TEN HOT TOPICS

ELLIOT ZWIEBACH

What's the buzz?

As consolidation continues to change the competitive landscape, there's no end to speculation about who will buy what. But given today's disclosure rules, public companies are unable -- and usually unwilling anyway -- to confirm or deny any of the buzz until they are ready to make a formal announcement.

But that doesn't stop those in the industry from speculating about various possibilities. Based on conversations with securities analysts and other industry observers, SN has determined some of the hottest speculation circulating through the industry -- buzz about the futures of most of the top companies, including A&P, Ahold, Albertson's, Kroger, Pathmark, Safeway and Supervalu.

Typically, the speculation involves potential acquisitions, sales or spin-offs. While speculation doesn't always become reality, it sheds light on industry expectations for the future. And the industry has a lot of expectations about future consolidation, as evidenced by the buzz that follows.

Here, then, are 10 items industry observers are talking about:

Albertson's To Streamline?

There's a widespread expectation that Boise, Idaho-based Albertson's will exit some markets by the end of 2001 as it tries to get its corporate house in order. Divisions that are likely to be sold, according to various observers, include Tennessee and parts of Texas -- possibly Houston, San Antonio and/or Austin -- and there could be some paring back of operations in Florida.

According to Gary Giblen, senior vice president and director of research for C L King Associates, New York, "Texas is where Albertson's faces the most competitive market now -- it's wide open for supercenters and other non-union competitors, and it won't ever be a great market for Albertson's."

George Dahlman, an analyst with U.S. Bancorp Piper Jaffrey, Minneapolis, told SN, "Exiting markets has to be part of Albertson's strategy. Right now, it's trying to make the case that it has drawn the line by pinpointing 165 poor performers that will be closed, but that can't be the end of it."

Another observer, who asked not to be named, said Albertson's is already marketing several divisions to in-market competitors, with a sale to some combination of Safeway, Kroger, H.E. Butt Grocery Co. and possibly Winn-Dixie Stores likely by early fall. "When Safeway told analysts there is more capacity than they may be aware of, I believe that was a reference to Safeway talking to Albertson's about some in-market acquisitions," the observer said.

Another observer suggested Albertson's might make a logical acquisition candidate for a European operator like French retail giant Carrefour. Albertson's already has a European connection -- 12% of its stock is indirectly owned by Germany-based Aldi.

Pathmark For Sale?

A number of observers say it's likely that Pathmark Stores, Carteret, N.J., will be sold, though the timing is up to Pathmark itself, sources told SN.

"Pathmark can take its time," Ted Bernstein, an analyst with Dresdner Kleinwort Wasserstein-Grantchester, New York, said. "It's always been a good franchise -- it was simply overleveraged before its restructuring. But now its operating results are good, the balance sheet is clean, management is intact, and there's no pressure on it to sell."

Another observer suggested Pathmark may not want to wait too long. "When Jim Donald [chairman and CEO] brought Pathmark out of bankruptcy last year, he indicated he wanted to run it for two or three years. But with the stock up to about $25 a share, he's likely to seek a buyer sooner rather than later," he said.

From the standpoint of potential buyers, however, there is some urgency, Giblen said, "because the better Pathmark does, the more it grows in value and the more costly an acquisition it becomes."

Meanwhile, Pathmark has expressed an interest in acquiring Big V Supermarkets, Florida, N.Y., for a deal valued in excess of $200 million. Big V is reorganizing in a Chapter 11 bankruptcy.

Many observers said they believe Safeway will ultimately buy Pathmark. Among them is Jonathan Ziegler, San Francisco-based managing director for Deutsche Banc Alex. Brown, New York, who said a Safeway acquisition of Pathmark is likely "just because it makes so much sense. Pathmark's Northeast territory would be a fabulous market for Safeway, one that would help it fill in the gap between its operations in Chicago and those in Philadelphia and Washington."

