ROUNDY'S, SPARTAN IN PACT TO FORM NO. 3 WHOLESALER

ELLIOT ZWIEBACH

PEWAUKEE, Wis. -- In a move that would create the nation's third-largest food wholesaler and that signals continued consolidation among distributors, Roundy's here and Spartan Stores, Grand Rapids, Mich., have agreed to merge. The combination of the two privately held cooperatives would create a $4.7 billion wholesaler that falls in at third-largest -- albeit a distant third -- behind Fleming Cos., Oklahoma City, and Supervalu, Minneapolis. Fleming's volume is $19.1 billion and Supervalu's is $15.9 billion. The Roundy's-Spartan combination would displace Wakefern Food Corp., the cooperative based in Elizabeth, N.J., from the third slot. Wakefern's sales volume is about $3.7 billion. The proposed Roundy's-Spartan merger would give the combined company more buying clout in key Midwestern operating territories and lead to synergies in technology and distribution, according to observers. Following the merger, a new, as yet unnamed holding corporation would be formed. Spartan and Roundy's would retain their individual identities as wholly owned subsidiaries of the new entity, which would be privately held, according to insiders. Company executives declined to say if either wholesaler would become a more dominant player in the organization.

Neither Spartan nor Roundy's indicated what the hierarchy of

executives would be in the new entity. John R. Dickson, 64, is currently chairman and chief executive officer of Roundy's and Patrick M. Quinn, 60, is president and CEO of Spartan.

The two parties have signed a letter of intent to merge. Consummation of the deal is expected to take several months and is subject to several prerequisites, including a definitive agreement on the merger, approval and adoption of the merger by the respective shareholders of each company, and appropriate regulatory approvals. Under terms of the proposed transaction, shareholders of each company would exchange their holdings in Spartan or Roundy's for shares of common stock in the new corporation. The headquarters of that company would be determined by the new company's board. Industry observers told SN the two companies have decided to create a holding company in order to allow them to create a new ownership framework that will resolve structural differences between Spartan, which is a pure cooperative, and Roundy's, which runs a core cooperative business but also owns other wholesalers that are not cooperatives. "That's the reason for creating a holding company -- to take some time to bring the two operating companies closer together," one observer told SN. "And then, once the ownership issues are resolved, the holding company can bring together and restyle the operating businesses. "Both companies have done a decent job of achieving a strong sales base. Now they must look at where they can go from here and how they can rationalize operations to take advantage of strategic opportunities to move forward." Roundy's currently is the nation's sixth-largest food wholesaler, with sales for the year ended Jan. 1 of $2.48 billion. Spartan is the nation's seventh-largest wholesaler, with total revenues for the year ended March 26 of $2.19 billion. In a joint statement, the companies said they share "similar technology, systems, operating philosophies and cultures and, in addition, both are located in the heart of the Midwest. The pending merger presents the companies with a whole new set of opportunities for growth." Some industry observers speculate that Roundy's will emerge with a 51% stake in the new company, while Spartan will have a 49% share. But James B. Meyer, Spartan's senior vice president and chief financial officer, told SN, "As of now, the ultimate ownership terms are confidential. At this point we contemplate a merger of equals." What a merger of equals means, he said, "is that both parties bring comparable value to the table. It's a situation where neither company would be a dominant factor in the merged company." Meyer said it would be reasonable to assume there will be synergies resulting from the merger, but he declined to pinpoint any potential synergies or speculate on what the impact of the merger will be on either company or the potential hurdles that must be faced in finalizing the merger. "There are still a lot of unresolved issues," he told SN. Some observers expect Roundy's to emerge as the majority partner because of the structure of its nine-member board of directors, which includes equal representation from management, retailers and outsiders and which is concerned with providing general goals and guidance for the company.

In contrast, Spartan is a more retailer-controlled company whose 10 directors -- nine retailers and Quinn -- "often have a hard time taking off their retailer hats and looking at broader issues that move the company forward," which is perceived to be a structural weakness, one observer said.

