FRED MEYER SIGNS ACCORD FOR ACQUISITION OF SMITH'S

ELLIOT ZWIEBACH

PORTLAND, Ore. -- Fred Meyer Inc. here said last week it has signed a definitive agreement to acquire Smith's Food & Drug Centers, Salt Lake City.

The move is designed to reduce costs, increase buying power and strengthen Fred Meyer's balance sheet, company executives said.

Fred Meyer said it expects to complete the transaction -- for $720 million in stock equity plus assumption of $1.3 billion in debt -- by late August or September. The combined entity would operate 374 stores in 17 states, including 258 large-format stores with food in 11 Western states, with estimated 1997 sales of more than $7 billion.

The merger would create synergistic benefits such as increased buying clout, streamlined information and distribution systems, and improved opportunities for private-label sales, company executives said.

According to Robert G. Miller, chairman and chief executive officer of Fred Meyer, "This merger of equals will create a merchandising powerhouse across the Western United States [that] will enjoy strong market positions in five of the fastest-growing cities [Las Vegas, Seattle, Phoenix, Salt Lake City and here] and seven of the fastest-growing states in the country [Nevada, Utah, Idaho, Arizona, Oregon, Washington and New Mexico]."

After the merger, Fred Meyer and Smith's would each become separate operating entities of a newly formed holding company based here, although Smith's would retain offices in Salt Lake City and Phoenix "while we look at the administrative area to determine the best approach going forward," Miller said.

Yucaipa Cos., Century City, Calif., which has a 24% equity position in Smith's, would be the largest single shareholder in Fred Meyer, with just under 10% of its equity, once the deal is completed. Kohlberg Kravis Roberts & Co., the New York-based investment firm that bought a majority share of Fred Meyer stock in 1981 but has sold off most of its holdings, would own approximately 1% of the company's stock following the merger.

Yucaipa also owns majority shares in Ralphs Grocery Co., Compton, Calif., and Dominick's Finer Foods, Northlake, Ill.

Ronald W. Burkle, Yucaipa's principal, would become chairman of Fred Meyer, and Miller would give up his title as chairman but would remain CEO and add the title of president. Burkle would also continue to serve as CEO of Smith's, chairman and CEO of Ralphs and chairman of Dominick's.

In addition, Fred Meyer's seven-member board would be expanded to 11 seats to accommodate four new members, including Burkle; Jeff Smith, Smith's chairman; and two current Smith's directors -- Fred Smith and Bruce Karatz.

It was unclear last week what would happen to two top executives at Smith's -- Al Rowland, president and chief operating officer, and Matt Tezak, chief financial officer, "but their options are wide open," Burkle told SN in an interview last week.

According to Burkle, the combination of Fred Meyer and Smith's makes sense "because the geography is so fantastic," with the two companies competing directly in only six communities in Utah and two in Idaho.

Under the agreement, Smith's shareholders -- including affiliates of Yucaipa and members of the Smith family -- would receive 1.05 shares of Fred Meyer common stock for each share of Smith's common at a price of $43.97 per share, for a total of $2 billion, including assumption of debt.

The companies said the transaction is structured to qualify as a tax-free exchange and would be accounted for as a purchase.

The merger has already been unanimously approved by both companies' boards of directors; in addition, certain shareholders controlling over 65% of the voting power of Smith's outstanding capital stock have agreed to vote in favor of the merger.

Nevertheless, shareholders of both Smith's and Fred Meyer will be asked to vote on the merger in approximately 60 days, company sources said, following issuance of proxies in the next 30 days and reviews by the Securities and Exchange Commission over the succeeding 30-day period.

Fred Meyer, founded in 1922, operates 222 stores averaging 145,000 square feet, with 1996 sales of $3.7 billion. Its store base includes 113 multidepartment stores -- of which 106 have food departments -- in six Western states (Oregon, Washington, Utah, Alaska, Idaho and Montana), plus 104 jewelry stores, three nutrition centers, one small freestanding grocery store and one small freestanding general merchandise store.

It also operates a dairy and commercial bakery here, plus three major distribution facilities in Puyallup and Chehalis, Wash., and Clackamas, Ore.