J. SAINSBURY TO BUY STAR MARKETS FOR $490 MILLION

JAMES FALLON

LONDON (FNS) -- J. Sainsbury plc here keeps its promises.

The United Kingdom's second-largest food retailer stuck to its plan to expand further in the United States with the announcement of the proposed $490 million acquisition of Star Markets, Cambridge, Mass., from the investment group Investcorp. The acquisition is expected to be completed in early 1999.

The purchase comes less than a month after Dino Adriano, Sainsbury's chief executive, said the U.K. retailer remains committed to the American market, where it currently owns Shaw's Supermarkets, East Bridgewater, Mass.

"This move is wholly in line with the North America strategy that we have outlined for over a year," Adriano said in a statement about the Star Markets acquisition. "Our strategic intent is to build on our existing presence in order to achieve our longer term sales, profitability and shareholder-value targets."

Star Markets operates 53 supermarkets in the greater Boston area, including four Wild Harvest natural-food markets and a wholesale food business that serves more than 70 supermarkets in New England and New York. The company had losses before taxes, after financing costs, of $8.2 million on sales of $1.03 billion in the year ended Jan. 31, 1998. Its net assets totaled $51.5 million.

Investcorp and a management team headed by Star Markets' chairman and chief executive officer Henry Nasella bought Star Markets in September 1994 from American Stores Co., Salt Lake City, for $285 million. The company has significantly upgraded and expanded its stores in the last four years, opening 21 stores and remodeling or expanding more than a third of its existing stores, Investcorp said.

Sainsbury plans to rebadge Star Markets as Shaw's stores over time and to continue to expand and upgrade the chain, a spokeswoman said. It estimates its capital investment in Star Markets would total about $166 million (100 million pounds) over the next five years.

Shaw's currently operates 126 stores in six New England states. The chain has been struggling over the last 18 months as a result of expansion into the Connecticut market but in the six months ended Sept. 19 had returned to the growth path. Shaw's increased its operating profit by 25.3% in the first half to $46 million on a 9.3% rise in sales to $1.63 billion.

But while Shaw's operates in Massachusetts, it is weak in the Boston area. The Sainsbury spokeswoman said Star Markets perfectly complements Shaw's for that reason. "It's an incredibly good fit," she said. "It's like dropping the last piece into a jigsaw."

The purchase also would bolster Sainsbury's position in the New England market overall, where it continues to lag Stop & Shop, owned by Ahold of Zaandam, Netherlands. Stop & Shop has an estimated 27% share of the New England market while Shaw's has a 15% share. The addition of Star Markets would increase its share to about 21%, the spokeswoman said.

"Star Markets represents an excellent fit with Shaw's Supermarkets, in terms of the geographical locations, core competencies and management," Adriano said. "We anticipate that, from year three onwards, we will achieve approximately $40 million of synergies from central services, purchasing, the optimization of the distribution systems and own-brand development."

The Star Markets customer profile ranges from university to affluent consumers in the Boston suburbs, a Shaw's spokesman said in a telephone interview. The stores are much smaller than Shaw's, which now average 50,000 square-feet. Star Markets stores average about 20,000 square feet although there are a few units that approach the size of the Shaw's stores.

Two aspects of the deal that particularly excite Shaw's are the Wild Harvest line and Star Markets' strength in prepared meals. Shaw's plans to roll out both lines into its stores as soon as possible, the spokesman said.

It has not yet been determined whether Star Markets' management would remain with the company, he said. The deal still requires the approval of the Federal Trade Commission and the attorney general of Massachusetts before an announcement can be made about management structure.

Sainsbury's goal is to increase its U.S. business to sales of about $10 billion a year by 2005. Adriano said last month that this, along with a strong No. 1 or No. 2 position in a regional market, "will become the threshold for delivering sustained growth at the end of the cycle."

David Bremner, the Sainsbury director responsible for North America, said at the time that there are plenty of medium-sized food retailers in the United States that are still privately owned and eventually could be available to buy. The Sainsbury spokeswoman said last week that the food retailer will reach its $10 billion sales goal partially through organic growth of its existing operations.

"But Star Markets still will increase our sales to only $4 billion, so more acquisitions are on the cards as well because there is still $6 billion to add," she stressed.

While Sainsbury's management was thrilled at the proposed acquisition, London retail analysts were less than impressed. Sainsbury's share price on the London Stock Exchange fell 10 days ago when the acquisition was announced. Analysts continue to question whether Sainsbury can thrive in the U.S. market at a time when the leading players are rapidly consolidating into larger and larger groups. Analysts point out that, even with sales of $10 billion a year, Sainsbury will be dwarfed by such companies as Wal-Mart, Kroger Co. and Albertson's.

Gary Giblen, managing director of FAC Equities, New York, said that Sainsbury is a "logical buyer" for Star. "Sainsbury has been severely challenged for the last several years; Tesco has jousted Sainsbury from its dominant U.K. position," he said. "So the only surprise is that Sainsbury would undertake this deal. But it shows they are forward thinking. They are not curling up into a shell over problems in the U.K. And it's logical because it fits like a glove with Shaw's."

Debra Levin, a securities analyst at Morgan Stanley Dean Witter, New York, said, "It's a contiguous acquisition, and it looks like it makes a great deal of sense. There's very little overlap, with Star operating mostly in the inner core of Boston, and Shaw's operating throughout New England, so there shouldn't be any FTC issues. And there will be several synergies, particularly in the areas of distribution, buying and overhead reduction."