Antitrust Trial Ordered in Lucky-Alpha Beta Merger

A federal judge ruled Thursday that combining Alpha Beta and Lucky supermarkets into one chain would “substantially and irreparably harm� California consumers and ordered a trial to see if the merger violates federal antitrust laws.

U.S. District Judge David Kenyon said he examined each chain’s share of the California supermarket industry, before and after the proposed merger, and decided that combining the two would “substantially lessen competition.�

As a result, the judge said the two chains must remain competitors and may not proceed with plans to make all 592 stores part of the Lucky chain.

The two chains, both owned by American Stores of Irvine, must maintain separate records and purchasing operations and not sell any stores, warehouses or distribution facilities until a trial is held.

If completed, the merger would be the biggest in supermarket history and make American the nation’s largest supermarket owner.

The 27-page opinion surprised industry analysts and competitors, who said the ruling is certain to mean disruption, a loss of morale and momentum, and a heavy financial burden for the chains, which already have begun to merge.

American Stores, which purchased Lucky stores in June, announced that it will immediately appeal. The company said in a statement that it was “surprised and disappointed� and will “vigorously defend this action to its final conclusion.�

Because of the time needed to challenge the decision, it also could spur American into a settlement with Atty. Gen. John K. Van de Kamp, whose office filed the antitrust suit Sept. 1, observers suggested Thursday. A trial would probably not begin before sometime next year, officials said.

Van de Kamp hailed the order as an “initial victory� and said it “guarantees� that until a trial is held, “shoppers will continue to have the choice between Lucky and Alpha Beta operating as two competing businesses.�

Doesn’t Deal With Purchase

Kenyon’s order does not touch on American’s $2.5-billion purchase of Lucky but only American’s plans to convert all Alpha Beta stores in California to Lucky outlets.

Deputy Atty. Gen. H. Chester Horn, who argued the attorney general’s case, said that if “appropriate� evidence develops, his office will consider asking the court at trial to require American to sell its Lucky stores in California.

The antitrust case was brought 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.

Lucky operates 340 markets in California, while Alpha Beta has 252. Even with the divestiture of 37 stores, the Lucky-Alpha Beta combination would have 555 stores.

In court arguments and papers, lawyers for the attorney general and American Stores had argued that a ruling against them would cause California’s shoppers to dig deeper into their wallets.

According to the attorney general’s office, the merger would reduce competition and cost shoppers millions of dollars by leaving two powerhouse chains--American and Vons--to dominate Southern California.

The merger would cost consumers more than $400 million a year in higher food prices, Horn said in arguments to the court.

But American’s attorneys countered that the merger actually would save shoppers at least $78.1 million a year because of the resulting economies of scale and lower overhead.

‘Maintain Its Low Prices’

“The stiff competition in the markets in which Lucky competes makes it imperative that Lucky maintain its low prices,� American’s attorney, Frank Rothman, argued in court papers.

Moreover, American claimed, forbidding the merger would be “devastating� to Lucky and Alpha Beta because the chains would be forced to operate as two wholly owned subsidiaries.

In his decision, Kenyon conceded that the supermarkets could suffer by not being allowed to combine operations. But that suffering “is substantially less than the harm� to consumers if the merger is not halted, he wrote.

The increased concentration in the marketplace from the merger “would substantially lessen competition� among supermarket chains in California, he said.

Kenyon also found it likely that combining Alpha Beta and Lucky would be illegal under the federal Clayton Act, which forbids mergers that would tend to substantially lessen competition.

In the meantime, it was unclear late Thursday to what extent Alpha Beta and Lucky will have to undo their efforts to combine the chains.

‘Pretty Harsh Blow’

The order technically requires the two chains to immediately freeze their efforts to merge. But according to Chief Assistant Atty. Gen. Andrea Ordin, an agreement is likely to be reached “in the days to come . . . about what (the chains) can and can’t do.�

Reaction among retail analysts was one of surprise Thursday, with several guessing that American eventually will settle its differences with the attorney general.

“It sounds like a pretty harsh blow to American Stores,� said Edward Comeau, a vice president with Oppenheimer & Co. “I’m sure American considered the enormous synergies to justify the $2.5-billion price� for Lucky. “Now they’ve bought something they can’t fully exploit at this time . . . and they’d never get what they paid for it.�

John B. Kosecoff, a senior analyst with First Manhattan Co., noted that American is paying upward of $250 million a year to finance its purchase of Lucky. While the company will suffer some temporary financial hardship, he said, shareholders are already prepared for depressed earnings through this year because of the Lucky acquisition. “But this is a long-term investment� for American, Kosecoff added.

In trading on the New York Store Exchange on Thursday, American Stores stock closed Thursday at $57.375 a share, up $1.25 from Wednesday. Industry analyst Jonathan Ziegler at Sutro & Co. in San Francisco attributes the increase in the stock price partly to the decision. “The speculation could be that Lucky will be broken out and therefore American will be an easier takeover target,� he said.

Executives at competing supermarket chains in Southern California also expressed surprise that Alpha Beta and Lucky were not allowed to proceed, particularly in light of the approval recently granted Vons Cos. to buy Safeway’s operations in the Southland and Van de Kamp’s decision not to challenge that merger.

Roger E. Stangeland, chairman and chief executive of Vons, could not be reached for comment about Kenyon’s decision.

Another competitor who asked not to be named candidly admitted that “nothing would delight me more� than the merger ultimately not going through. “It will be a tremendous problem for them--like trying to unscramble an egg,� he explained.

Jack H. Brown, chairman and chief executive of Stater Bros. in Colton, expressed concern that the action might affect Lucky and Alpha Beta workers as they cope with concerns about job security and other issues. He also said he expects that the merger eventually will go through.

As for the effect on grocery shoppers, Brown said the proposed merger would not result in higher-than-normal price increases “due to the competitive nature of the industry.�

Times staff writer Martha Groves contributed to this story.