Tuesday, October 20, 1998

Kroger purchase creating supermarket powerhouse

By JOHN NOLAN Associated Press Writer

CINCINNATI (AP) - Kroger Co. is buying Fred Meyer Inc. to create a grocery powerhouse designed to compete with giant retailers such as Wal-Mart that are expanding into the supermarket business.

The $8 billion merger will create a company with supermarkets from Virginia to Alaska. The combined company will keep Kroger's name and Cincinnati headquarters, but the component supermarket chains will retain their own identities while trying to learn from each other, executives said.

Fred Meyer's expertise at marketing imported items and seafood should help Kroger, and Kroger's experience in running combined supermarkets and drug stores should benefit Fred Meyer, Kroger consultant Paul Bernish said.

Otherwise, shoppers should not expect to see much that looks different in their stores. The companies already target the stores to satisfy the tastes of the neighborhoods that the outlets serve, Bernish said.

"These are two companies with strong local franchises. Why mess with it?" Kroger spokeswoman Lynn Marmer said.

Kroger operates 1,398 food stores, 802 convenience stores and 34 manufacturing plants that supply Kroger stores and outside customers. Portland, Ore.-based Fred Meyer operates 800 food and general merchandise stores in 12 western states from Alaska to Texas, including Ralphs, Food 4 Less and Hughes Family Markets.

The buying power and efficiency of the combined company should help it hold food price increases below the rate of inflation, industry analyst George Thompson said.

The combined company will have annual sales of $43 billion, 2,200 supermarkets in 31 states and about 300,000 employees.

Under terms of the deal, which management expects to close in about four months, Kroger will pay about $8 billion and assume about $4.8 billion in debt, a legacy of Fred Meyer's acquisition of Ralphs.

Fred Meyer shareholders will receive one newly issued share of Kroger common stock for each Fred Meyer share, giving them 38 percent of the combined company.

Kroger and Fred Meyer shares both closed down sharply in heavy trading Monday on the New York Stock Exchange. Kroger was down $3.31 to $45.44. Fred Meyer dropped $4.81 to $44.19.

The grocery business has seen a series of buyouts aimed at creating big companies that can compete with mass merchandisers that sell discount groceries. Wal-Mart has been seen as a particular threat because it has begun opening stand-alone supermarkets in addition to its big discount stores.

Supermarket chains also believe it is more cost-effective to expand by joining forces, rather than building stores in new markets.

Recent mergers include Safeway Inc.'s acquisition of Vons Cos. Albertson's Inc. has announced plans to buy American Stores Co., which owns Lucky grocery and Sav-on drugstore chains. Safeway announced it is buying Dominick's Supermarkets.

Joseph A. Pichler, Kroger's chief executive and chairman, will retain those titles with the combined company. Ronald W. Burkle, Fred Meyer's chairman, will become chairman of the executive committee of Kroger's board.

The merger requires Federal Trade Commission approval, not seen as a big hurdle because the companies mostly serve different markets. Their operations overlap in Arizona, and Kroger is waiting to see whether the FTC orders any stores sold there to promote competition, said Kroger president David Dillon.

Also Monday, Kroger reported company-record earnings and sales for the third quarter.

Net earnings for the quarter ending Oct. 3 were $117.9 million, or 45 cents per diluted share, up from $95.8 million, or 37 cents a share, a year ago. Sales increased 4.4 percent to $8.02 billion from $7.69 billion last year.

Earnings for the first nine months of the fiscal year totaled $259.6 million, or 98 cents per diluted share, compared with $288 million and $1.10 per share a year ago. Sales were $20.9 billion, up from $20.1 billion last year.