Handsome severance terms--"golden parachutes"--were issued to them and other departing executives and the deal was concluded for $1.15 billion, the largest-ever purchase among supermarket companies.

Skaggs announced, "We will quickly proceed to merge the two companies and carry out our goal of creating a nationwide organization."

Before the merger, Skaggs could muster from Salt Lake City more than 1,000 stores operated by four separate entities. These are:

* Skaggs Companies Inc., which operates 198 super drug centers and 48 combination grocery and drugstores in 21 states in the West, Midwest and Southwest.

* Alpha Beta Inc., headquartered in La Habra, Calif., which operates 328 supermarkets and three combination stores. New construction will concentrate on superstores and combination units.

* Acme Markets Inc., which operates 364 supermarkets in seven eastern states under the Acme and Super Saver names. Acme's headquarters are in Philadelphia.

* Rea & Derick Inc., which operates 146 drugstores in Pennsylvania, New York and Maryland. These stores range in size from 3,200 to more than 18,00 square feet.

American Stores began an accelerated building program in 1983 that was hampered by one of the longest and most severe winters in U.S. history. Still, capital expenditures exceeded $140 million which included the opening of seven grocery/drug combination and six drugstores. Major remodelings were completed for nine first-generation combination stores and 157 food and drug stores.

Sales and profits from operations in 1983 reached record highs for the third consecutive year and seem certain to repeat in 1984. Sales rose to $7.9 billion, up 6.4% from 1982 and net earnings increased 30% to $117.9 million, up from $90.4 million in the prior year.

Meanwhile, Jewel has come off a record sales year of its own. Overall sales, including those of Aurrera, the Mexican chain that is 36% owned by Jewel, reached $5.7 billion, upo 2.7% over 1982. But consolidated net earnings at $83 million were 5.7% below 1982.

"While we are not pleased with the year's earnings," Christopherson said in Jewel's annual report, "the shortfall in U.S. income compared to our plan was almost entirely related to lower than expected results at Sav-On-Drugs."

Results in the first quarter of 1984--the last published under the Jewel banner--prove the point. Sales of Osco Drugs stores and Sav-On-Drugs stores were up 13.2% and 11.5%, respectively, but profits were below 1983 levels, with Sav-On showing the larger decrease.

Jewel's supermarkets were another story, however. In 1983 combined sales for the four companies exceeded $3.5 billion, up 1.5% over 1982. Pre-tax earnings soared 28%.

The line-up of 140 combination food/drug stores at year-end included: Butrey/Osco, 34 stores in seven states; Eisner/Osco, 10 stores, two states; Jewel/Osco, 93 stores in two states; and Sav-On Drugs/Food, three stores in one state.

Supermarkets totaled 193 at year-end: Buttrey Foods, 23 stores in three states; Eisner, 15 stores in two states; Jewel,105 stores in four states; and Star, 50 stores in three states.

At the Beginning of 1983, earnings were blah, but as the year progressed the supermarket companies turned things around. Said Christopherson," Helped by investment in scanning and other systems changes, and by attention to cost containment and loss control, expenses increased at the lowest rate of recent years and, by reducing retail shrink, margins were moderately improved without price increases."

Referring to the intense competition and lower wage rates of "the new discount food store operators," he said, "To narrow the gap and thus improve our ability to compete, some people have been asked to accept lower compensation in 1984."

Jewel also countered with a new super warehouse store in the Chicago area which "is meeting performance targets."

A more dramatic move was the opening of three Sav-On-Drugs combination stores, 47,000 square footers with all the amenities, in California's San Joaquin Valley. Some 40 Jewel management people were transferred to get the new commitment underway.

American Stores can count on about 5% of pre-tax profit coming from 301 White Hen Pantry convenience stores, most of them franchised units, scattered across five states. Another $400 million in business will come from Jewel's extensive manufacturing activities, which include everything from private label groceries to paper bags to film processing and even egg farms.

Notably absent will be the sales from 132 Jewel T limited assortment stores. After seven years, Jewel had already decided to sell them. They will hardly be missed, however, for even without them the new American will make its presence felt in 41 states.

How powerful will this new company be? Based on 1983's results, the company is the most profitable in the U.S., exceeding even Safeway.
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Title Annotation:American Stores Company
Publication:Progressive Grocer
Date:Oct 1, 1984
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