YUCAIPA SUES SAFEWAY TO HALT DOMINICK'S SALE

David Ghitelman

PLEASANTON, Calif. -- The slow and very private process of Safeway here selling Dominick's Finer Foods exploded last week into a very public battle, with Yucaipa Cos., Los Angeles, the once and would-be future owners of the Chicago-area supermarket chain, filing a lawsuit in California Superior Court alleging that Safeway has conducted a "biased and unfair" bidding process.

In its suit, Yucaipa asked for monetary damages. It also asked for the court to grant injunctions prohibiting Safeway from selling Dominick's and requiring Safeway to reopen the sale process.

Safeway responded by declaring that the allegations contained in the Yucaipa suit "are completely without merit," and said it plans to file a counterclaim against Yucaipa, which had operated Dominick's from 1995 to 1998, when it sold the chain to Safeway.

A Yucaipa spokesman, in turn, commented: "We are disappointed, but not surprised, by Safeway's response. This was not a fair and impartial bidding process."

Veteran observers noted that this sort of public airing of grievances between companies is rare in the supermarket industry.

Neil Stern, a senior partner at McMillan Doolittle, a Chicago retail consultancy, told SN the Dominick's sale has been "kind of bizarre. It's been very public from the get-go, which creates an opening for a lot of misinformation."

At the heart of the dispute is Safeway's relationship with United Food and Commercial Workers Union locals 881 and 1546, which represent most Dominick's workers. As previously reported, in November, the company told the locals they would either have to agree to a contract that would give Dominick's employees pay and benefits comparable to those of workers represented by the same locals at Chicago-area Jewel-Osco stores, operated by Albertsons, Boise, Idaho, or Safeway would sell the chain.

The company demand surprised most industry observers, as did the union response, which was to agree to a contract extension while Safeway attempted to sell Dominick's.

Andrew Wolf, an equity analyst with BB&T Capital Markets, Richmond, Va., said it appears to be a case of both labor and management acting badly.

"With 20-20 hindsight, you can probably criticize Safeway's hardball tactics," he said. "But you can criticize the union for being irrational, too. They'd rather shut down the stores than meet Safeway halfway."

Re-enter as a potential re-buyer Yucaipa, which claimed in its filing to have "worked hard to cultivate, over many years, excellent relationships with many unions [including the UFCW]."

Safeway apparently had a similar assessment of Yucaipa's sway over organized labor, according to a letter obtained by SN. In the Feb. 7 letter to Yucaipa, Vasant Prabhu, Safeway's executive vice president and chief financial officer, noted that Yucaipa had, "without Safeway's prior knowledge, consent or approval," conducted discussions with UFCW and Teamsters Union officials. Prabhu then outlined several customary conditions for Yucaipa's participation in the Dominick's sale process, including that the company have no further talks with the unions.

Yet one of the conditions that Prabhu described appears to have been highly unusual, and possibly unique, according to industry observers. He wrote that in the event Safeway ultimately selects another company as the purchaser of Dominick's, Yucaipa and its representatives "will use their respective good faith efforts to obtain for such party or parties... collective bargaining agreements with the unions... that will enable the transaction to be consummated as promptly as practicable."

However, in July, when Yucaipa was informed that Safeway had chosen to move ahead with another purchaser, it refused to contact the unions. Yucaipa said it did not intercede with the unions on behalf of the winning bidder for two reasons: First, Safeway's requirement that Yucaipa promise to intercede was unfair, since Safeway made no similar requests of any other bidder; and second, Safeway never seriously considered selling the chain to Yucaipa.

Safeway, for its part, said it conducted a fair auction "using one of the world's leading investment bankers, and Yucaipa was not the winning bidder." Safeway added that it has been trying unsuccessfully for more than a month to get Yucaipa to intercede with the locals on behalf of the auction's winner. Although Safeway has never named that winner, it is widely believed to be Supervalu, Minneapolis, which has repeatedly declined to comment.

Supervalu currently operates the Cub Foods chain of supermarkets in Chicago, whose workers are represented by UFCW locals 881 and 1546.

For their part, the two locals said last week they are "reviewing the lawsuit."

Commented Ronald Powell, president of Local 881, "We are obviously disappointed that, if true, Safeway would engage in the conduct alleged by Yucaipa."

Meanwhile, apart from the central issue, the filing contains a wealth of intriguing details, including:

In March 1995, Yucaipa purchased Dominick's for approximately $693 million. In November 1998, it turned around and sold the chain to Safeway for approximately $1.9 billion. Yucaipa said Safeway then spent another $450 million to integrate Dominick's. Yucaipa also said its final offer for Dominick's, submitted June 6, was $300 million in cash and $50 million in stock.

Yucaipa's initial bid for Dominick's, submitted April 4, included a payment of $50 million to Safeway "from the benefits Yucaipa projected it would generate from a successful acquisition of the infrastructure of Eagle Food Centers," a 60-store supermarket chain in Milan, Ill., that filed for Chapter 11 bankruptcy protection April 7. Industry sources said Yucaipa was less interested in Eagle's store base and more interested in the company's information technology and computer systems, which it would need because Dominick's, having been integrated into Safeway, lacks systems of its own.

The labor cost disparity between Dominick's and Jewel is $3 an hour. Yucaipa added that this disparity was caused by Safeway's layoffs after it purchased Dominick's, which left the chain with "a highly senior employment base whose rate of pay and benefits structure was generally higher than average."