Observers also told SN they believe getting both companies' members to agree to the merger may present some hurdles. According to one observer, "In a cooperative, it's tough to get people to agree to a merger because it's difficult to get them to listen to valuations. Each member is usually looking at how the merger will affect his maximum earnings stream, and he's not generally financially sophisticated. "And there's a general sense that Spartan has been more aggressive in such areas as Efficient Consumer Response and in re-engineering and restructuring initiatives, and there are questions about how that will affect profits." The proposed merger offers benefits for both companies, according to Rick Mazer, president of Mazer Group, a San Francisco-based consulting firm that works with wholesale food distributors. He said both have good systems in place and that Spartan is advanced in ECR and could lead Roundy's further in that direction. Mazer also pointed to the geographic advantages in the merger. For example, because Roundy's leads in Wisconsin and Spartan in most of Michigan, the new cooperative will dominate in a wider, contiguous area and can become more aggressive in marketing.

"Also, Spartan has wanted to go into Indiana and northern Ohio, where Roundy's already has a base, so Spartan will have a clearer path of growth after the merger," Mazer said. In terms of distribution facilities, "the two companies have an opportunity going forward to rationalize distribution by warehouse, so the larger warehouses can handle larger supermarkets and the smaller ones can handle convenience stores and smaller markets," Mazer said. "In addition, Spartan has made some acquisitions in the candy and tobacco business that overlap what Roundy's is doing, and now it has the opportunity to penetrate the front-end and convenience store businesses in Roundy's marketing areas. "And that may lead to the acquisition of additional distributors to add to that capability," Mazer said.

Gary Giblen, a securities analyst for PaineWebber, New York, who follows wholesale companies, said the same factors that led to the merger of Scrivner with Fleming and Wetterau with Supervalu led to consideration of the merger of Spartan and Roundy's. "The food wholesaling business is becoming increasingly challenging, and you've got to be big to succeed," Giblen explained. "And for the first time, national buying power, more so than regional buying power, matters because suppliers are willing to make national deals." With ECR becoming increasingly important to the industry, "there are a lot of up-front costs involved, and it's better to be big to absorb those costs," Giblen added.

Shifting at the Top

The proposed merger of Roundy's and Spartan would push the combined entity into the No. 3 spot on the list of top U.S. wholesalers, displacing Wakefern from the third slot.

HOW WHOLESALERS WOULD RANK IF THE MERGER WERE APPROVED

1. Fleming Cos., Oklahoma City $19.1 bil.

2. Supervalu, Minneapolis $15.9 bil.

3. Spartan Stores/Roundy's $4.7 bil.

proposed merger (R=$2.48 bil. S=$2.19 bil.)

4. Wakefern Food Corp., Elizabeth, NJ $3.7 bil.

5. Nash Finch Co., Minneapolis $2.7 bil.

Before the Mergers

Many of the top wholesalers of 1990 are part of merged companies today as a result of the ongoing consolidation in the wholesale sector. As examples, Supervalu has merged with Wetterau, and Fleming Cos. with Scrivner. The latest proposed merger of Spartan Stores and Roundy's would continue that trend.

HOW THE TOP WHOLESALERS RANKED IN MARCH OF 1990

1. Fleming Cos., Oklahoma City $12.5 bil.

2. Supervalu, Minneapolis $11.1 bil.

3. Scrivner, Oklahoma City $5.70 bil.

4. Wetterau, Hazelwood, Mo. $5.40 bil.

5. Wakefern Food Corp., Elizabeth, NJ $4.30 bil.

6. McLane Co., Temple, TX $2.70 bil.

7. Certified Grocers of Cal., Los Angeles $2.33 bil.

8. Roundy's, Pewaukee, WI $2.25 bil.

9. Nash Finch Co., Minneapolis $2.22 bil.

10. Assoc. Wholesale Grocers, Kansas City, KS $1.94 bil.

11. Spartan Stores, Grand Rapids, MI $1.73 bil.