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Safeway Buying Illinois Chain


Safeway Inc., further accelerating the rapid consolidation of the U.S. supermarket industry, said Tuesday that it's buying Chicago-area chain Dominick's Supermarkets Inc. for $1.2 billion in cash.

By adding Dominick's 112 stores, Safeway, which also owns the Vons chain, would operate 1,490 outlets in 18 states and have annual revenue of nearly $27 billion.

Safeway, based in Pleasanton, Calif., and other major chains are on a merger binge that has dramatically changed the industry's landscape, especially in Southern California.

Indeed, Dominick's chairman, Los Angeles-based supermarket billionaire Ronald Burkle, in August said the chain was looking for a merger or some other transaction that would enable Dominick's to exploit the industry's merger trend.

The grocery chains are combining for two main reasons: They find it more cost-effective to buy other players instead of building new stores as a means to grow, and they're bulking up to stay ahead of growing competition from big general-merchandise discounters such as Wal-Mart Stores Inc. that also sell groceries.

And although some consumer advocates argue that these mergers will lead to higher prices and reduced competition, thus far there has been little conclusive evidence of that, and perhaps just the opposite may prove true, with companies achieving economies of scale that eventually bring lower prices.

Last year, Safeway bought California rival Vons Cos. And just two months ago, Albertson's Inc. agreed to buy American Stores Co., which owns the Lucky grocery and Sav-On drugstore chains, for $11.7 billion.

American Stores also owns the leading Chicago-area grocery and drugstore chain, Jewel-Osco. So, if both pending mergers go through, Safeway and Albertson's will be battling for supremacy in the Windy City.

The American Stores deal also would give Boise, Idaho-based Albertson's annual revenue of about $36 billion, lifting Albertson's above Kroger Co. as the nation's biggest supermarket operator.

In recent months, there have also been persistent rumors on Wall Street that Safeway and Kroger might someday merge.

Meantime, Burkle's holding company, Yucaipa Cos., and New York investment firm Apollo Advisors together own 41% of Dominick's and have agreed to sell their shares to Safeway.

Burkle also is chairman of Fred Meyer Inc., a Portland, Ore.-based supermarket chain that has been contributing to the industry's merger frenzy. This spring, it completed deals for the Ralphs, Food 4 Less and Hughes Family Market chains.

Burkle and Yucaipa also own a combined 9.3% stake in Fred Meyer, according to the company's most recent prospectus.

"I'm a firm believer in the consolidation taking place in the supermarket industry," Burkle said in a statement Tuesday.

Asked if Burkle plans to use the Dominick's proceeds for another supermarket deal, a Yucaipa spokesman said the company "is always interested in looking at various transactions."

Meredith Adler, an analyst at Lehman Bros. in New York, said Dominick's "is an attractive asset, and it's a good fit for Safeway." Safeway itself, under the direction of Chief Executive Steven Burd, in recent years has gone from an industry laggard to an industry standout in terms of profit margin, sales growth and return on stockholders' investment.

Under their agreement, Safeway would pay $49 for each of Dominick's common shares. Safeway said it also would assume about $646 million of Dominick's debt.

In response, Dominick's stock soared $6.88 a share to close at $48.25, while Safeway's stock slipped 9 cents to $41.34 a share, both in composite trading on the New York Stock Exchange.

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