MERGER FALLOUT

David Merefield

The spate of large-scale mergers of recent times may be due a little breather now, so it's a good time to take a look at how the activity is changing the industry.

And according to two news articles in this week's SN, a couple of major consequences -- more or less unexpected -- have transpired. Both news articles were written by reporter Elliot Zwiebach and are on the front page.

One result of merger mania is that the value of the 38 stocks comprising the SN Composite Index grew at a slower pace during the most recent six-month period than was seen in the previous six-month period or the one prior to that. Indeed, the value of the 38 issues grew during the most recent six-month period at a lesser rate than general stock-market measures such as the Dow Jones Index and the Standard & Poor's 500.

The recent slowing of stocks in the index as compared with the general market marks quite a change, since food-related issues had outperformed the market for fully four years prior to the beginning of this year.

One reason food-related equity is no longer growing at a fevered pace has to do with circumstances external to food retailing. Among them were the market downturn of October and fears that many of the world's economies were turning downward. Those situations made investors more cautious, which nearly always benefits defensive stocks such as food retailing. In contrast, those external factors started to abate during the first half of this year.

Closer to home, reality set in during the first half of this year: It started to dawn on investors that they had already realized gains to be made from takeover speculation and that the merged companies now must settle in for the long and uncertain work of gaining synergies.

Moreover, many investors became disenchanted by the protracted period it took for the big mergers to be approved by the Federal Trade Commission and by continued hints that many stores would have to be divested to win approval. That proved to be the case, especially in the instance of the Albertson's-American Stores Co. merger.

That leads to another effect of mergers, namely the liberation of quite of number of store locations, which are now being snapped up in the Southwest by smaller chains such as Stater Bros., Raley's Supermarkets and Certified Grocers of California. The last will acquire stores on behalf of its independent members.

The store buys will mean quite a bit to the two regional chains. Stater will move to a new market in Southern California, while Raley's will move to new markets in Nevada and New Mexico.

These could prove to be seminal events for both chains. In all likelihood, both are now entering an era of accelerated growth, although more than one chain has been hobbled by growing beyond the point that hands-on management is possible. In any case, the wheel of retailing turns, as always.