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Safeway an Attractive Takeover Target for Several Reasons

July 9, 1986

Undated (AP) _ Safeway Stores Inc., the nation’s largest food retailer and the target of a $3.6 billion tender offer by Dart Group Corp., is an attractive takeover candidate because it has been operating weakly and it owns subtanital assets, including undervalued real estate leases, analysts said Wednesday.

And a retailer, in particular, would want to buy Oakland, Calif.-based Safeway because it would provide immediate entry into many markets, they said.

Safeway, the subject of takeover speculation for at least a year, isn’t the first, nor will it be the last, food retailer to be pursued, the analysts said. Difficult industry conditions have put many of the companies ″in play,″ in Wall Street parlance.

Dart Group, a Landover, Md.-based discount retailer that already owns 5.9 percent of Safeway’s 61.5 million common shares outstanding, offered Wednesday to buy each of the remaining shares for $58 each.

Safeway said it would weigh the bid. It already has instituted various antitakeover measures, which Dart Group is seeking to invalidate.

Susan Schmierer, an analyst with the investment firm L.F. Rothschild, Unterberg, Towbin, said Safeway is attractive because ″it has a lot of underutilized assets.″

″Other people can make more money with the assets in place than Safeway could. The store base that they have should be producing more in terms of income,″ she said.

″Safeway’s management has lacked a lot of good skills. I don’t know anyone who thinks it’s a superbly run company. If it was, it wouldn’t be in this position.″

Joanne Legomsky, a retailing analyst with Standard & Poor’s Corp., said Safeway’s real estate leases are conservatively valued.

But Mrs. Schmierer said:: ″Most food retailing stores are better operated as food retailing stores ... There is a lot of value to Safeway (but) as an operating company.″

The company’s operating earnings have been hurt by very competitive market conditions in such areas as Southern California, the fact that many of its stores are located in places hit hard by the energy crunch, and high labor costs, Miss Legomsky said.

At the end of 1985, Safeway operated 2,365 stores, of which 1,986 were located in the United States, 258 in Canada and 121 in England.

The American stores are located mainly in the West, Southwest and Washington, D.C., and accounted for 78.3 percent of sales.

Safeway, which was founded in 1926, also operates more than 360 full-line pharmacies.

In addition, it is also one of the largest U.S. food processors. It owns warehouses, food canning, milk and ice cream, baking, processing and bottling plants.

For 1985, net income rose 25 percent to $231.3 million, or $3.83 a share. The results included a one-time, $34.8 million after-tax gain from the sale of some foreign operations. Excluding the gain, profit rose 6.2 percent.

Sales for the year were essentially flat at $19.65 billion.

″Maintaining sales growth in the face of continued low inflation, modest population gains and intense competition has proven difficult,″ Peter A. Magowan, chairman and chief executive officer, said in the company’s annual report. ″Doing it with substantially fewer stores will be harder still.″

Magowan has served in his posts since 1980. Educated at Stanford, Oxford and Johns Hopkins universities, he joined the company in 1968 and has held various management jobs. His brother, Merrill, serves as director. His father, the late Robert A. Magowan, led the company from 1955 to 1970.

Insiders control less than 1 percent of the company’s stock, of which 56 percent is held by institutional investors. Over the past 52 weeks, the company’s stock has traded between $29.62 1/2 and $60 a share.

Safeway has taken several steps to regain its sales momentum, including launching a mjor advertising campaign, adding in-store specialty departments at an accelerated pace, and changing its mix of merchandise.

However, such moves are costly, said the analysts, who did laud Safeway’s streamlining efforts.

During 1985, Safeway sold its Australian subsidiary to Woolworths Ltd. in exchange for a 20 percent interest in the combined opertions, that country’s largest food retailer. The company also sold its operating subsidiary in West Germany and its Toronto retail division.

Safeway, which employes 148,800 people, also closed 125 older stores. It opened 100 stores, mostly super stores and super warehouse stores. It expects to open 90 stores in 1986.

The industry in general has been hurt by ″overstoring″ - which leads to price-cutting - coupled with the low level of inflation.

″It has been a somewhat difficult environment for food retailers. Most of this year, its been rather difficult,″ Miss Legomsky said.

The other major grocery chains, in order of size, are Kroger Co., American Stores Co., Lucky Stores Inc., Winn-Dixie Stores Inc. and Great Atlantic & Pacific Tea Co.

″A lot of people have been speculating that retailers in general, including supermarkets, are takeover targets ... because it is a somewhat mature industry,″ Miss Legomsky said. ″The reason that other retailers are intersted is that it’s hard to enter markets and acquiring retailers is usually a more efficient way to do it.″

Among the food retailers that have changed hands are Shopwell Inc., a New York City chain acquired by A&P, and Jewel Companies Inc, bought by American Stores.

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