DOUBLE PLAY

ELLIOT ZWIEBACH

PORTLAND, Ore. -- The proposed megamerger of three of the West's major operators is being hailed by observers as a very positive and significant move in the industry's ongoing consolidation.

Fred Meyer Inc. had been the nation's 10th largest food retailer before the proposed merger.

Under the merger, Ralphs Grocery Co., Compton, Calif., and Quality Food Centers, Bellevue, Wash., will combine with Fred Meyer Inc. here in separate deals, creating the nation's fifth largest retail food distributor with 818 stores and sales of $14.9 billion. The transactions -- which together represent a value of $4.8 billion -- are expected to close in the first quarter of 1998. Yucaipa Cos., the Los Angeles-based investment firm that controls Ralphs and owns a large stake in Fred Meyer, was the moving force behind the parallel mergers. Ron Burkle, managing partner in Yucaipa and chairman of both Ralphs and Fred Meyer, will be the chairman of the surviving entity, which will retain the Fred Meyer name.

Besides adding Ralphs and QFC as operating divisions with their own separate identities, Fred Meyer already operates Smith's Food & Drug Centers, Salt Lake City, and Smitty's Supermarkets, Phoenix.

According to a variety of observers, the megamerger would enable the newly constituted Fred Meyer to harness tremendous buying power through a wide variety of formats spread over a broad geographic area, while upgrading distribution and systems. It would also result in the elimination of the Hughes Family Markets banner in southern California as those 57 stores are converted to the Ralphs logo.

"It's really a multifaceted opportunity from the standpoint of market strength, cash-flow strength and management strength with all kinds of synergies involved," Jonathan Ziegler, a securities analyst with the San Francisco office of Salomon Bros., New York, told SN.

The merger would catapult Fred Meyer into the top ranks of buying power in the West "with the ability to do more coordinated buying. What remains to be seen is how the company accomplishes systems integration, and whether it can operate with the multitude of formats it will have," he added. Ted Bernstein, a high-yield analyst with Grantchester Securities, New York, expressed a similar view. "It looks to be a very positive move because it puts the new Fred Meyer into a broader geographic area and gives it a presence in some of the West's fastest-growing markets -- and while Fred Meyer will certainly have its work cut out for it in terms of integrating systems, logistics and purchasing, I think it is capable of handling it."

Chuck Cerankosky, an analyst with the Cleveland office of Tucker Anthony, Boston, said the proposed merger represents "another example of a retailer looking at economies of scale across several regions and finding ways to procure merchandise at a lower cost, which should benefit both the retailer and the consumer."

Once the merger has been completed: Fred Meyer will begin supplying QFC's 90 stores from its two-year-old facility in Puyallup, Wash.

The 57 Hughes stores will be converted to the Ralphs banner in the first few months.

Burkle will remain chairman of Fred Meyer and Robert G. Miller will remain president and chief executive officer; George Golleher will remain CEO of Ralphs; and Dan Kourkoumelis, who moved from the Northwest to southern California to oversee the Hughes operation for QFC, will return to the Seattle area as president of QFC.

The combined companies will allocate a total of $500 million in 1998 to capital spending, although none will alter its previously disclosed spending plans.

Fred Meyer anticipates annual savings of at least $100 million in the third full year after the consolidation from efforts to integrate administration, overhead, procurement, distribution and systems.

The NCR systems utilized by QFC and Hughes would be converted to the IBM systems used by Fred Meyer and Ralphs.

The Fred Meyer/QFC and Fred Meyer/Ralphs transactions are independent and not contingent upon each other, with the Fred Meyer/QFC combination accomplished by a tax-free pooling of interests valued at $1.7 billion, and the Fred Meyer/Ralphs union accomplished through a purchase involving an exchange of stock valued at $3.1 billion. Combined, the transactions would involve $2 billion in stock and $2.8 billion in assumed debt.

The merging companies said both combinations have already been approved by the boards of Fred Meyer, QFC and Ralphs, but are subject to regulatory approval and shareholder votes; the principal owners of QFC and Ralphs have already agreed to vote in favor of the transactions, they said.

According to Fred Meyer, the enterprise value of the combined company -- equity plus long-term debt -- would be about $10 billion. The new entity is expected to have a combined operating cash flow this year of $1.15 billion, including $606 million from Fred Meyer, $390 million from Ralphs and $154 million from QFC.

The new Fred Meyer would operate stores in 13 contiguous Western states and Alaska: 406 Ralphs-owned stores (including 262 conventional Ralphs units and 80 Food 4 Less warehouse stores in southern California; 27 stores in northern California, and 37 in the Midwest); 265 Fred Meyers (including 112 Fred Meyer multidepartment stores in the Pacific Northwest and West; 127 Smith's Food & Drug Centers in the intermountain states; 22 Smitty's Supermarkets in Phoenix, and four Price-Rite warehouse stores in Las Vegas); 90 QFC units in the Seattle area; and 57 Hughes Family Markets in southern California (which QFC acquired in March).

Although the dual mergers are subject to regulatory approval, the companies said they do not anticipate any significant problems, with head-to-head competition between Ralphs and Hughes in southern California and Fred Meyer and QFC in the Pacific Northwest at only a handful of locations.

The company would retain all existing formats, including the conventional format at Ralphs, Hughes, Smith's and Smitty's; the multidepartment-store format at Fred Meyer; the upscale marketing approach at QFC; and the warehouse approach at Food 4 Less and Price-Rite (which has already had some input by Food 4 Less personnel), Burkle said.

"There might be some cross-pollination among the companies in some merchandising areas, but not a lot," he noted.

Regarding future acquisition plans, Burkle told SN, "If it makes sense for another company to function together with what we have, we'll look at it."

Upward Mobility

Top 10 Food Retail and Wholesale Distributors

(Based on Projected Year-End results)

Annual Sales

Rank Company in billions

1 Kroger Co. $26.5

2 Wal-Mart Supercenters $25.0

3 Safeway $22.0

4 American Stores Co $19.4

5 Supervalu $17.1

6 Fleming Cos. $15.4

7 Fred Meyer Inc. $14.9

(including proposed mergers)

8 Albertson's $14.8

9 Ahold USA $14.0

10 Winn-Dixie Stores $13.2

Retailers Wholesalers

Of Wal-Mart Supercenters' total volume, about 40% represents sales of edibles and supermarket-oriented merchandise and 60% represents sales of general merchandise. Projected year-end sales for supermarkets are based on estimates by Salomon Bros. and Goldman Sachs research; projected year-end sales for Wal-Mart Supercenters, Supervalu and Fleming are based on industry estimates obtained by SN.