Judge Temporarily Blocks Alpha Beta-Lucky Merger

The $2.5-billion merger of the Alpha Beta and Lucky supermarket chains was temporarily blocked on Wednesday by a federal judge who voiced concern about potential “irreversible harm� to California consumers if the two operations are allowed to combine.

U.S. District Judge David Kenyon said he does not want any stores sold, transferred or closed, and he wants the two chains operated separately at least until a Sept. 16 court hearing. The ruling could spell confusion and disruption for the two chains, which have already begun to consolidate.

The supermarket merger follows the purchase in June of Lucky Stores by Irvine-based American Stores, which also owns Alpha Beta. Tuesday’s court order does not affect the purchase itself, but only the plans to change all Alpha Beta stores in California to Lucky outlets.

The court ruling came in an antitrust lawsuit filed last week by state Atty. Gen. John K. Van de Kamp. The judge said he will determine at the Sept. 16 hearing whether he will continue to block the combination, pending trial of the lawsuit.

Attorneys for American Stores had argued during a court hearing Tuesday that the merger already is completed. American cannot “unscramble the egg,� said attorney Frank Rothman.

“The merger is complete. The management has changed. Everything that has to be done has been done or is being done,� he said. A second American Stores lawyer added that all that remains to be done is changing the Alpha Beta signs to Lucky signs and reducing some of Alpha Beta’s prices to pull them into line with Lucky’s discount prices.

Rothman said in court Tuesday that American had planned a “merger party� for Sept. 13 to mark the official combination of the two store chains.

American Stores attorneys also argued that delaying the merger would cost American more than $250,000 a day. American borrowed nearly $2.5 billion to finance its takeover of Lucky Stores and interest charges on the loans began accruing June 2.

Van de Kamp filed the antitrust suit last Thursday, shortly after the Federal Trade Commission approved the merger on the condition that American divest itself of 37 stores in areas where its concentration would create near-monopolies. Only six of those stores are in Southern California.

354 Markets Operated

Lucky operates 354 markets in California, while American operates 249 Alpha Beta markets and one so-called superstore in San Diego under the “Advantage� name. Even with the divestiture of 37 stores, the Lucky-Alpha Beta combination would become the nation’s largest supermarket chain with 567 stores.

In the suit and in courtroom arguments Tuesday, the attorney general’s office maintained that the merger would give American control of more than 25% of the state’s supermarkets, which in turn would create an “anti-competitive� environment and cost consumers more than $400 million a year in higher food prices.

American’s attorneys argued in court Tuesday that because of the economies of scale, and because the Alpha Beta stores would adopt Lucky’s discount pricing, the merger actually would save consumers $50 million a year.

‘Maintain the Status Quo’

“Judge Kenyon’s ruling was simply designed to maintain the status quo until a hearing on the merits of the case can be heard,� John Lillie, chairman of Lucky Stores Inc., said in a prepared statement issued Wednesday. “We are confident that the court will not want to delay the combination of Alpha Beta and Lucky Stores Inc. once we have the chance to lay out the facts before him.�

Several industry analysts said that if Van de Kamp prevails, it might be possible for American to continue as owner of Lucky while operating the chain independently of Alpha Beta, but that it would be more likely that American would have to sell its new acquisition.

And that would prove costly to American Stores, said Edward Comeau, a New York-based supermarket analyst with Wood Gundy Ltd., a Canadian brokerage firm.

“They paid quite a premium to get Lucky,� Comeau said. “I doubt they could get $2.5 billion if they sold it.�

American Stores paid $65 per share to acquire Lucky. American stock closed Wednesday up 87 1/2 cents for the day at $50.87 1/2 per share in light trading on the New York Stock Exchange.

One analyst, who asked not to be identified, speculated that Wednesday’s gain came because “there are some people out there who think American would be ripe for a takeover if it isn’t able to complete this merger.�

John Kosecoff, an industry analyst with First Manhattan Co., said he has reviewed Van De Kamp’s suit and does not believe the attorney general has made a good case. “It is largely based on academic arguments that are not borne out by actual industry experience either in California or in other part of the country,� he said.

Kosecoff said that the suit ignores “the fact that the supermarket industry is a consolidating, maturing industry. California has been the newest and fastest growing market for the last two decades, so it is reasonable now for it to begin to consolidate. This is the process we are witnessing,� he said.

The attorney general’s suit voices concern that by placing nearly 600 supermarkets under one ownership, competition would be stifled, especially in Northern California, where there are fewer competing chains than in the south.

‘We’re Relieved’

“We’re very happy,� Deputy Atty. Gen. Owen Lee Kwong said of Kenyon’s decision. “We’re relieved. It shows, at least in part, the efficacy of our case: that there are competitive concerns here that need to be dealt with and explored.�

Those concerns include the sheer size of the combined operations, “the market concentration, which we believe leads to higher prices . . . and the fact that the mere presence in California of so large a market operation is intimidating to other firms that might otherwise consider entering the marketplace,� said Lawrence R. Tapper, deputy attorney general.

The attorney general filed suit to block the American-Lucky merger after talks aimed at mitigating the anti-competitive features of the deal broke down.

Acquisition Opposed

Van de Kamp opposed the acquisition by Vons earlier this year of Safeway’s Southern California markets and other assets on the same grounds. But he has not sued to block the action because negotiations to mitigate are being conducted “and we feel they will wind up successfully,� Tapper said.

Among the issues being negotiated with Vons and Safeway are the divestiture of stores and a guarantee by Safeway--a major Northern California market chain--that its directors will not try to influence Vons directors to avoid expanding that chain into the northern part of the state, where Vons now has no presence.

Tapper said he believes Kenyon’s decision to grant a temporary restraining order in the American-Lucky case should send Vons and Safeway a message to “wrap up (talks with the attorney general) as soon as possible.�

At Vons, a spokeswoman said she would “not read anything into� Tapper’s comment.