SAFEWAY: YUCAIPA UNDERMINED SALE

Elliot Zwiebach

PLEASANTON, Calif. -- Safeway here filed a cross-complaint last week against Yucaipa Cos., the Los Angeles-based investment firm, alleging Yucaipa's actions have jeopardized Safeway's attempts to consummate the sale of Dominick's Supermarkets.

"The harm that Yucaipa has caused, and is continuing to cause Safeway, is irreparable," the complaint says.

The action, filed in Los Angeles Superior Court, charges Yucaipa with breach of contract, fraud and intentional interference in connection with Safeway's efforts to sell Chicago-based Dominick's. It alleges that Yucaipa's conduct "has impeded the progress of Safeway's negotiations" with another bidder, and created the risk of additional damage.

Yucaipa officials could not be reached for comment.

Safeway's cross-complaint was filed two weeks after Yucaipa filed suit against the chain, claiming Safeway had conducted a biased, unfair bidding process.

Safeway announced last November it would try to sell Dominick's after it was unable to reach agreement with the chain's unions on new labor contracts. Yucaipa sold Dominick's to Safeway in 1998, and is interested in re-acquiring it; however, Safeway has selected another bidder, and although none of the parties involved have ever identified that bidder, industry sources generally believe it to be Supervalu, Minneapolis.

According to the complaint, Safeway said Yucaipa had engaged in "extensive communications" with the unions earlier this year without providing notice to Safeway or seeking its consent. Those communications were so detailed and conclusive, the complaint indicates, "that they led Yucaipa to state to Safeway that Yucaipa was confident that, if it acquired Dominick's, it could achieve [labor] parity with Jewel [Dominick's principal competitor in Chicago] in three years -- something that would require, according to Yucaipa's own complaint, significant concessions from the unions."

Safeway's complaint says Yucaipa's communications with the union "raised the specter that Yucaipa would seek to use [its union] ties to sabotage a higher bidder's efforts to negotiate similar concessions from these same unions."

The complaint says Yucaipa agreed to Safeway's request that, if it was not the winning bidder, it would use its "good faith best efforts" to help the winning bidder negotiate agreements with the unions.

"Yucaipa never intended to honor its key obligations in these agreements," the complaint alleges. "Yucaipa's plan was to submit a weak initial bid and... use its ties to the unions to cause the efforts of other, more serious bidders to fail in the hopes that Yucaipa would be able to buy Dominick's at a bargain price once it had eliminated all competition."

Safeway said it selected a bidder other than Yucaipa in June, and asked Yucaipa to comply with its agreement to intercede with the unions on the winning bidder's behalf. A few days later, Yucaipa filed suit against Safeway -- a suit Safeway's complaint says is "meritless" and intended "to undermine the efforts of the selected buyer to negotiate an agreement with the unions... and to advance its ultimate aim of coercing Safeway to sell Dominick's to Yucaipa at a price below its market value."