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A Supermarket Special For Bargain Shoppers

Inside Wall Street


As the market once again moves into record territory, analysts are scouring the landscape for a superstock in the next hot-growth area. But some pros think they may have found one in the most mundane of places--the grocery business. They're buying shares in Vons Cos., the largest supermarket chain in Southern California.

These pros describe Vons as a superior retailer that successfully tailors individual stores to each neighborhood. Its nine Tianguis supermarkets, for example, which are located in Hispanic communities, sell food and goods targeted to Hispanics. The company is also an innovative merchandiser. One gambit: "frequent shopper" cards that entitle customers to discounts on merchandise, thereby building loyalty.

Based on earnings alone, Vons has become "a compelling buy," says analyst Gary Giblen of PaineWebber, who recently raised his estimate to $1.80 a share for 1991 and $2.35 for 1992, vs. $1.28 in 1990. The stock, now trading at 29, "is undervalued and could be worth 40 over the next 6 to 12 months," says Giblen. Plus, there's a further allure: Some takeover investors say an $80-a-share buyout is possible.

SIDE ROUTE. How so? Vons owns 328 stores, including 74 Vons Food & Drug stores and the 162 supermarkets it acquired from Safeway Stores in 1988. That deal gave Kohlberg Kravis Roberts, which controls Safeway, a 31% stake in Vons. True, KKR signed a standstill agreement that stops it from buying any more Vons shares, and the pact still has two years to run.

But the agreement doesn't preclude a friendly bid for the rest of Vons. Now that it's profitable after years of operating losses and is actively paring debt, the bet is that KKR is seriously thinking of acquiring it before August, 1993. One investor argues that even if KKR isn't interested in a Vons-Safeway deal, it could sell its 31% to another supermarket group, which could in turn pursue a merger or takeover. One possible buyer, say some pros: Great Atlantic & Pacific Tea, owner of the A&P chain, which operates mainly in the Northeast. KKR declined comment.

Vons has been busy streamlining operations after completing the integration of all those Safeway stores. Frank Prodbelsek, an analyst at Gruntal & Co., notes that Vons stores are located in the nation's fastest-growing population centers. About 75% of the stores are new or have been remodeled or upgraded in the past five years, he says, "creating one of the most modern supermarket chains in the U. S."GENE G. MARCIAL

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