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PSU EXECUTIVE FORUM

PORTLAND, Ore. -- The potential sale and breakup of Albertsons may be a winning proposition for a host of smaller retailers, industry observers said last week during a panel discussion at the Food Industry Leadership Center Executive Forum 2005, sponsored by Portland State University here."The pattern in the 1990s was for smaller companies to combine to build giant chains, but now we're seeing a reverse

PORTLAND, Ore. -- The potential sale and breakup of Albertsons may be a winning proposition for a host of smaller retailers, industry observers said last week during a panel discussion at the Food Industry Leadership Center Executive Forum 2005, sponsored by Portland State University here.

"The pattern in the 1990s was for smaller companies to combine to build giant chains, but now we're seeing a reverse of that, with the giants being broken up among regional or multi-regional players who will take all the chips at the end of the game," said Jonathan Ziegler, a senior analyst for J.M. Dutton Associates, Eldorado, Calif. "Those players will be able to pick up fill-in locations in existing markets."

Mary L. Burke, principal at The Food Partners, Washington, D.C., offered a similar outlook. That Albertsons is looking at alternatives, including a sale of the company, "is an acknowledgement that earlier consolidation was not as successful as everyone thought it would be," she noted. "Decisions by consumers are made on a local basis, yet we're seeing some [national] companies impose products on consumers that don't meet their local preferences. So maybe a better way for the industry to go is to become more regional, and that presents large opportunities for independent retailers."

According to Erica T. Kuhlmann, managing director, food group, Harris Nesbitt Bank, Chicago, "The most successful operators today are regional operators, and Albertsons is composed of a series of regional firms. Although no single strategic buyer is likely to try to buy all of Albertsons, some of its non-core assets may be more desirable to strategic regional buyers than to the private-equity investors that are expected to buy the chain."

Kuhlmann said private-equity investors are changing the face of merger-and-acquisition activity in the industry, "and that's having a profound effect. They're not there to build businesses -- it's all about investing money to get a return. Those companies are able to pay more money [than strategic buyers], and they tend to be very liquid, with very deep pockets."

David Frost, principal at Frost & Partners, Bellevue, Wash., said he agreed that private-equity investors will play a stronger role in industry consolidation going forward. "Strategic buyers have been involved in most of the industry's acquisition activities in the last two or three years," he said, "but I think we'll see financial buyers become more active over the next few years. With plenty of private-equity money out there, I think this is a great time to be a seller.

"Publicly held companies are expected to grow as much as they can, but when you look at merger and acquisition activity, it's more of a market-by-market, store-by-store approach. There are many local regional leaders who continue to prefer to remain private, and with industry sales going up and some companies becoming more aggressive and more forceful, I'd rather see more ownership by strong private companies."

Ziegler said Wall Street may be creating problems for public companies. "As a group, we like to look at the next quarter's earnings, and we criticize companies like Costco and Whole Foods for treating their employees too well -- but that's misguided thinking."

"Private-equity firms have longer-term horizons than Wall Street has," Kuhlmann said. "They have the capacity to buy companies as a whole and then split them up, and I think these types of companies will have a profound impact on the industry beyond any deal they do with Albertsons. After that first round, I think they will continue to look at what else is out there."

The panel was sponsored by SN and moderated by David Orgel, editor-in-chief.

Asked about the importance of the real-estate component in an Albertsons transaction, Burke replied, "Albertsons has the highest percentage of real-estate ownership of the Big Three chains, which is why each of the prospective investment groups is partners with a real-estate investment trust. But the question is, who else can use the Albertsons boxes? Not all of that space will stay in grocery retail because financial buyers want returns."

Burke said some of the Albertsons stores would likely close "because so many areas are over-stored."

Shifting the discussion to prospects for Pathmark Stores, Carteret, N.J., Ziegler said he sees its turnaround as a four-stage process. "Following Pathmark's acquisition by Yucaipa Cos. [a Los Angeles-based investment group], the first stage is to bring in a new management team; the second is to remerchandise stores and make other changes that don't cost a lot of money; the third is to make changes in the physical structures at the stores to boost same-store sales; and the fourth is to consolidate the Northeast market. However, with the availability of Albertsons, it's possible that fourth stage could move up."

For Frost, the biggest challenge for Pathmark "involves Wal-Mart, Whole Foods, Costco and Trader Joe's tearing up the turf in metro New York, which means someone is going to have to take assets out of that market," he said.