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Friday, November 7, 1997 - Page updated at 12:00 AM

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Fred Meyer To Buy Qfc -- Chain With National Plans Is Sold Instead

Seattle Times Business Reporter

Fred Meyer will buy Bellevue-based Quality Food Centers Inc. in a stunning turn of events for QFC, which had been on an aggressive national expansion plan.

In a $4.8 billion deal, which also includes the purchase of Ralphs Grocery Company in Compton, Calif., Portland-based Fred Meyer discount chain would become the nation's fourth-largest grocery company.

With Ralphs, the largest grocery chain in Southern California, and QFC's 147 stores and 11,000 employees, Fred Meyer would become a $15 billion-a-year, multiregional chain. It would have 88,000 employees in more than 800 food stores in 14 states stretching from Alaska to Texas.

The deal, which reflects growing consolidation in the grocery-store industry, would give the merged company the No. 1 market share in Seattle, said Robert G. Miller, Fred Meyer president. Safeway Stores, based in California, now holds that position.

QFC stores would continue to operate as QFC stores, with the same management, employees and emphasis on high-end products and customer service that have been its trademarks, said a QFC official. Quality Food Centers has about 6,000 workers and 90 stores in the state.

QFC spokesman Marc Evanger acknowledged the upscale image of QFC clashed with the discount reputation of Fred Meyer.

"They do have a lower price image than we do," he said. But he said the two stores can exist together: "It works extremely well because we tend to serve different customer bases."

Still, if initial reaction is any gauge, QFC and Fred Meyer will have a selling job to convince the general public that QFC business won't be diluted.

"I would be really disappointed if QFC were sold. I don't come to QFC to save money - I come for the merchandise and the service," added Erik Hart'e, shopping at the Queen Anne QFC last night.

"It's the Nordstrom of grocery stores. We have been coming here 25 years," said Joyce Honeyman, a Bellevue QFC customer.

Savings, layoffs in forecast

The combination of operations will save Fred Meyer about $100 million a year, Miller said. He said he expected that about 880 employees would lose their jobs. Analysts speculated that most of those layoffs will probably be in Los Angeles, where Fred Meyer would combine QFC-owned Hughes Family Markets with Ralphs' operations.

Fred Meyer officials gave no word on possible store closures.

"They are going to do what they are going to do," Bill Ketcham, senior vice president of marketing and public affairs for QFC, said of Fred Meyer. "But I'd be surprised to see much impact in Seattle. QFC runs pretty lean to begin with."

Another question is what effect the deal might have on competition and food prices in the Seattle area. Fred Meyer - which sells everything from fine jewelry to circular saws to groceries - is known as an aggressive competitor. Prices could drop as competition heats up with Fred Meyer's growing power to buy in greater volume at lower prices.

On the other hand, the deal could reduce competition and raise prices by giving one chain - Fred Meyer - control over a greater number of stores in the Seattle area.

Sloan calls deal `bittersweet'

The value of the QFC deal, which includes QFC's recent purchase, the Hughes Family Market chain in Southern California, was placed at around $1.7 billion.

Stuart Sloan, chairman of QFC, said Fred Meyer's offer was simply too compelling to pass up.

QFC stock shot up $7.125 to $58.75 in late trading today. With Fred Meyer's stock price at $32.125, and the exchange rate set at 1.9 Fred Meyer shares for one QFC share, the deal is worth about $61 for each QFC share.

"It's bittersweet," Sloan said today. "There's the economic part of you and the emotional part. It's been fabulous, a wonderful treat for QFC to be independent. It's been fun to take the company from $130 million in sales to $2.2 billion. Really a dream.

"So is this perfect? No, it's not perfect. But I have a responsibility to thousands of shareholders. I have thousands of partners and they don't have the same emotional attachment. Their focus is much more economic. You say to them I turned down $55 a share (the original value of the deal) and they say `Let me call my lawyer.' "

Sloan stands to gain substantially, as does Chicago financier Sam Zell, who bought into QFC in 1994 through his Zell/Chilmark Fund. Zell holds close to 4 million shares, or 18.95 percent of the company's stock, and is QFC's largest single stockholder. At today's prices, Zell's stock is worth about $236 million. Sloan's owns 1.7 million shares, which would be worth about $99 million.

Sloan will join the Fred Meyer board, Miller said, but it was not immediately known what role Zell would play.

Rumor mill had mentioned Albertson's

The rumor mill about a possible QFC sale had gone into overdrive in the past few days.

Albertson's, the Boise-based supermarket chain, was thought to be the No. 1 suitor.

