THE URGE TO MERGE

RUSSELL REDMAN

Nineteen ninety-six rumbled to a close with a bustle of merger and acquisition activity, capping off a year rife with blockbuster deals and more industry consolidation.

Two huge deals were unveiled in the last week of October alone. First, Safeway, Pleasanton, Calif., proposed a merger with Vons Cos., Arcadia, Calif. If Vons agrees to the $1.65 billion offer (it had not responded as of early this month), Safeway would become the second-largest U.S. supermarket operator, with volume of about $21.3 billion -- vaulting it past American Stores Co., Salt Lake City, but behind Kroger Co., Cincinnati.

Just a day later, Food Lion, Salisbury, N.C., announced an agreement to acquire Kash n' Karry Food Stores, Tampa, Fla., which would forge a supermarket company with volume of $9.2 billion.

Another big deal steamed ahead right on the heels of those two blockbusters. In early November, Nash Finch Co., Minneapolis, completed a tender offer to acquire Super Food Services, Dayton, Ohio, in a deal announced in early October. The merger creates a company with about $4.1 billion in sales, making Nash Finch about even in size with Wakefern Food Corp., Elizabeth, N.J., the third-largest U.S. wholesaler. In early June, Nash Finch also acquired wholesaler T.J. Morris, Statesboro, Ga., which added $110 million in volume.

Still more brow-raising merger and acquisition news followed in November. In moves about a week apart, Quality Food Centers, Bellevue, Wash., entered agreements to acquire Keith Uddenberg Inc., Gig Harbor, Wash., and then Hughes Family Markets, Irwindale, Calif. The latter marks QFC's first out-of-Washington operation. Combined, the deals would push QFC's store count from 64 to 145 and its volume from roughly $700 million to about $2 billion.

At about the time the QFC-Hughes deal was unveiled, reports also surfaced that Schwegmann Giant Super Markets, New Orleans, had agreed to be acquired by Kohlberg & Co., a Mount Kisco, N.Y.-based investment firm. As of early this month, the 29-store chain had not made any announcements about such a deal.

However, the biggest deal in 1996 erupted in late March, when Ahold, Zaandam, the Netherlands, surprised many industry observers by gobbling up Stop & Shop Cos., Quincy, Mass., in a $2.9 billion acquisition. The transaction, closed in late July, boosted sales at the Dutch retailer's Ahold USA, Atlanta, subsidiary by $4 billion, hiking its total volume to about $12.4 billion and ranking it the No. 6 U.S. supermarket operator.

In swallowing Stop & Shop, Ahold gained a sixth U.S. chain. The others are Tops Markets, Williamsville, N.Y.; Giant Food Stores, Carlisle, Pa.; Finast, Maple Heights, Ohio; Bi-Lo, Mauldin, S.C.; and Edwards Super Food Stores, Windsor Locks, Conn. In September, Ahold realigned its U.S. operations into four divisions: Giant (including some Edwards), Tops (including Finast), Bi-Lo and Stop & Shop (including some Edwards).

The transaction shook up the New England and Long Island supermarket scenes. Shaw's Supermarkets, East Bridgewater, Mass., and Bozzuto's, Cheshire, Conn., emerged as the key beneficiaries of Federal Trade Commission-required store divestitures. Foodtowns formerly operated by Melmarkets, Garden City, N.Y. -- acquired by Stop & Shop in late 1995 -- ended up as Edwards Super Food Stores with the Ahold-Stop & Shop deal.

Leading off the wave of high-profile mergers this year was Smith's Food & Drug Centers, Salt Lake City, which in late January/early February struck a deal to acquire Smitty's Supermarkets, Phoenix. The deal, closed in May, added nearly $600 million in volume to Smith's $3 billion.

The merger, though, proved to be an unusually public and equivocal transaction. Around the turn of the year, Smith's said it was in talks about acquiring Smitty's, a subsidiary of Yucaipa Cos., Los Angeles. Those talks were interrupted when another chain -- reportedly Vons -- expressed interest in acquiring Smith's itself. After discussions voyaged through various ups and downs, talks with Vons reportedly broke off and Smith's and Yucaipa resumed their negotiations, yielding the Smith's-Smitty's merger.

Other notable deals in 1996 included the following:

Grand Union Co., Wayne, N.J., in late summer agreed to turn over majority control of the company to Shamrock Group, a Los Angeles-based investment partnership. The transaction involves the sale of $100 million in preferred convertible stock in installments through February 1998, which would give the partnership a 58% to 61% stake.

Megafoods Stores, Mesa, Ariz., in early October agreed to sell its 16 Megafoods stores to Bashas' Markets, Chandler, Ariz., leaving Megafoods with 19 Handy Andy units in San Antonio. The deal was pending as of early this month, with the chance that other bidders could emerge in a court-ordered auction arising from Megafoods' Chapter 11 bankruptcy status.

Bruno's, Birmingham, Ala., in mid-October said it would seek buyers for 42 stores in Georgia and South Carolina plus a Georgia distribution center. As of early this month, it had found buyers for 22 of the stores.

Whole Foods Market, Austin, Texas, reached an agreement in June to acquire Fresh Fields, Rockville, Md., its biggest competitor. The deal, closed in September, solidified Whole Foods' position as the leading natural-food chain.

Fleming Cos., Oklahoma City, acquired Abco Foods, Phoenix, in a public auction in January. Fleming, Abco's primary supplier and largest creditor, had said in late 1995 that it aimed to buy the chain.

Jitney Jungle Stores of America, Jackson, Miss., was bought in March by Bruckman, Rosser, Sherrill & Co., New York, a newly formed leveraged buyout firm.

Schnuck Markets, St. Louis, in early January agreed to sell 23 stores to Family Co. of America, St. Louis, to satisfy an FTC-ordered divestiture from its 1995 acquisition of National Super Markets, St. Louis. The deal with Family Co., a newly formed company including ex-National executives, closed in mid-March.

Wild Oats Markets and Alfalfa's, both based in Boulder, Colo., in late January announced plans to merge. The deal, closed in the summer, formed the second-largest natural food chain.