Giblen also said he expects Safeway to be the buyer. "Once one company makes an offer, there will be a free-for-all, but Safeway will probably prevail because it has the most to gain, and it can afford to pay more," he said. "But Delhaize America has a supra-economic desire to acquire Pathmark because it wants to get bigger and increase its U.S. presence, and Pathmark offers that opportunity."

Delhaize pursued and lost a chance to buy Pathmark in 1999 when it was outbid by Ahold -- a deal that ultimately fell apart when Ahold was unwilling to divest stores as requested by the Federal Trade Commission. "Delhaize will certainly look at Pathmark again," one observer said, "since it fills the gap nicely between Hannaford in New England and Food Lion in the Southeast."

Sainsbury is another possible contender for Pathmark, sources told SN. "Sainsbury needs to decide if it wants to be in the U.S. or not, and it would make a strong statement that it wants to stay if it pursues Pathmark to extend Shaw's base in New England down through Connecticut and into the New York metropolitan area," one observer said.

Giblen suggested that Albertson's could be a possible buyer, despite the likelihood it will pull back in several markets. "Albertson's won't enter any new markets through acquisitions, but it would look at anything that fits with what it has, and Pathmark fits well with Acme," he said.

A&P To Sell Divisions?

Industry speculation continues to swirl around A&P, Montvale, N.J., which may have to decide soon whether it wants to sell any or all of its divisions.

Observers said they believe A&P's Canada division is likely to be the first to go. Although the company sought to scotch that speculation recently by saying it was very satisfied with its Canadian operation, skepticism persists.

"Speculation about A&P Canada keeps coming up," Dahlman said, "and it has come up enough times that I won't rule it out anymore. From conversations I've had, it seems that selling Canada may have been in the talking stage for a while, or at least remains an option. There are enough differences between operations in the U.S. and Canada that there aren't many synergies, so Canada could be separated fairly easily, without much hemorrhaging, so it makes some sense."

One observer said the company is unlikely to make any decisions until the end of the year, when it will have a clearer reading of whether its restructuring initiative, Great Renewal II, is working. "That project is like a rocket on the launch platform," he told SN. "There are great expectations but many questions about whether it will take off or explode. For A&P, the rocket will probably take off, but if not, it may have to consider selling some divisions."

Another observer said the Haub family in Germany, which controls A&P stock, has very little liquidity in its German investments, "and those operations are getting hurt by Wal-Mart. So it could look at selling A&P as a way to get some liquidity for its holdings. In the past it has used A&P for financial flexibility, but with the stock price down, A&P isn't worth as much, so it's possible there could be a sale."

However, a third observer told SN he doubts the Haub family has any interest in selling A&P. "If anything, it is more likely to buy back all the public stock and take the company private," he said. "The Haubs have a lot of time, money and personnel invested in the U.S., and they are unlikely to sell the whole company or even part of it."

Safeway's Growth Path?

The company linked to most industry acquisition scenarios is Safeway, Pleasanton, Calif. -- and the fact its sales have slipped makes an acquisition of some sort particularly compelling, observers told SN.

"Safeway is bumping up against the wall on sales due in large part to the energy situation on the West Coast, and its attempts to sustain growth with same-store sales aren't very strong," one observer said. "The breakaway strategies are probably working, but the headwinds are pretty strong, and the solution is not necessarily in Safeway's control.

"Safeway is on record with hefty earnings goals that it's trying to beat, but given those headwinds, it has got to either pull back on some goals or figure out some way to achieve them. The resolution of its situation may be more in the hands of Alan Greenspan because it may require some help from the economy, and Steve Burd [chairman and CEO] doesn't like to admit a slowdown. So an acquisition may be the short-term solution."

Giblen expressed a similar point or view. "The big question mark is, can Safeway get back on the path of higher growth? Even though it's so well managed, it's going through some tough times till its breakaway sales initiatives kick in, and that makes an acquisition more likely as a way to accelerate its growth rate."

