Merger mania struck again Monday when Albertson's Inc., the Boise-based supermarket chain, announced it will acquire Salt Lake-based American Stores Co. in a mega-deal valued at $11.7 billion.
The new company, to be called Albert-son's, will be the largest food and drug chain in America (surpassing Kroger, the current largest) with 2,470 stores and some 218,000 employees in 37 states.Ironically, the merger announcement comes while American Stores employees are still moving into the company's new corporate headquarters in downtown Salt Lake City. A total of some 1,900 people are expected to occupy the 25-story office tower at Main and Broadway within the next few weeks.
But how long they will remain is in question. Albertson's says its corporate headquarters will remain in Boise and it expects to achieve annual costs savings of $300 million from buying and distribution efficiencies and overhead reductions, including "redundant administrative functions."
That sounds a lot like job cuts, and it is.
In a telephone interview from New York where the merger was announced, American Stores chairman and CEO Victor L. Lund told the Deseret News there was "no doubt" that some of the company's headquarters employees will lose their jobs in the merged company but the number hasn't been determined.
But he said he was "confident" that American Stores would retain a presence in Salt Lake City and perhaps in its new corporate tower at Main and Broadway.
"We're working now to determine how many people will be impacted. We're also working hard to assure them a good severance package and to make the transition comfortable for them," said Lund, noting that no one will be terminated until the deal is completed early next year.
The merger has been OK'd by the boards of both companies but still has to be approved by federal regulators and will doubtless come under antitrust scrutiny. Lund said there is a "one in a hundred" chance it could be killed because of antitrust laws and in that event American Stores would want to have its headquarters employees still in place.
"But I'm confident we will solve any problems that will come up in our antitrust review," said Lund.
Lund will become a director and vice chairman of the board in the new company, not a full-time job.
"I have no idea what I'm going to do," he said. "I will take a year and talk to my wife, and the two of us will decide." Will they stay in Utah? "We love Utah," Lund said but would not elaborate beyond that.
If worse comes to worst and American Stores leaves its new tower, it would dump some 427,000 square feet of Class A office space on the downtown market - about 70 percent of the building's total space.
"It wouldn't be the end of the world, but it would shake things up dramatically," said Ray Unrath, associate broker at Consolidated Realty Group in Salt Lake City.
Unrath said the downtown office market normally absorbs from 100,000 to 250,000 square feet of space per year, but it is driven by availability.
"It's hard to get projects going downtown, so when they do, they fill up quickly. That building would be potentially attractive to another company, either locally or out of state."
Unrath said Monday there are currently two developers considering building high-rise office buildings downtown. "This will put them on hold for sure," he said.
Following the merger announcement Monday, Albertson's stock was down $2.31 to $45.69 per share in early trading. The deal will mean a "significant" but as yet unknown charge on Albertson's 1998 earnings but is expected to boost future earnings as the cost savings kick in. American Stores stock shot up $3.88 to $27.06.
Many people Monday were surprised that American Stores was the entity being acquired and not the other way around. But though American Stores is a larger company and has more stores - 1,558 in 26 states vs. Albertson's 916 stores in 23 states - its stock value is considerably below Albertson's.
Annual sales of the two companies are expected to top $36 billion for all of 1998.
Albertson's said it intends to retain the various store names of both companies, although the names of individual stores may change, depending on their size and location. Albertson's has a strong retail presence in Utah, but American Stores does not, operating only a single grocery store in its downtown office tower.
Nationwide, American Stores operates under the Acme Markets, Jewel Food Stores, Lucky Stores, Osco Drug and Savon names.
Under the terms of the deal, shareholders of American Stores will get 0.63 share of Albertson's stock for each of their shares. Based on $48 per share, Albertson's closing share price on Friday, the transaction would be valued at $30.24 per share for American's shareholders, about a $7 premium over American's closing price on Friday.
Albertson's will issue some 172.8 million shares of new stock to make the deal, meaning current American Stores' shareholders would own 41.3 percent of Al-bert-son's' stock.
The merger cancels previously announced stock buyback plans of both companies.
Albertson's chairman Gary G. Michael said in a prepared release that the supermarket industry is under increasing pressure to enhance value to customers through cost effective operations and the merger is designed to do just that.
Last May, the Wall Street Journal speculated that American Stores was ripe for a takeover, noting that its plan to cut costs and improve efficiency by getting rid of unprofitable businesses was not working.
The Journal also speculated that American Stores had been approached by Fred Meyer Inc., the retailer based in Portland, Ore., about a merger. Lund would not confirm that Monday, saying only that the Albertson's deal "came together very, very quickly . . . after they came to us."
Lund said the details would be forthcoming in the company's filing with the Securities and Exchange Commission.
Patrick Schumann, an analyst with Edward Jones in St. Louis, said he was not surprised by the merger announcement.
"American Stores has been under some pressure to either improve their profitability or make a significant change," Schumann said.
Several large players were whispered about as possible suitors, he said, and Albertson's came into the discussion as another company that is headquartered in the West.
The combined company should benefit from economies of scale and the ability to buy in bulk, which should improve the margins at the former American Stores outlets, Schumann said.
"Once they get the margins up, this is going to be a food and drug powerhouse," he said.