PLEASANTON, Calif. -- Safeway here said last week it has signed a definitive agreement with Vons Cos., Arcadia, Calif., to acquire the southern California chain -- a move that sets the stage for both companies to benefit from a variety of synergies.
The actual value of the acquisition, first proposed by Safeway in late October, will be determined by the price of Safeway stock just prior to completion of the deal, which is expected to close in March or April.
Following the merger:
Safeway would become the second-largest supermarket chain in the United States, with projected sales of $22.6 billion.
Vons would continue to operate its stores under the Vons and Pavilions names in southern California and Nevada.
Few disruptions are likely at store level, although some Vons headquarters personnel may be negatively affected as Safeway eliminates duplicate functions.
Dick Goodspeed, president and chief operating officer of Vons, would become head of Safeway's Vons division.
Lawrence A. Del Santo, chairman and chief executive officer of Vons, would retire in May as scheduled. His date of retirement had been set at the time he rejoined Vons nearly three years ago.
Concurrent with last week's announcement of the definitive merger agreement, Vons disclosed preliminary earnings results for the fourth quarter ending Dec. 29 -- projecting earnings of 73 to 78 cents per share for the quarter, compared with 48 cents a year ago, and $2.29 to $2.34 per share for the year, compared with $1.55 a year ago.
Safeway initially proposed to acquire Vons Oct. 30 and asked Vons for a response in two weeks. Vons said it would respond "in due course." However, "a thorough review of our options took a little longer," Mary McAboy, vice president of corporate communications at Vons, told SN last week.
The transaction calls for an exchange of stock at a 6% higher ratio than Safeway's original proposal, plus an agreement by Safeway to repurchase at least 15 million shares of its stock from Kohlberg Kravis Roberts & Co., the New York-based investment firm that controls the chain -- moves designed to improve Safeway's earnings going forward, chain officials pointed out.
Speaking to reporters last week, Steve Burd, Safeway president and chief executive officer, said, "We believe Vons is an excellent fit with Safeway, and this merger will generate greater earnings growth than we could possibly accomplish without it.
"Vons has a very strong No. 2 market-share position [in southern California] and a great reputation that we believe we can build on. And it has a cash-flow margin that is hovering in the 6.5% area, and we believe we can take that to 8%.
"We already have a common vision with regard to how we treat our customers and our employees and what we are expecting for our shareholders. We think we operate with similar cultures, and it should be easy to mesh the two organizations.
"While Vons has some great momentum going right now, we believe we can add to that momentum and further improve its operating results and sales."
Asked about possible personnel cutbacks at Vons, Burd said, "It's too early for me to tell what kind of reductions in staff might take place. However, to the extent that there are reductions, the cost savings will be small in the scheme of things."
According to Del Santo, "We believe this combination will work well for all parties involved. Vons was well along the way in its own sales and earnings recovery, and we believe that by combining these two companies we will accelerate our earnings potential beyond what we could have achieved on our own.
Beyond such benefits as cost reduction and geographic diversification, Del Santo said other "valuable opportunities" will exist following the merger. "Clearly there are some things we do better than Safeway that can apply to their stores, and surely we are going to learn an awful lot from the Safeway organization," he noted. "In the end, it's a powerhouse company with two very strong and healthy entities."
Goodspeed echoed Del Santo's optimism, noting, "Safeway certainly has a great deal of respect for what the Vons team has accomplished, and this mutual respect will allow us to take the best practices of both companies and build on them to create an even stronger, more customer-responsive organization."
Melissa C. Plaisance, senior vice president of finance and public affairs, told SN the combination of Safeway and Vons will result in "better buying power for the combined entity and the ability to lower manufacturing costs through increased volume."
Securities analysts said they agreed that both chains are likely to benefit from the combination, with Vons continuing to pursue the Safeway-derived strategies that have made it successful -- such as reducing operating expenses and reinvesting the savings to stimulate sales -- while benefiting from administrative reductions and Safeway's private-label programs, and Safeway able to take advantage of Vons' strong frequent-shopper card program, its human resources expertise and the additional cash flow Vons will provide.
Gary Giblen, managing director of Smith Barney, New York, said Safeway -- as a 35% equity holder in Vons -- has already exerted considerable influence on the way Vons runs its business, "and it's likely to do more of the same while pursuing new avenues of cost reduction, such as consolidating Vons' accounting and management information systems functions at Safeway's corporate level, as Safeway has done with its existing operating divisions."
He said Vons will also benefit from Safeway's private-label expertise. "Most of the Vons Select line comes from Safeway, and I'd expect more Vons private-label lines to come from Safeway, which will lower the cost of goods to Vons and provide more volume-driven efficiencies for Safeway," Giblen said.
Safeway should benefit from Vons' extensive use of loyalty cards, which Safeway has tested at two divisions with only limited success, Giblen noted.
Ed Comeau, a securities analyst with Donaldson Lufkin & Jenrette, New York, also said he sees added cash flow as a major benefit for Safeway. "While the Vons acquisition is a single for Safeway from an earnings standpoint, it's a home run from a cash-flow standpoint," he declared.
"Though it will add only about 15 cents per share to earnings in 1998, it will boost cash flow by $200 million, which will further solidify Safeway's balance sheet."