ALBERTSON'S AMERICAN PLAN

ELLIOT ZWIEBACH

BOISE, Idaho -- The stage is set for a new No. 1 in the food industry

Albertson's, based here, is poised to replace Kroger Co., Cincinnati, as the nation's top-volume chain. Last week Albertson's announced a definitive merger agreement with American Stores Co., Salt Lake City, for $11.7 billion, including $3.4 billion of debt.

The combined company, which would be called Albertson's, would operate 2,474 stores in 37 states with pro forma 1998 estimated sales of approximately $36 billion.

Kroger's sales this year are expected to be approximately $28 billion -- though there is rampant industry speculation that Kroger may soon be part of a merger of its own, either as buyer or seller, that could push another company up to the No. 1 position.

The merger of Albertson's and American Stores is expected to close early next year. Albertson's said it expects the merger to strengthen its operations in several significant ways, including the following:

Expanding its scope in northern and southern California and the Southwest.

Moving into urban locations in Philadelphia and Chicago.

Operating stand-alone drug stores for the first time.

Achieving an anticipated $300 million in cost savings, including $100 million in buying and distribution efficiencies and $200 million in reduced overhead.

The proposed merger with American Stores was Albertson's second in less than a week. In a considerably smaller transaction four days earlier, Albertson's agreed to acquire 15 stores from Bruno's, Birmingham, Ala. (See story, Page 4.)

Earlier this year, Albertson's acquired Seessel's Supermarkets, Memphis, Tenn.; Smitty's, Springfield, Mo.; and three Super One Foods stores in Des Moines, Iowa. Its acquisition of Buttrey Food & Drug Stores Co., Great Falls, Mont., is still pending before the Federal Trade Commission.

Albertson's operates 916 stores in 23 states, while American has 1,558 stores in 26 states, including 269 food and drug combination stores, 539 supermarkets and 750 drug stores.

American Stores' supermarkets operate under the names Acme Markets, Jewel Food Stores, Jewel-Osco and Lucky Stores, and the drug stores carry the Osco or Sav-on banner.

The deal would put Albertson's in 14 new states. Albertson's said it intends to retain current store names on most locations, "although the names of individual stores may change, depending on their size, location and other factors."

The "new" Albertson's would continue to be based here, with Gary G. Michael, chairman and chief executive officer of Albertson's, retaining those titles, while Victor L. Lund, chairman and CEO of American Stores, would become vice chairman of Albertson's. According to Michael, "This transaction provides for the strategic combination of two outstanding companies with complementary strengths and common values.

"At a time when the supermarket industry is under increasing pressure to enhance value to customers through cost-effective operations, this merger has been designed to assist us in continuing to provide superior value and service to our customers and compete successfully in today's marketplace.

"We expect the new Albertson's will be an industry leader, with well-know store names and private-label brands. We will have a seasoned and proven management team at both the corporate and division levels, and a sound balance sheet and strong cash flow, which will enable us to continue our combined capital spending and debt-reduction programs at current levels.

"In short, our potential for enhanced revenue and earnings growth is tremendous." Albertson's said that, excluding onetime merger-related charges, the deal is expected to be accretive to earnings per share in 1999; it also said the merger should accelerate Albertson's annual earnings growth in subsequent years through the realization of approximately $300 million in annual cost savings.

According to Lund, "I believe this strategic combination is in the best interests of our employees, customers and shareholders, providing them with the opportunity to participate in the growth of an exciting company with outstanding people and a promising future.

"Because of our consistent business philosophies and similar corporate cultures, I am confident the integration of these two companies will go very smoothly."

Michael said the merger will yield "significant strategic and financial benefits and is a defining milestone in our ongoing program to accelerate sales growth, increase profitability and enhance shareholder value.

"From a strategic standpoint, this transaction will strengthen our presence in many of our existing markets across the country, particularly in northern and southern California and the Southwest, and enables us to enter important urban markets like Chicago and Philadelphia for the first time."

The acquisition of American's 750 stand-alone drug stores -- called Osco in the Midwest and Sav-on in southern California -- would mark Albertson's entry into the stand-alone drug store business.

"By combining our fast-growing pharmacy business [with the stand-alone drug business], we expect to achieve significant benefits such as improved procurement and distribution, more efficient systems and processes and an enhanced ability to participate in third-party pharmacy reimbursement plans.

"Financially, we expect to achieve substantial food and drug synergies through a combination of cost reductions, enhanced purchasing ability and greater volumes and efficiencies in our existing markets. We expect these annual synergies to [include] at least $100 million by the end of the first year and to total approximately $300 million in the third year."

He said the $100 million in savings will come from buying and distribution efficiencies in the combined food and drug operations, while approximately $200 million are anticipated from a reduction of overhead, including redundant administrative functions and information systems, as well as a reduction of advertising expenditures in overlapping markets.

"The company will also streamline operations, with common systems and a best practices approach in all areas," Michael said.

The company said the $11.7 billion price tag on the deal consists of $8.3 billion of equity value and $3.4 billion of debt.

The merger, which has been approved by the board of directors of both companies, is being structured as a tax-free transaction and is expected to be accounted for as a pooling of interests.

It is subject to approval by shareholders of both companies and regulatory agencies. Following the merger, Albertson's said it expects to record significant onetime charges in connection with the transaction, the magnitude of which have not yet been determined. Under terms of the deal, shareholders of American Stores would receive 0.63 shares of Albertson's common stock for each share of American common they own. Based on Albertson's closing stock price of $48 per share July 31, the company said the transaction has a value of $30.24 per share of American stock.

Albertson's said it would issue approximately 172.8 million shares in the transaction. Following closing of the merger, American Stores shareholders would own 41.3% of Albertson's. The companies said they have entered into cross-options under which each company has been granted an option to purchase up to 19.9% of the other company's common stock under certain conditions. Both companies said they have rescinded their respective stock buyback programs.

The Top U.S. Retailers

The list of the nation's top chains is about to undergo another major shuffle. Albertson's will become the new No. 1 when it completes the deal to acquire American Stores Co. Albertson's is currently No. 6 and American No. 4. The ranking of Ahold USA includes volume from its proposed acquisition of Giant Food, which is still pending before the Federal Trade Commission. Safeway's volume reflects its proposed merger with Carr-Gottstein.

The New Top 5

Rank Company Sales (in billions) Location

1 Albertson's $33.81 Boise, Idaho (pro forma)

2 Kroger Co. $26.6 Cincinnati

3 Wal-Mart

Supercenters $25.0 Bentonville, Ark. (est.)

4 Safeway $23.12 Pleasanton, Calif.

5 Ahold USA $18.53 Atlanta (pro forma)

1Based on the combination of American Stores' 1997 volume of $19.1 billion and Albertson's 1997 volume of $14.7 billion.

Albertson's projects 1998 sales to be $36 billion.

2Based on the combination of Safeway's 1997 volume of $22.5 billion and Carr-Gottstein's 1997 volume of $589.3 billion.

3Based on the combination of Ahold's 1997 volume of $14.3 billion and Giant Foods' 1997 volume of $4.2 billion.