PEAPOD TO BUY PART OF STREAMLINE'S OPERATIONS

JON SPRINGER

CHICAGO -- Peapod here last week said it would purchase the Washington and Chicago operations of Streamline.com in a move that provides Peapod with strategic benefits and Streamline with the means to keep its other businesses afloat.

Peapod said it would pay $12 million in cash for Streamline's Chicago and Washington operations, including its facilities, customer base and employees. Peapod will also assume leases on Streamline warehouses in Gaithersburg, Md., and Lake Zurich, Ill.

Streamline, Westwood, Mass., will keep its Boston and New Jersey operations.

The move marks the second time in three months that a struggling Internet grocer was rescued in part by Dutch-based supermarket operator Ahold. Ahold in June purchased a 51% interest in Peapod after that company had run into financing troubles. Streamline, also running low on cash, had said it would cease operations completely if it could not obtain additional financial backing.

Both companies were snatched up at bargain prices, noted Ellen Baras, securities analyst for William Blair & Co. here.

"It shows you that desperation changes valuation," Baras told SN.

Streamline said it would use the cash to fund its existing markets in Boston and northern New Jersey. In addition, it has exited its lease agreement to open a new facility in Minneapolis.

Peapod, which as expected last week said it would exit the Texas and Ohio markets, will use the Chicago facilities to bolster its own business and customer base there. The Gaithersburg facility will allow Peapod to roll out service by the fourth quarter -- sooner than originally planned -- and take advantage of Ahold's Giant Food chain, based in Landover, Md., for marketing and promotion.

Peapod, which partnered with Randall's Food Markets (a Safeway-owned chain) in Texas and with Kroger in Columbus, Ohio, said it would exit those markets this week. Those operations represent the last of Peapod's store-partnership picking models.

"It's a good strategic move for Peapod," Baras told SN. "The new customers they'll pick up in Washington and Chicago will more than make up the revenue they are losing in Texas and Ohio. Peapod also had some capacity issues in Chicago, and Streamline's warehouse there is new and quite a bit more automated than what Peapod is using now."

Paula Wheeler, a spokeswoman for Peapod, told SN that Peapod would offer Streamline customers attended or unattended delivery. She said the company would not offer new refrigerator models.

Streamline is pulling out of Washington less than a year from its launch there. It sold its Chicago business just eight months after completing its acquisition of Scotty's Home Market, a Chicago-based Internet grocer, in a stock deal worth $30 million.

Streamline shares have plunged since that deal was announced last October, when Streamline was trading at $6.75. It has traded as low as 50 cents in recent weeks, and was trading Thursday at around 81 cents.