Pacific Lighting's surprise announcement Wednesday that it will purchase Thrifty Corp. ended a careful five-year search for a non-energy acquisition to help stabilize the utility holding company's cyclical earnings.
And, although the painstaking planning process took years, Pacific Lighting moved quickly once it identified Thrifty as a potential partner, making initial contact only two weeks ago and crafting the details in numerous meetings over the Memorial Day weekend.
Pacific Lighting, known chiefly as the parent of Southern California Gas, is a diversified holding company with interests in oil and gas exploration, real estate and financial services. About a third of its earnings come from non-utility operations.
Thrifty Corp. operates 555 Thrifty discount drugstores, 27 Thrifty Jr. drugstores and 89 Big 5 sporting goods stores. It is part owner of the Trak Auto West and Crown Books chains.
Pacific Lighting Chairman Paul A. Miller and Thrifty Chairman Leonard H. Straus first met to discuss the merger May 19 over lunch in a dining room at the downtown Los Angeles headquarters of Southern California Gas.
Straus initially was reluctant to accept Miller's luncheon invitation, insisting that Thrifty was not for sale. But he finally relented and agreed to discuss the combination--in principle.
In their talk, Miller was naturally concerned about what price Straus would demand for the successful, fast-growing drugstore chain. Among Straus' chief demands, according to knowledgeable sources, was that he be allowed broad autonomy to continue to run Thrifty.
Eventually, both questions were settled, with Pacific Lighting agreeing to a stock swap valued at about $885 million while leaving Straus satisfied with his operational independence.
The deal was conceived by Lloyd A. Levitin, a Pacific Lighting executive vice president in charge of finance and strategic planning. He said in an interview Thursday that the acquisition fits into the company's plan to earn half of its net income from non-utility sources by 1992.
By the end of 1986, analysts estimate, Pacific Lighting's subsidiaries--other than Southern California Gas--will contribute about 40% of profits.
Levitin said he narrowed his search for a merger partner to five industries and hired consultants to evaluate their growth potential and their "fit" with Pacific Lighting. The analysts looked at publishing, cable television, financial services, construction and drug retailing.
By late last year, the strategy team had eliminated financial services and construction as too close to interests that Pacific Lighting already owned and too vulnerable to swings in interest rates and fluctuations in the broader economy. Earlier this year, they ruled out potential publishing and cable-TV deals as too expensive.
That left drugstores, Levitin said, and Pacific Lighting began evaluating firms in that field, quickly settling on Thrifty because of its impressive growth record and its local base.
"Being local was important but not a requirement," he said. "If you're going into a business that's completely different, you don't want to go to a geographical area you don't know. We feel it (Thrifty) is a natural fit because we're both serving the same communities."
20% Dilution of Earnings
Levitin said the seemingly incongruous combination makes sense in today's market. "The economy is so uncertain, and technology is changing so fast, you have to be diversified to weather unexpected adversities. In the long term, diversification creates a stronger, healthier, more rounded company."
Analysts generally agreed, although they said the purchase would cause as much as a 20% dilution in Pacific Lighting's per-share earnings for the next year or two.
"I think it offers Pacific Lighting finally an opportunity in a counter-cyclical business and offsets the cyclical nature of the energy-related and land development business," said Sarah A. Stack, who follows both companies for the Los Angeles investment house of Bateman Eichler, Hill Richards. "For the individual investor, Pacific Lighting will only be improved. It will help stabilize their earnings and help reinforce their dividend."
Analyst M. Craig Schwerdt of Morgan, Olmstead, Kennedy & Gardner, another Los Angeles brokerage, said the key question raised by the deal is whether Pacific Lighting can earn more by investing in drugstores than it can as a regulated utility, where rates of return are set by state regulators.
Utility managers tend to be conservative, Schwerdt noted, "playing by the rule book as laid out by the regulatory commission. Outside the utility arena, they have no scapegoat to hide behind" if performance does not meet investor expectations.
"What shareholders will look at is, 'Did he (Pacific Lighting's Chairman Miller) beat the utility rate of return?' That will be the turning point," Schwerdt said.