THE $33 BILLION CHAIN

ELLIOT ZWIEBACH

BOISE, Idaho -- Albertson's here became the nation's second-largest supermarket chain last week when it completed its megamerger with American Stores Co., Salt Lake City -- a move that thrusts it for the first time into the freestanding drug-store business.

The new Albertson's will operate 2,437 stores -- including 783 drug stores -- with an estimated volume of $33.4 billion, including $13.7 billion from Albertson's and $19.7 billion from American Stores. Only Kroger Co., Cincinnati, has a higher volume -- $43 billion -- following its merger with Fred Meyer Inc., Portland, Ore., in May.

It also puts the suburban-oriented company into two urban markets -- Chicago and Philadelphia -- for the first time.

Albertson's said it will be required to divest 145 stores plus four store sites -- reportedly the largest number of divestitures ever ordered in the retailing industry, observers said. Gary E. Michael, chairman and chief executive officer, said last week the number of divestitures "was more than we had hoped for, [but] it is certainly manageable."

In an unexpected development, the company said Dick King, president and chief operating officer -- who was designated as a member of the post-merger office of the chairman -- has resigned from Albertson's and from its board of directors "to pursue other opportunities."

The office of chairman will now include Michael; Michael Reuling, vice chairman; Carl Pennington, executive vice president for marketing; and Thomas Saldin, executive vice president and general counsel.

Teresa Beck, president of American Stores, had been scheduled to be part of the office of the chairman; however, she opted out of the position last December, although she has agreed to serve on the Albertson's board.

In other top-level changes, Peter Lynch, general manager of American's Acme Markets, was named executive vice president of corporate operations, and Robert Butler, vice president of Albertson's southern California division, was named senior vice president of corporate merchandising.

Lynch will oversee operations in the South, East, Northwest and the drug-store division, and David Simonson, who also holds the title of executive vice president for operations, will oversee the Midwest, northern California, southern California and Intermountain regions.

Albertson's also said last week it will continue to operate stores in southern California, Las Vegas and New Mexico under both the Albertson's and Lucky Stores banners for the present.

The 145 divestitures include 117 stores in California, 19 in Las Vegas and nine in New Mexico, encompassing 105 Albertson's units and 40 American Stores locations. Those stores accounted for sales of $2.3 billion in the fiscal year ended in January, Albertson's said.

All sales are expected to close within 45 to 90 days, and most existing employees are expected to be offered jobs with the new owners. Buyers for the stores and store sites are as follows:

Stater Bros. Markets, Colton, Calif., 43 southern California stores and one store site, which Stater said combined for 1998 sales of approximately $500 million. The proposed acquisition, which would mark the largest single expansion in the company's history, would give the chain 155 stores and double its presence in Los Angeles and Orange counties, increase its presence in Riverside County and move the chain into San Diego County for the first time.

Ralphs Grocery Co., Compton, Calif., a division of Kroger Co., Cincinnati, 40 units -- including 31 in northern California, six stores and a store site in central California, two stores in southern California, plus one store and a vacant parcel of land in New Mexico, all of which reportedly accounted for an estimated $750 million to $800 million in sales last year. The acquisition would enable Ralphs to expand the Ralphs banner into central and northern California, including Sacramento, where it is acquiring 17 stores.

Certified Grocers of California, Los Angeles-based, member-owned cooperative, 31 stores, plus a single store acquired from Vons Cos. in a related transaction, all of which the company said it expects to transfer to retail members. The stores accounted for 1998 sales of approximately $475 million, Certified said.

Raley's Supermarkets, West Sacramento, Calif., 19 units in Las Vegas and eight in New Mexico (six in Albuquerque, two in Las Cruces), which Raley's said combined for sales of approximately $500 million last year. With all 124 of Raley's existing stores in northern California and northern Nevada, the acquisition moves the chain into two new marketing areas.

Vons Cos., Arcadia, Calif., a division of Safeway, Pleasanton, Calif., four stores and one store site in southern California. To acquire an Albertson's store that Vons wanted in Costa Mesa, Calif., it was required to sell its existing store there, which was acquired by Certified Grocers.

Gary Giblen, New York-based managing director of Banc of American Securities, San Francisco, said the divestitures "allow Albertson's to keep the majority of [stores] out of the hands of first-class aggressive competitors, with only 2% going to Safeway/Vons and 27% to Kroger/Ralphs, though Kroger may have less impact than usual as the Ralphs banner is not well known in northern California."

