Albertson's replaces Kroger as largest U.S. supermarket chain

SALT LAKE CITY -- Albertson's Inc. on Monday knocked Kroger from the top shelf of U.S. supermarkets by announcing its $8.3 billion purchase of American Stores, owner of Acme, Jewel and Lucky stores.

The deal will create a huge national grocery and drug store chain, with more than 2,470 stores in 37 states.

For Albertson's and American Stores, the deal is historic. In 1939, the family of American Stores founder Samuel Skaggs lent Joe Albertson the money to buy his first Albertson's grocery store.

On Wall Street, investors cheered the deal. American Stores stock rose $5.12 1/2, or 22 percent, to $28.31 1/4 on the New York Stock Exchange. Shares in Albertson's fell 43 3/4 cents to $47.56 1/4 also on the NYSE.

Albertson's corporate headquarters will remain in Boise, Idaho, and the company will keep its name.

Albertson's intends to retain both companies' current store names, although some individual store names may change.

Gary G. Michael, chairman and chief executive of Albertson's, acknowledged the increased competitive pressure and cost efficiencies as reasons for the deal.

As supermarkets themselves have grown into vast emporiums in recent years, the companies that operate them have also been striving to get ever larger as well. Increased size gives the store companies greater strength in bargaining with suppliers.

In addition, grocery chains are facing new competition from retailing giants like Wal-Mart, which sells food at many of its discount stores and just announced plans to test free-standing supermarkets.

"We keep seeing consolidation in the supermarket industry," said Tom Agan of the Atlanta-based retail consulting firm Kurt Salmon Associates. "The chains just keep getting bigger and bigger" to stay competitive and keep costs down.

There will be more than 218,000 employees at the new company, and no job cuts were immediately announced. But Lund did acknowledge that layoffs will likely come in Salt Lake City, where American Stores is based.

Under the deal, Albertson's will pay $8.3 billion worth of stock and will also assume responsibility for $3.4 billion worth of American Stores' debt. Following the merger, Albertson's expects a significant, though as yet unspecified, one-time reduction in its profits.

American Stores shareholders are to receive 0.63 shares of Albertson's stock for each share of American Stores stock they own. Based upon Albertson's closing stock price of $48 per share on Friday, the deal is worth $30.24 per share for American shareholders and American Stores shareholders would own 41.3 percent of Albertson's.

Albertson's operates in the Midwest, West and southern states. American Stores is spread across the country from Boston to California with most of its stores in California and Texas.

The merged company expects to have revenues topping $36 million, which would put it head of No. 1 Kroger and Safeway, the nation's second-largest grocery chain.

Analysts say the biggest question of the merger is what will come of the drug store operations. While Albertson's is respected for its well-managed operation of food stores, American Stores has the most experience in running free-standing drug stores with its Osco and Sav-on drug stores.

Wendy Liebmann, president of the New York consulting firm WSL Strategic Retail said the drug stores pose a whole different set of shopping patterns and other issues Albertson's has not faced before.

But Michael dismissed such notions, saying the drug stores present an opportunity to gain a significant foothold in the health care market.

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