VONS, SAFEWAY SET TO TIE KNOT TOMORROW

ELLIOT ZWIEBACH

PLEASANTON, Calif. -- The merger of Vons Cos., Arcadia, Calif., into Safeway here is expected to be completed tomorrow when Vons shareholders vote at a special meeting.

Consummation of the deal would make Safeway the No. 2 U.S. supermarket operator and open a new chapter in southern California retailing with synergistic opportunities for the merged entity, observers said.

Once Vons shareholders have completed their vote, legal documents would be signed to complete the transaction, with trading on Vons stock on the New York Stock Exchange scheduled to cease at the end of business the same day, the company indicated. The merger would also return Safeway to southern California after a 10.5-year absence, although it is a very different Safeway than the one that sold its 162 stores to Vons and left the area in 1986. According to observers, the differences should make Vons a stronger player in the southern California marketplace.

Executives at Safeway could not be reached last week for comment on their post-merger plans. Observers said those plans are likely to include the following:

Safeway would retain the Vons and Pavilions names on the southern California stores because of the strength the Vons name carries.

The merger would provide Safeway with sufficient additional cash flow to pay down debt or to seek further acquisitions.

While Safeway is likely to seek acquisitions of groups of 20 to 30 units over the next couple of years, it is unlikely to pursue another major acquisition like Vons until late 1998 or early 1999.

Safeway would be likely to accelerate cost reductions and re-engineering programs at Vons, while Vons would be expected to provide improvements to Safeway in the areas of human resources management and expansion of loyalty-card programs.

The merger might also give Safeway sufficient critical mass to open a distribution center for slow movers in California.

The merger would mark the end of a 40-year industry career for Lawrence A. Del Santo, who is to retire as chairman and chief executive officer of Vons. Del Santo disclosed plans a year ago -- before the merger with Safeway was contemplated -- to retire after Vons' annual meeting this year. (See story on Page 6 that looks back on Del Santo's career.) Expected to succeed Del Santo -- albeit as general manager of Safeway's Vons division -- is Richard Goodspeed, Vons president and chief operating officer.

Commenting on this week's merger vote, one observer said, "The vote in favor of the merger is already secure. Tuesday's shareholder meeting is just a formality."

The acquisition of Vons' 320 stores in southern California and Nevada would push Safeway past American Stores Co., Salt Lake City, which has been the second largest supermarket operator in the United States. The new Safeway entity would have a total volume of $22.7 billion, combining Safeway's 1996 sales of $17.3 billion with Vons' $5.4 billion. That compares with 1996 volume of $25.2 billion at Kroger Co., Cincinnati, the No. 1 operator.

Gary Giblen, managing director of Smith Barney, New York, told SN last week he expects both chains to benefit from the merger.

"Obviously, Safeway can accelerate cost-reduction measures and re-engineering at Vons, and Vons can help Safeway expand its frequent-shopper program and improve the whole area of human resources, including employee empowerment and morale -- an area in which Vons is the best in the industry."

Giblen said he believes Vons will benefit from the Safeway programs "almost immediately, while the reverse effect will take a little longer."

As a 35% equity owner in Vons that has participated to some degree in Vons' management, Safeway should encounter few surprises in taking over Vons, Giblen added. "Like marrying a longtime girlfriend, Safeway knows pretty much what it's getting," he said.

He said he doubts Safeway will make another major acquisition for 18 months to a year. "The Vons acquisition will definitely cool Safeway's jets for a couple of years as it seeks to realize the benefits of the deal," Giblen said. "Safeway has already demonstrated that's it's very disciplined when it comes to solidifying what it has before biting off any more. It could have bought Vons two years ago at half the price, but it chose instead to concentrate on its own turnaround first because it felt it was more important to shore up what it was doing rather than trying to save a few bucks on Vons.

Jonathan Ziegler, a securities analyst with the San Francisco office of Salomon Bros., New York, said he expects Safeway will be able to digest the merger with Vons in less than two years, "so it may seek another major acquisition a lot sooner."

He said a logical growth plan for Safeway "would involve fleshing out its Eastern division." Ziegler said the merger of two large companies "that already operate in adjacent markets in the nation's most populous state should provide opportunities for critical mass," including Safeway's ability to open a distribution center for slow-moving items such as general merchandise and health and beauty care.

Ziegler also said he expects some best practices to move downstream from Safeway to Vons -- including labor-saving methods at store level, improved private-label merchandising and more efficient buying; he also said he anticipates perishables handling practices and Vons' strong frequent-shopper program to move upstream to Safeway.