"The combination took me by surprise," said Lesa Sroufe, a stock analyst at Ragen Mackenzie in Seattle. "I had thought there would be a trading of stores, to include maybe Albertson's."

Sroufe said Fred Meyer and QFC have different cultures and that it would be a mistake to change the atmosphere or appeal of either.

The QFC deal was all the more shocking because only last month, top officials waxed enthusiastic at the annual shareholder's meeting about expanding nationally - by acquiring chains and imprinting them with QFC's quality food and service.

If the proposal wins Federal Trade Commission and shareholder approval - QFC officials expect the deal to close around February or March - Fred Meyer would trail only Kroger Company in Cincinnati; Safeway, based in Oakland, Calif.; and American Stores in Salt Lake City, whose holdings include Lucky supermarkets.

In addition to Seattle, Fred Meyer officials said their combined stores would have the No. 1 market share in Los Angeles, Salt Lake City, Las Vegas and Albuquerque.

The Puget Sound region QFCs and Fred Meyers would take about 30 percent of the market; Safeway would be just under that at around 29 percent, said Evanger.

Hughes would become Ralphs

Evanger said the 57 Hughes Family Markets in Southern California, which QFC acquired for $360 million, will be converted to Ralphs. Both have upper-end retail formats. George Golleher, chief executive officer of Ralphs, will manage the new Southern California operations. Hughes has 5,000 employees.

Fred Meyer reportedly will assume $3 billion in debt from the deal, bringing its total debt to $5 billion. In September, Fred Meyer acquired Smith's Food & Drug Centers of Salt Lake City for about $1.9 billion.

Fred Meyer will exchange 22.5 million shares of its common stock for 100 percent of the equity of Ralphs' parent, Food 4 Less Holdings. That company is controlled by Ron Burkle, who also is Fred Meyer's chairman.

Sales are estimated to be $15 billion for the three companies. QFC and Hughes generated more than $2 billion of their own sales this past year. Cash flow should be strong enough to repay debt and finance new construction, Miller said.

Evanger said Dan Kourkoumelis, the former QFC president who recently went to Los Angeles to head up Hughes Family Markets, will return to Bellevue as QFC president.

Fred Meyer generates about $7 billion a year in sales, with 50,000 employees in 265 stores in 11 Western states. Ralphs has 27,000 employees, 406 stores in California and the Midwest, and more than $5.5 billion in annual sales.

Miller, the Fred Meyer president, told The Oregonian in Portland, "Timing is everything. This is an opportunity we had, and we didn't want to let it get away."

Seattle Times staff reporters Carole Beers, Lisa Pemberton-Butler and Lynda Mapes contributed to this report.

Lee Moriwaki's phone message number is 206-464-2320. His e-mail address is: lmor-new@seatimes.com ----------------------------------------------------------------- QFC history:

1955: The first store in what would become the Quality Food Centers chain is opened at 6600 Roosevelt Way Northeast by a group headed by L.H. "Vern" Fortin, former president of Van de Kamp's Holland Dutch Bakeries and founder of Vernell's Fine Candies.

1960: Jack Croco merges his two stores in Bellevue and Redmond with Fortin's four stores in the Seattle area, and becomes the company's president and chief operating officer.

1963: The company adopts Quality Food Centers as its name.

1974: A&P leaves Seattle and QFC purchases five former A&P stores.

1986: Stuart Sloan and Croco acquire the company from the Fortin and O'Connell families. Sloan becomes chairman. QFC stores go to a 24-hour, seven-day-a-week operation.

1987: The company, with a total of 22 stores, goes public with an initial stock offering.

1994: The Zell/Chilmark Fund becomes the largest shareholder as QFC recapitalizes. Chicago financier Sam Zell, the fund's general partner, joins the QFC board of directors.

1995: QFC acquires 12 Olson's Food Stores in Seattle.

September 1996: Christopher Sinclair, former PepsiCola chairman, is named president and chief executive officer of a QFC holding company that is to lead a multiregional expansion.

November 1996: QFC announces plans to buy the 57-store Hughes Family Markets chain in Southern California and 25 Stock Market and Thriftway stores in the Puget Sound region.

May 1997: QFC says it plans to build two stores in Portland, now under construction, its first stores in Oregon.

October 1997: Shareholders approve a company restructuring that sets up a parent company, Quality Food Inc., with two operating divisions, Quality Food Centers and Hughes Family Markets.

November 1997: QFC announces it will merge with Fred Meyer.

Copyright (c) 1997 Seattle Times Company, All Rights Reserved.

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