Of the remaining stores, Giblen said 22% are going to independent members of Certified, "[who are] particularly secondary players," while the remainder are going to private regionals Stater Bros. and Raley's, "who are fine operators but historically defenders of their turf rather than aggressors."

He also said the divested units average $15 million per year, compared with $19 million for American Stores' supermarket base and $15 million for the Albertson's store base, adding that Albertson's said several of the stores being divested were slated for closure as underperformers.

On a premerger basis, Albertson's was operating 997 stores in 25 Western, Midwestern and Southern states and American Stores was operating 1,585 units in 26 Western, Midwestern and Eastern states, including 514 supermarkets, 288 food-and-drug combination stores and 783 drug stores. Following the divestitures of 145 units, the new Albertson's will operate 2,437 stores.

The acquisition puts Albertson's in 14 new states and adds the names Acme Markets, Jewel Food Stores and Lucky Stores to the Albertson's family, along with the Osco and Sav-on drug-store names.

Albertson's said it will continue to conduct business as an operating company based here, with 30 divisions in eight regions.

Those regions will be as follows:

The Northwest region here, encompassing Washington, Oregon, Idaho, Utah and parts of Nevada, headed by Denny Lucas, formerly senior vice president and regional manager for Albertson's.

The Southern region, based in Arlington, Texas, and encompassing Albertson's, Max Foods and Seessel's stores in Texas, Florida, Arkansas, Louisiana, Mississippi, Tennessee and Georgia, headed by William H. Emmons, formerly senior vice president and regional manager for Albertson's.

The Intermountain region, based in Denver, encompassing Albertson's, Max Foods and Lucky Stores in Montana, Wyoming, Colorado, Arizona, New Mexico, North Dakota, South Dakota, Nebraska, Kansas, Oklahoma, Iowa and Missouri, headed by Wayne Denningham, formerly Florida division vice president for Albertson's.

The Southern California region, Buena Park, Calif., which incorporates Albertson's and Lucky Stores in southern California and parts of Nevada, headed by Roe Cefalo, formerly executive vice president and general manager of Lucky Stores South.

The Northern California region, San Leandro, Calif., including Albertson's and Lucky Stores in northern California and headed by Don Keprta, formerly executive vice president and general manager of Lucky Stores North.

The Eastern region, Malvern, Pa., encompassing Acme Markets, headed by Craig Herkert, formerly senior vice president of marketing for Acme Markets.

The Midwest region, Melrose Park, Ill., covering Jewel-Osco stores in Wisconsin, Illinois and Indiana, headed by Greg Josefowicz, formerly executive vice president and general manager of Jewel-Osco.

The drug region, headquartered in Scottsdale, Ariz., headed by Kevin H. Tripp, formerly executive vice president and general manager of American Drug Stores.

According to Michael, "Strategically, this merger creates a nationwide retailer, [and] the stand-alone drug stores provide a new vehicle for growth that will help us take advantage of the promising opportunities in the pharmacy business."

Michael said the company believes the synergies will be greater than the original estimate of $100 million in the first 12 months, $200 million in the second full year and $300 million per year thereafter.

Michael said the combined company plans to spend approximately $11 billion over the next five years on capital projects, including construction of 750 combination stores, 500 drug stores and 600 fuel centers, plus approximately 730 store remodelings.

The merger, which was announced following a definitive agreement in August, is valued at $11.7 billion, including $3.4 billion of debt. It was structured as a tax-free

Under terms of the deal, shareholders of American Stores will receive 0.63 shares of Albertson's common stock for each share of American common they own and will own 41.3% of Albertson's.

The New Albertson's

CORPORATE OFFICE: Boise, Idaho

VOLUME: $33.4 billion

NUMBER OF STORES: 2,437 stores in 38 Western, Midwest, Southern and Eastern states.

STORE BANNERS: Albertson's Food & Drug (23 states); Max Foods (California, Denver, Dallas/Fort Worth); Seessel's (Memphis, Tenn.); Lucky Stores (California, Loas Vegas, New Mexico); Jewel (Chicago); Acme Markets (Philadelphia): Osco Drug (Chicago, Kansas City, Phoenix, New England, other areas); Sav-on Drugs (southern California, Las Vegas).