AMERICAN SELLING STAR TO INVESTORS

ELLIOT ZWIEBACH

SALT LAKE CITY -- American Stores Co. here has signed a definitive agreement to sell its 33-store Star Market Co. operation to an investment group organized by Investcorp for $285 million cash and the assumption of debt.

Investcorp, an international investment bank with offices in New York, London and Bahrain, has a number of U.S. holdings, including Saks Fifth Avenue, New York, and the convenience-store operator Circle K Corp., Phoenix. Investcorp's clients include overseas investors, with a significant portion usually emanating from the Persian Gulf states.

Upon completion of the deal, which is expected by early September, Henry Nasella would become chairman, president and chief executive officer of Star Market, Cambridge, Mass.

Nasella, an equity partner in the Investcorp group and a central figure in the deal, was Star's

president in 1986 and 1987. Nasella is the only specific investor named in the deal so far. He spent 20 years at Star, leaving in 1987 to found Staples, a nationwide office supply retailer based in Framingham, Mass. (The co-founder of Staples was Leo Kahn, also formerly of Star, who left Staples in 1991 to found Fresh Fields, Rockville, Md.)

Still uncertain is the future of Peter Lynch at Star. Lynch has been general manager of Star for less than a year, although he has spent most of his career there. A Star spokesman said Nasella would like to have Lynch remain with the company, "and they are talking about Lynch taking a role here but nothing has yet been defined."

Star, which American acquired in 1984 as part of its acquisition of Jewel Cos., Melrose Park, Ill., had sales of $840 million in 1993, about 4.5% of American's $18.8 billion revenue base. Except for an 11-store Jewel Osco operation in Albuquerque, N.M., Star is American's smallest division. Star has had the fifth-largest market share in the Greater Boston area for several years, behind Stop & Shop, Demoulas, Shaw's and Purity Supreme.

Victor L. Lund, president and chief executive officer of American, said although Star Market's operations have made a valuable contribution to the company's overall financial success, the company believes its longterm interests are best served by focusing on operations where it has significant market positions.

"The net cash proceeds from the sale will initially reduce debt and, in the longer term, be redeployed to our remaining businesses," Lund said. The transaction would result in a onetime gain for American in the third quarter.

Meredith Anderson, American's vice president of public relations, said a deal was struck after Investcorp approached the company.

Speaking on behalf of Investcorp, James Fingeroth, of the public relations firm of Kekst & Co., New York, told SN that American had not shopped Star to prospective buyers. "But I believe Nasella felt it could be available for the right offer and the right circumstances," he said.

Fingeroth said the Investcorp group, which also will assume substantially all of Star's outstanding liabilities in the transaction, expects to put capital into the chain, but he declined to specify how much funding might be forthcoming. Nasella, in a statement, said his goal at Star "is to improve our service to customers, strengthen Star Market's franchise and return it to its position as the premier food retailer in the Boston market.

"We plan to upgrade and expand existing stores, open new stores and explore innovative new supermarket concepts under the Star banner."

Following the sale of Star, American would operate about 900 supermarkets, including Lucky Stores, Dublin, Calif.; Acme Markets, Malvern, Pa.; Jewel Food Stores, Melrose Park, Ill., and Jewel Osco.

Gary Giblen, a securities analyst with PaineWebber, New York, said the deal should net American $210 million after capital gains taxes, which it will use to pay down debt and invest in its remaining sales base.

"Divesting noncore operations to invest capital spending in a more focused fashion is a recipe for success that companies like Safeway have followed," Giblen said. The Star units are "in great niche locations in central Boston that are incredible and unassailable," Giblen said.

Rick Church, an analyst with Smith Barney Shearson, New York, said the selling price was "reasonable -- American didn't get a huge windfall, but the price was not cheap.

"Obviously American didn't think Star fit in with its overall strategic priorities, which are to operate chains with leading and sustainable market shares."