MORE SAFEWAY ACQUISITIONS ARE EXPECTED

ELLIOT ZWIEBACH

PLEASANTON, Calif. -- Now that Safeway has opened the acquisition door, industry analysts say they expect more to come.

The basis for their anticipation is the pending merger of Safeway with Carr Gottstein Foods, Anchorage, Alaska -- which comes more than a year after Safeway completed its acquisition of Vons Cos., Arcadia, Calif.

Safeway said earlier this month it will pay $330 million for the 49-store chain, including $110 million of equity and $220 million of debt. The company said it expects the deal to be completed early next year.

As to what it will do next, Safeway has been reluctant to tip its hand. According to Melissa Plaisance, the chain's executive vice president of finance, Safeway is "proactively looking for opportunities to add value for our customers and our shareholders, and we will continue to do so.

"But it's impossible to put a timeframe on it because it takes a willing buyer and seller." Ted Bernstein, a high-yield securities analyst with Grantchester Securities, New York, said the Carr Gottstein deal "is good news for the industry because it means that Safeway has finally arrived at the consolidation party.

"Since it acquired Vons, Safeway has been surprisingly quiet on the acquisition front, but now it appears it is starting to follow through and is looking around and indicating a readiness to re-emerge as a consolidator."

Bernstein said Safeway's next acquisitions may not be megadeals like the one between Boise, Idaho-based Albertson's and Salt Lake City-based American Stores Co. Instead, Safeway may pursue the route Albertson's had been following -- going after medium- and smaller-sized companies -- before striking its megamerger.

"What Safeway does next will depend on where it sees itself and the opportunities that arise to buy businesses where the company thinks it can make improvements. Safeway says it is looking for acquisitions in existing or contiguous markets where it sees opportunities to improve operations, and there are a number of potential candidates out there."

Debra Levin, an analyst with Morgan Stanley Dean Witter, New York, said she expects Safeway to make "other, larger acquisitions that target large, regional players with sales of over $1 billion, as well as continuing to in-fill markets."

Although she said she would not name potential targets, Levin said Safeway is "very focused on acquisitions, and it's staffed up to focus more attention in that area."

Jonathan Ziegler, a San Francisco-based analyst with Salomon Smith Barney, New York, said he expects Safeway to make significantly larger acquisitions than Carr Gottstein. "This is definitely not the big deal Safeway has been hinting," Ziegler said. "This is a minor, bush-league acquisition. The elephant is still out there."

Ziegler said he expects Safeway's bigger deal "fairly soon."

He said he believes Pathmark Stores, Woodbridge, N.J., would make an ideal fit for Safeway. "It would not be as big a merger as the Albertson's-American Stores deal," Ziegler said, "but it would be a fabulous deal that could have very dramatic meaning for Safeway."

Pathmark could not be reached for comment on the speculation.

According to Ziegler, "Pathmark has a great real-estate base, with lots of mouths to feed surrounding the stores and no Wal-Mart supercenters nearby. And it offers Safeway a great opportunity to restructure the balance sheet, expand private-label brands and build its Eastern operations."

Bernstein said he agreed that Pathmark would be a good, logical acquisition for Safeway. "Someone has to begin consolidating the Northeast, and that consolidation will begin with Pathmark," he said.

Analysts were divided on the wisdom of Safeway's pending merger with Carr Gottstein. Levin called the deal "a small gem of an acquisition.

"Although it will only add about 2% to Safeway's sales, it fills in a market in which Safeway already operates and will provide significant synergies for Safeway's Alaskan operation," in areas including administration, private label, buying, advertising, distribution, freight, debt refinancing and best practices, Levin said.

She also said she expects Safeway to undertake an aggressive remodeling program in Alaska "that would likely benefit both sales and earnings."

Levin said she expects the Federal Trade Commission to require Safeway to divest some units but said she doesn't believe that will be a major issue.

Ziegler was more negative about the transaction. "I don't know why Safeway did it," he told SN.

"Why waste the time and effort? Alaska is not a growth area, and the deal has only marginal benefits, since margins are already high at Carr Gottstein and there's not much room for improvement."

He also questioned how many of Carr Gottstein's 51 stores will meet Safeway's standards, since only 25 are supermarkets -- including 16 Carr's combination stores of 60,000 square feet and nine conventional Eagle Markets of 25,000 square feet; the company also operates 19 Oaken Keg liquor stores and seven Great American Tobacco Co. outlets.

Bernstein said the merger will be good for both parties.

"Alaska is certainly a limited market, with little room to grow the business, which is one reason Carr Gottstein was for sale. But Safeway was able to buy it at a relatively low multiple -- 7.2 times operating cash flow, compared with 9.3 times in the Albertson's-American merger and 11 times in the Ahold-Giant merger.

"So with the built-in discount, Safeway didn't have to overpay.

"But Carr Gottstein has proven to be a good operator that's done a good job in a limited-growth environment by improving margins and keeping costs down. I was not very enthusiastic about the company when it came into the bond market, but I've changed my tune because they've improved themselves and grown margins."

Although margins are already high, "Safeway can still make improvements on the expense side to some degree," Bernstein said.

Regarding the store names, Safeway said it plans to keep the Carr's and Eagle banners. However, Ziegler said the names ought to be changed to Safeway. "Carr's has a strong, longtime reputation in Alaska, but this is a great opportunity, if Safeway makes some changes at store level, to grab the advantage and change the store names to Safeway," he said.

Larry Hayward, president and chief executive officer of Carr Gottstein, said the store names may be changed at some point. "We intend to maintain our name, although some changes may occur in different markets -- and Safeway also has a strong name in the state. That's something the transition team will have to evaluate."