According to Ziegler, "There's a presumption out there that there aren't a lot of major food retailers left to buy. But there's also a feeling that Safeway has got to make an acquisition to continue its growth rate -- and if the pickings among supermarkets get too slim, Safeway could look at drug stores as a natural extension."

Ziegler said Safeway has had talks with Rite Aid in the past, although a merger of those two companies is unlikely in the near term. "But if Safeway is really interested in getting into the drug store business," he added, "it could look seriously at the Texas and Florida operations of Eckerd."

Transition At Kroger?

The industry is also buzzing about reports that Joseph A. Pichler, chairman and CEO of Kroger Co., Cincinnati, since 1990, may retire at the end of the fiscal year in February. Kroger officials declined to comment on the speculation.

"Pichler's retirement would make sense at this time because the company is reaching the natural end of an era," Giblen said. "Pichler led Kroger [originally as president] through a period during the 1980s when its performance was mediocre, saw it through its highly leveraged recapitalization in 1988 through 1995 that make it a world-class operator, and then led it through the mega-merger with Fred Meyer in 1999 that got it to a global scale; so what else is there left for him to do?"

While some SN sources said they expect Pichler's successor to come from within the company -- David Dillon, president and chief operating officer, or possibly Rodney McMullen, executive vice president, strategy, planning and finance -- there is another school of thought that Kroger could seek a successor from outside, as Safeway did when it named Burd, a former consultant, as CEO in 1993, or Albertson's did earlier this year when it brought Larry Johnston over from General Electric.

Whoever heads the company, observers said they expect Kroger to continue to make smaller, in-market acquisitions, similar to its purchase earlier this summer of 14 stores in Georgia from Harris Teeter.

A Kroger-Harris Teeter Deal?

Some observers believe that deal may be a precursor to a larger transaction between Kroger and Harris-Teeter's parent company, Ruddick Corp., Charlotte, N.C.

Ruddick has indicated it does not plan any further store cutbacks, but some industry sources remain skeptical.

"Ruddick has talked at one time or another with everyone who's a potential buyer," one observer told SN. "Harris Teeter operates beautiful stores in prime locations throughout the Southeast, and it would make a good purchase for anyone. But Kroger would seem to have the inside track, and if Ruddick decides to sell, Kroger will be the buyer."

Giblen said Ruddick is more likely than ever before to sell off Harris Teeter, "and Kroger is the most likely buyer because it operates in the same markets and has traded stores with Harris Teeter in the past."

Fleming-Kmart To Altar?

Fleming, Dallas, seems on course to merge with Kmart Corp., Troy, Mich., several observers said. The two companies are already linked by the supply agreement that made Fleming the exclusive supplier of consumables to Super Kmart stores, and by investments in each by Yucaipa Cos., Los Angeles, the investment group that engineered the merger of Fred Meyer Inc. with Kroger.

"Fleming and Kmart have already taken preliminary steps toward working more closely together [through the supply agreement]," Ziegler said, "and it makes sense to go to the next level of a fully integrated supercenter chain with integrated distribution capacity."

Another observer said it would be mutually beneficial to both Fleming and Kmart to operate as a single organization "because that may be the most effective way to combat Wal-Mart. Given Wal-Mart's ongoing efficiencies, a Kmart-Fleming combination would enable the merged company to do a more effective job."

Such a merger "clearly lurks in the back of investors' minds and would be on the wish list of a number of Fleming investors," Bernstein said. "Right now Yucaipa is testing the waters to see if it can realize synergies from the supply agreement, and if it works, then it will move to take control and merge the two companies in the next one to three years."

If such a merger occurs, a next logical step could be to sell the combined operation to a foreign-based company, Giblen suggested.

Supervalu Mulling Moves?

Supervalu, Minneapolis, must decide what to do with Save-A-Lot, its wildly successful limited assortment store banner -- either take it public or keep it as a cash-producing subsidiary -- observers said.

