KKR PLANS TO REDUCE SAFEWAY HOLDINGS

ELLIOT ZWIEBACH

NEW YORK -- Kohlberg Kravis Roberts & Co. here, which owns a 61% stake in Safeway, Oakland, said it will reduce its holdings to 53.4% This will be achieved through a secondary offering of Safeway stock by two KKR affiliates later this year. Safeway filed a registration statement last week with the Securities and Exchange Commission for the proposed offering. Once the SEC approves the sale, a price and date for the offering will be set. Observers said the move probably signals the beginning of KKR's exit strategy from majority control of Safeway. Once the offering is completed, KKR is likely to wait a year and then do another offering that will bring its ownership stake below 50%., one securities analyst said.

Observers added the deal is likely to be completed by early February, with the price expected to be close to the stock's trading price at that time.

KKR became the majority shareholder in Safeway following a leveraged buyout in 1986.

"Every leveraged buyout has an exit strategy -- that's just the nature of LBO's," one analyst told SN. "The real surprise is that this didn't happen two years ago. But KKR probably felt that it could increase the return on its investment in Safeway by holding onto the stock a bit longer because Safeway has been on such a roll." According to another analyst, "The fact that KKR hasn't sold off any shares for the nine years it's owned the stock shows its confidence in Safeway. And the fact it's selling only a small part of its holdings indicates its ongoing confidence in Safeway's future." Disclosure of the offering follows a 2-for-1 stock split at Safeway last week, effective Jan. 30 to holders on record Jan. 16. The split will reduce the price per share "and make it more appealing to individual investors" to buy stock once the offering takes place, one observer said. Observers said the offering will enable KKR to realize a return on its investment in Safeway, in which it acquired majority control in 1986. According to a KKR spokesman, the current value of KKR's Safeway holdings is $3.2 billion, and the value after the sale will be $2.8 billion, "so KKR will still be very much involved in the company." KKR's average holding period in most investments is five to eight years, the company told SN last spring, "though in the supermarket business we've exceeded that limit in several instances," Paul Raether, a general partner, said. "But all our supermarket investments have done well and have continued to grow nicely, and we want to hold onto good investment opportunities like those, so there's no real timetable involved." Besides Safeway, KKR also holds major equity positions in three other supermarket chains: Fred Meyer Inc., Portland, Ore.; Stop & Shop Cos., Quincy, Mass., and Bruno's, Birmingham, Ala.