Lucky Stores has emerged as a serious bidder for Ralphs Grocery, industry sources said Sunday.
Such a consolidation of two major supermarket chains, on top of Vons Cos. plans to buy 172 Safeway stores locally, could mean reduced competition and perhaps higher grocery prices in Southern California, along with personnel cutbacks at Ralphs, analysts said.
Lucky officials were said to be meeting with Ralphs executives on Sunday, but none of those involved were available to discuss the meeting.
One investment banking source close to the Ralphs negotiations said, however, that such a deal could prompt governmental scrutiny. "I would think Lucky would have tremendous antitrust problems," he said.
As many as seven food retailers and investment banking firms are reportedly interested in making a bid for Ralphs. American Stores, parent of Alpha Beta, also reportedly has expressed interest in buying Ralphs but is not viewed to be as serious a bidder as Lucky.
Meanwhile, informed sources said Ralphs management, led by Chairman Byron Allumbaugh, is racing to nail down financing for its own buyout of the 129-store chain, based in Compton. Ralphs was put up for sale as part of an effort by parent company Federated Department Stores to thwart an unwanted takeover by Campeau Corp., a Canadian real estate developer.
Documents circulated to potential bidders by Cincinnati-based Federated show that interested parties must submit their best offers by Tuesday for consideration by Federated's board of directors, which will decide the supermarket chain's fate at a meeting Thursday.
Federated has set a base price for Ralphs of $900 million, a price well in excess of analysts' estimates of $700 million to $750 million.
The high price tag indicates the value of the Ralphs name, locations and real estate. Ralphs has grown from a one-store operation at Sixth and Spring streets in the 1870s into a powerhouse food operation in one of the nation's most competitive markets. Federated bought the chain, which employs more than 15,000 people, in 1967 for $60 million.
A purchase by Lucky, based in Dublin, Calif., or another Southern California competitor would almost certainly spell the end of the Ralphs name and likely lead to substantial layoffs as the buyer moved to consolidate operations, cut costs and deal with debt incurred in the takeover.
However, observers noted that Federated's board might not have the luxury of waiting for a months-long review by the Federal Trade Commission. The need for a quick sale might give Ralphs management an edge, sources said.
Analyst John B. Kosecoff of the First Manhattan investment house in New York said there are two ways of looking at a potential purchase of Ralphs by Lucky. On top of the Vons-Safeway deal, he said, another combination might raise concerns. However, he added, "Southern California shopper mobility is so great and the market itself so large that a combined market share (of Lucky and Ralphs) would not necessarily" raise red flags at the FTC.
Kosecoff added that Southern California food retailers have undergone substantial consolidation in the past 25 years. A combination of Ralphs and Lucky, he said, "could be considered a natural evolution" as the Southland market matures.
Ralphs, "is certainly not the last that could go by the wayside," he said, adding that Stater Bros. and Hughes Markets might soon be ripe for takeover or sale.
A bid by Lucky would be indicative of its return to strength after a revamping that it underwent in its own effort to stop a hostile bid by takeover artist Asher B. Edelman in late 1986. The company closed its Gemco membership department store operation, spun off some specialty retail units and bought back $575 million in Lucky shares. Since then, Lucky, under Chairman John M. Lillie, has been achieving record operating earnings by concentrating on its core food business.
Although Lucky has limited cash on hand, Kosecoff said, it has an estimated debt of only $185 million, compared to about $370 million one year ago.
Throughout the weekend, Allumbaugh and other members of Ralphs management were reportedly working to secure financing for a bid that Federated would view as adequate.
"In any situation, company management would prefer to keep the company independent, particularly a 100-year-old company," an investment banking source said.
Riordan Freeman & Spogli, a Los Angeles merchant banking firm that has backed several management-led buyouts in the food industry, reportedly is quite close to Ralphs' management. "We like the industry, and it's a great company," Brad Freeman, a principal in the merchant banking firm, said last week.
To be sure, observers noted that some jobs would be at risk even if Ralphs' management succeeded in buying the company. The onslaught of debt and the absence of the parent company's resources might force management to thin out employment and raise prices.