"With Save-A-Lot generating a lot of the company's earnings, it could be killing the golden goose to spin it off," said one. "Supervalu would certainly get a good price for it, but what would it be left with? The alternative is to milk it for a while longer and get full shareholder value that way."

Now that Supervalu has moved to streamline its retail operations by divesting its Cub Food Stores in Indianapolis and its Laneco operations in Pennsylvania and New Jersey, industry speculation is centering on what Supervalu will do with its corporate-owned Cub locations in Chicago once the turnaround of those units is complete. According to one observer, "Supervalu is fixing those stores now and turning the corner, but then what does it do -- sell them off or continue to operate them?"

Ahold Food Service Expansion?

Ahold, which has lately been eschewing retail purchases in favor of acquisitions in food service and convenience stores, is expected to continue to expand in the food-service area -- possibly with the acquisition of Alliant to join U.S. Foodservice and PYA/Monarch in the Ahold portfolio, according to one observer.

Giblen said there's also a possibility Ahold could go after the Smart & Final food-service division, "which would give Ahold better [food-service] penetration on the West Coast and enable Smart & Final's French corporate parent, Casino, to get value from its investment to plow back into the Smart & Final store base."

Wild Oats A Natural Target?

Wild Oats Markets, Boulder, Colo., has been struggling to survive since expanding too rapidly through acquisition and overextending management's capacities, observers said, and the resulting negative impact on earnings has made the company a potential takeover candidate -- "though it could end up as a leveraged buyout by management," Ziegler pointed out. "It's certainly an interesting target." Another observer suggested the chain might make a nice acquisition for a traditional supermarket operator.

Done Deals

Below are some of the major developments that kept the industry buzzing during the first seven months of the year:

January:

Safeway acquires 11 Abco Markets in Arizona from Fleming, Dallas.

Jitney Jungle Stores, Jackson, Miss., completes liquidation by selling stores to Winn-Dixie, Jacksonville, Fla., and Bruno's Supermarkets, Birmingham, Ala.

Supervalu, Minneapolis, drops out of bidding for Kmart supply contract; contract goes to Fleming.

February:

Furr's Supermarkets, Albuquerque, N.M., files for Chapter 11 protection.

Safeway, Pleasanton, Calif., completes acquisition of Genuardi's Family Markets, Norristown, Pa.

Roundy's, Pewaukee, Wis., acquires Copps Corp., Stevens Point, Wis.

March:

Spartan Stores, Grand Rapids, Mich., acquires Prevo's Family Markets, Traverse City, Mich.

Grand Union, Wayne, N.J., completes liquidation, sells 170 stores to C&S Wholesale Grocers, Brattleboro, Vt.

April:

Albertson's names Larry Johnston as chairman, CEO.

Tom Dahlen resigns as chairman, CEO of Furr's, named executive vice president of Fleming.

IGA operators acquire 29 Abco Markets in Arizona from Fleming.

Kroger Co., Cincinnati, acquires Baker's Supermarkets, Omaha, Neb.

Nash Finch Co., Minneapolis, divests 20 Sun Mart IGA stores in Southeast.

June:

Schultz Sav-O Stores, Sheboygan, Wis., acquires Dick's Supermarkets, Platteville, Wis.; Schultz changes corporate name to Fresh Brands.

Supervalu announces plans to close 30 stores in Pennsylvania, New Jersey and Indianapolis.

Marsh Supermarkets, Indianapolis, acquires O'Malia Food Markets, Carmel, Ind.

July:

Harris Teeter sells 27 noncore stores to Kroger (15 units); Ahold USA, Chantilly, Va. (8), and Piggly Wiggly Carolina Co., Charleston, S.C. (4).

Fleming agrees to acquire 66 Furr's stores.

Albertson's announces plans to close 165 underperforming stores.

Nash Finch announces negotiations to acquire 14 U-Save Foods in Omaha, Neb.