STOP & SHOP TO BUY PURITY SUPREME CHAIN

ELLIOT ZWIEBACH

BOSTON -- Stop & Shop Cos. here said last week it has entered into a definitive agreement to purchase Purity Supreme, North Billerica, Mass., for about $255 million.

The combined sales of the two chains would be about $4.7 billion, which would allow Stop & Shop to move from the 14th to the 12th largest volume chain in the United States if it is not required to divest too many overlapping locations by federal regulatory agencies.

The sale is expected to close during the summer, following completion of the regulatory approval process and compliance with the terms and conditions of the purchase agreement.

Because the $255 million price includes assumption of $208 million in debt, observers said the deal would involve a cash commitment by Stop & Shop of only about $50 million.

As a result, the purchase of Purity is not expected to have any effect on Stop & Shop's expansion, including a move into the Greater New York area over the next few years, with stores planned for northern New Jersey and Long Island.

The agreement for the purchase of Purity Supreme was an independent deal engineered and financed by Stop & Shop and did not directly involve Kohlberg Kravis Roberts & Co., the New York-based investors that own more than 60% of Stop & Shop stock.

KKR also owns majority stakes in Safeway, Oakland, Calif., and Fred Meyer Inc., Portland, Ore., and is in the process of acquiring Bruno's, Birmingham, Ala., for approximately $1.2 billion.

Stop & Shop, with 1994 sales of $3.8 billion, operates 128 stores in Massachusetts, Connecticut, Rhode Island and New York.

Purity Supreme, with 1994 sales of $861 million, operates 55 supermarkets in Massachusetts, Connecticut and New Hampshire, plus a chain of 66 franchised convenience stores called Li'l Peach in Massachusetts.

Stop & Shop's stores average 50,000 square feet (including 101 superstores of 60,000 square feet each), while Purity's stores average 36,000 square feet (including 29 superstores ranging from 40,000 to 70,000 square feet, with an average of about 50,000 square feet).

Stop & Shop officials said they would convert the Purity Supreme stores to the Stop & Shop banner over time.

Robert G. Tobin, chairman and chief executive officer of Stop & Shop, said, "This expansion furthers our commitment to provide quality products and excellent service to our customers in the Northeast."

According to Peter J. Sodini, chairman and CEO of Purity, "Stop & Shop possesses the strong financial structure and marketing expertise to carry our stores well into the next century."

Stop & Shop officials said in a prepared statement they do not intend to close any stores or eliminate any in-store personnel as a result of the acquisition, although they said they expect to be asked to sell certain stores as part of the regulatory process.

Stop & Shop officials also said they anticipate some consolidation of administrative and distribution facilities.

Purity is owned by its top management and Freeman Spogli & Co., Los Angeles-based investment bankers, which acquired the chain in December 1991 for $265 million from Supermarkets General Holdings Corp., Woodbridge, N.J. (predecessor company to Pathmark Stores).

During the past three years Purity has remodeled approximately 35 stores and opened a couple of new units, Sodini told SN. However, he said sales "improved and regressed" during that period.

Ed Comeau, a securities analyst with Lehman Bros., New York, said Purity Supreme's debt load of more than $200 million has made it difficult for the chain to invest much money in its store base.

From Stop & Shop's point of view, the proposed acquisition is a good deal at a very reasonable price, Comeau said. "It fits Stop & Shop like a glove and enables it to fill in its existing areas in New England and to benefit from a huge number of synergies in terms of distribution, administration and advertising.

Comeau said he believes Stop & Shop may have to divest fewer than 10 stores. Purity's same-store sales would probably improve under Stop & Shop's banner, Comeau pointed out.

Debra Levin, an analyst with Morgan Stanley, New York, said the acquisition of Purity Supreme marks the first time Stop & Shop has purchased an entire chain. "But it was an opportunity that came up and helps Stop & Shop fill in the New England market fairly well, with a few more years of reasonably good growth there while it's picking up its expansion pace in the Greater New York area."

According to Levin, the deal would strengthen Stop & Shop's market share by adding Purity's 7% share to Stop & Shop's base of 17% in Massachusetts.

In addition, she said, the acquisition would allow Stop & Shop to expand into New Hampshire, a new, contiguous area where Purity operates seven stores, and enable it to improve its profitability through synergies in buying, distribution, administration, advertising and systems.

Jonathan Ziegler, an analyst with Salomon Bros., New York, said the inclusion of the Li'l Peach chain in the deal would put Stop & Shop into the convenience-store business for the first time, "and that could become a new vehicle for Stop & Shop expansion, especially if it determines there's a need for consolidation within the convenience-store industry." Ziegler said he expects Stop & Shop to refinance the $208 million in debt it would assume in the deal.