Safeway Agrees to Sale Valued at $4.1 Billion

Safeway Stores, the nation’s largest supermarket chain, said Sunday that it has agreed to be taken over by a New York investment firm in a deal that will put an estimated $4.1 billion worth of cash and securities in the hands of shareholders.

The transaction, the largest sale of a retailer ever, would remove the Oakland company’s stock from trading on the nation’s stock exchanges.

While the sale marks a potentially fatal setback to a rival hostile takeover bid by the Dart Group, owner of Trak Auto and Crown Books, it also could leave Safeway heavily burdened with debt and less able to expand in the fiercely competitive grocery industry.

Role for Executives

The merger would convert Safeway--with its 2,343 stores, 165,000 employees and 87 processing plants that produce such items as bread, milk, ice cream and pasta--into a privately held company owned by the New York investment firm of Kohlberg Kravis Roberts & Co. and presumably operated by current management. Safeway’s executives have been invited to participate in the deal as investors who would own up to 10% of the company.

Dart Group, which is controlled by Washington’s Haft family, has sought to purchase Safeway for several weeks, although some observers speculate that the Hafts have only threatened a takeover to pressure management into buying back their 6% stake in Safeway at an extra high price.

A Dart Group spokesman could not be reached for comment Sunday. But the Hafts are known for their determined style of doing business and may not be ready to give up the fight.

Shareholders, who must approve the merger by a two-thirds vote, would be able to take advantage of any better offers to come along because Safeway removed certain anti-takeover provisions.

The deal proposed Sunday would be a leveraged buy-out, which is Kohlberg Kravis’ specialty. In a leveraged buy-out, a company is bought with borrowed funds that are secured by the company’s assets. The money is then repaid with cash generated by company operations or by selling assets. A leveraged buy-out was also used for the $3.7-billion acquisition by management of Macy’s in June, which ranked as the second largest sale of a retailer.

Company officials usually participate as investors in leveraged buy-outs and remain with the company after the sale. Many companies have turned to leveraged buy-outs when management is threatened by hostile takeovers.

The Kohlberg Kravis deal marks the end of an era spanning six decades in which Safeway’s shares have been traded on the nation’s stock markets. Safeway traces it roots to an 18- by 32-foot grocery store founded in American Falls, Ida., in 1915 by Baptist minister S. M. Skaggs, whose motto was: “He who serves best, profits most.”

Joins Southland Chain

Skaggs’ eldest son, M. B. Skaggs, expanded beyond that original store to a chain of 428 units in 1926, called Skaggs United Stores. It merged that year with a Southern California chain of 322 stores that had just changed its name to Safeway from Sam Seelig stores.

Today, Safeway’s motto is: “You work an honest day and you want an honest deal.” Safeway said the Kohlberg Kravis merger is a honest deal for its shareholders. A spokesman said it “provides value to our shareholders greater than any other offer we have received.”

The merger would be a two-step transaction.

In the first step, a company formed by Kohlberg Kravis called SSI Holdings Corp. will “promptly” launch a tender offer to buy up to 45 million shares, or 73%, of Safeway stock for $69 each.

In the second step, the rest of the company’s 61 million shares would each be traded for Safeway debt that financial advisers to Safeway and Kohlberg Kravis have estimated to be worth $61.60 per share. If the newly constituted Safeway ever sells shares to the public again, today’s stockholders as a group would have the right to buy up to 5% of the new shares. Safeway did not place a value on that right to purchase shares in the future, and there is no assurance the company will ever issue new shares.

Two Offers Made

Dart Group has made two offers. First, it offered a $58-per-share bid, worth a total of $3.54 billion, which Safeway rejected as “inadequate.” Next, it offered to pay $64 per share in a deal valued at $3.9 billion, as long as Safeway agreed not to resist the merger. Safeway said it would study the latest offer.

Although the Kohlberg Kravis deal appears to have a higher total value than the most recent Dart offer, it is not clearly a better deal for shareholders because the actual value of the debt securities and stock-purchase rights is not known, said William Smith, an analyst with the New York investment firm of Smith Barney, Harris Upham. “I think that it could be a hard sell to shareholders,” he said.

The Haft family said in a letter last week to Safeway’s board that it plans to “vigorously litigate” if the board locks up a separate deal with another bidder.

Safeway’s board unanimously approved Kohlberg’s proposal at a daylong meeting Friday in Oakland but the deal was only announced Sunday after details were worked out. Safeway already has paid Kohlberg Kravis $15 million in arranging the merger and will pay another $45 million if the merger agreement is called off under certain unspecified circumstances.

Safeway has not always been so popular. As recently as 1982, the company was being ridiculed. Forbes magazine even called it “A&P; West” because of slipping profits and stodgy management.

Improvement in Results

But the company’s fortunes have improved under Chairman and Chief Executive Peter A. Magowan and President James A. Rowland, who redirected Safeway to “super stores” from small supermarkets.

Safeway’s profits last year rose 25% to a record $231.3 million. A strike, store closings and low food-price inflation kept sales virtually flat at $19.65 billion. For the first half of 1986, Safeway’s earnings fell 3.9% to $72.6 million. Sales of $9.04 billion were down 0.7%. The earnings decline reflected aggressive competition in some markets and the impact of low oil prices on such places as Texas and Oklahoma, where Safeway operates.

If Safeway is sold to Kohlberg Kravis, it could become a much weaker company because of the heavy debt it will be forced to carry. Already, Bankers Trust Co. has agreed to form a syndicate of banks to provide $3 billion in bank financing for the acquisition.

“Inevitably it places strains on the company from a management and financial point of view that would not have arisen otherwise,” analyst Smith said. “It certainly would put a crimp in their style in terms of expansion” and the company might have to sell some operations, he said.