BUSINESSWEEK ONLINE : AUGUST 10, 1998 ISSUE
INSIDE WALL STREET

Is Safeway Wooing Kroger?

The buzz may not have reached the deli counter, but talk at Kroger (KR) supermarkets is all about the stock, which has been hitting new highs. Kroger shares have climbed 33% so far this year, and are now at 48--just off the peak of 50, reached on July 21, 1998. What's going on? Apart from better earnings, renewed takeover whispers have fueled interest in Kroger, says Elaine Hahn, president of Hahn Capital Management in San Francisco, whose track record in bagging takeovers has been good. In 1997, half of Hahn's 12 core stocks ended up being acquired.

Kroger, which operates 1,400 supermarkets and 815 convenience stores in the Midwest and South, may be the target, says Hahn, of Safeway (SWY), with 1,360 stores in the U.S. and Canada. Hahn says Safeway has built up a $2 billion cash hoard for a new acquisition.

A big part of Safeway's growth has come from acquiring other grocery chains. ''The fit between Kroger and Safeway in terms of strategy and management style is almost perfect,'' says Hahn. She notes that both focus on improving operating profit margins through cost-cutting and through raising prices in high-margin superstores. And the locations of their stores mesh well: Safeway's strongholds are the West, Southwest, and Mid-Atlantic regions. Analysts expect Kroger to earn $1.97 a share in 1998 and $2.30 in 1999, vs. last year's $1.65.

Should Kroger decide to stay independent, it could make an acquisition of its own, as has been rumored in the past. But Hahn says it's more likely that it will strike a friendly merger deal with Safeway. Hahn figures that in a buyout, Kroger would fetch $15.4 billion, or 60 a share. Safeway has a market value of $21.7 billion, vs. Kroger's $12.6 billion. A spokesman says Kroger doesn't comment on rumors. A Safeway spokeswoman wouldn't comment on the company's acquisition plans.

BY GENE G. MARCIAL

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