MERGER DEAL IS REACHED BY SMITH'S AND SMITTY'S

ELLIOT ZWIEBACH

PHOENIX -- The Smitty's banner has been a fixture in Arizona for 35 years, but it's expected to disappear when the deal that was struck last week between Smitty's Supermarkets here and Smith's Food & Drug Centers, Salt Lake City, closes.

That's just one of the outcomes expected when the merger agreement goes into effect about May 1. The deal is valued at $240 million to $250 million, including Smitty's debt. Smith's also plans a tender offer for 50% of its outstanding common. The offer will begin about April 1.

Achievement of the Smith's-Smitty's merger agreement brings to a finish an unusually public and equivocal transaction.

Smith's said about a month ago that it was in discussions concerning a merger with Smitty's, a subsidiary of Yucaipa Cos., Los Angeles. Those discussions were interrupted when another operator, reportedly Vons Cos., Arcadia, Calif., entered the picture by expressing interest in acquiring Smith's itself. The ups and downs of the various talks were topics of two front-page news articles in Supermarket News last month.

When the talks with Vons reportedly broke off two weeks ago, Smith's and Yucaipa resumed their negotiations and those talks yielded last week's agreement regarding Smitty's.

Once the merger agreement closes, the 25 Smitty's stores here and the three in Tucson will be converted either to Smith's combination-store format or to its Price Rite warehouse format. That move is intended to strengthen Smith's position in Arizona and make better use of its distribution facilities, although exact arrangements for the supply of Smith's stores here haven't been determined. Smith's operates a 1 million-square-foot distribution center in nearby Tolleson, Ariz., while Smitty's is supplied by the local distribution facilities of Fleming Cos., Oklahoma City. There is apparently some disagreement about when that supply contract with Fleming expires, observers told SN. Smith's sales volume exceeds $3 billion annually. Smitty's stores had 1995 sales of $594 million.

According to a Yucaipa spokesman, the deal with Smith's "strengthens our position in California, Arizona and Nevada and enables us to pick up a strong presence in Utah and New Mexico." Smith's operates 120 stores outside California -- where its 34 stores are being sold or closed -- in Utah, Arizona, New Mexico, Nevada, Wyoming and Texas. Yucaipa, an investment company, owns controlling shares in Ralphs Grocery Co., Compton, Calif.; Dominick's Finer Foods, Northlake, Ill., and Smitty's. As for Smitty's, since it was founded in 1961 the chain has operated stores in the range of 100,000 square feet, most of them superstores. Over the years, Smitty's ownership has changed several times. Founder Clyde Smith sold the chain to Steinberg Inc., Montreal, in 1981, and Steinberg was sold in 1989 to Socanav, a Montreal-based shipping company. During most of that period, profits from Smitty's moved north into the parent company's Canadian operations. Smitty's stayed afloat during those years, David Green, Smitty's president and chief executive officer, told SN, because of three factors: "the equity in the Smitty's name, the chain's first-class locations and our one-stop-shopping concept." When Steinberg filed for bankruptcy in 1992, Smitty's was put up for sale and was eventually acquired in June 1994 by Yucaipa Cos. The market leader here is Fry's Food Stores, a 38-store division of Kroger Co., Cincinnati, with a 20% share; followed by Smitty's, whose 25 local stores account for a 15% share; Abco Foods, with 14%; Safeway, with 9.7%, and Smith's, with 9.3%. Securities analysts last week were generally bullish on the latest proposed transaction. "The merger is a good move strategically because it accomplishes what Smith's needs: increased penetration in Arizona," Jonathan Ziegler, an analyst with Salomon Bros., New York, told SN. Ronald W. Burkle, managing partner of Yucaipa, will be appointed chief executive officer of Smith's, succeeding Jeffrey P. Smith, who will continue as chairman, albeit in a less active role, observers told SN. And, in another development last week, Smith's said it has hired Allan R. Rowland as president and chief operating officer. Rowland, 51, succeeds Stuart A. Rosenthal, who resigned from Smith's last November. Rowland resigned from Albertson's, Boise, Idaho, in December, ending his 25-year career there. At the time he left Albertson's, he was senior vice president and regional manager of the chain's operations in Idaho, Oregon, Washington, Montana, Arizona and New Mexico. According to Smith's, these features also mark the merger agreement:

· Smith's board will be reconstituted to include two representatives of Yucaipa, two representatives of the Smith family, one member of senior management and two independent directors. · Smith's will issue nearly 3.04 million shares of Class B common stock in exchange for all of Smitty's stock. The chain will also assume and refinance about $148 million of Smitty's debt. · Smith's will commence a self tender offer to purchase 50% of the outstanding shares of its Class A and B common stock -- excluding the 3.04 million shares to be issued in connection with the Smitty's merger -- equivalent to about 11.2 million shares, at a price of $36 per share, or about $403.2 million.

Upon completion of the merger and the self tender, the Smith family would continue to be Smith's largest shareholder, with about 24% of the outstanding common stock and more than 40% of the voting power (which emanates from the amount of Class A stock it owns). Yucaipa would own about 14% of the stock, and other Smitty's shareholders would own about 6%. · Yucaipa is to enter into a 10-year standstill agreement with Smith's under which it will not attempt to purchase any additional shares of Smith's stock without the cooperation of Smith's ownership.

· Smith's is to enter a five-year management agreement with Yucaipa under which Yucaipa will provide various management services to Smith's, including financial and technical assistance. Also last week, Smith's issued financial results for its fiscal year and fourth quarter ended Dec. 30. Sales rose 3.4% to $3.1 billion for the year and 5.9% to $798 million for the 13-week quarter, while same-store sales fell 3.4% for the year and 2.9% for the quarter. Following an $84 million restructuring charge for the sale and closure of its 34-store southern California region, Smith's said it had a net loss of $40.5 million for the year and $70.1 million for the quarter. Income before the restructuring charge rose 4% for the year and fell 2% for the quarter.

4TH-QUARTER RESULTS*

Qtr Ended 12/30/95 12/31/94

Sales $798.3 million $753.9 million

Change 5.9%

Same-store - 2.9%

Net Income ($70.1 million) $14.2 million

Inc/Share ($2.79) 53 cents

52 Weeks 1995 1994

Sales $3.1 billion $3.0 billion

Change 3.4%

Same-store - 3.4%

Net Income ($40.5 million) $48.8 million

Inc/Share ($1.62) $1.73

*Results are for Smith's.