Costco, Price plan merger of warehouse club chains

June 17, 1993|By Bloomberg Business News

SAN DIEGO -- Costco Wholesale Corp. and Price Co. agreed %% yesterday to merge in a $2.26 billion stock swap that would create the country's largest warehouse club chain. %%

%% After months of speculation about a merger, the two companies said they had signed a definitive agreement to combine into a new company called Price/Costco, which would operate 195 clubs in the United States, Canada and Mexico with annual sales of about $16 billion.

"This is a great deal," said Bill Harnisch, president of Forstman-Leff Associates in New York, owner of about 10 percent of Price's shares. "This has always been a logical fit, but the question was whether they could get together and iron out a deal. They're going to be a powerhouse."

Price/Costco is edging out Wal-Mart Stores Inc.'s Sam's Clubs as the country's top wholesale operator. Wal-Mart has more stores, 282, but its clubs are expected to generate only about $15 billion in sales this year.

Sol Price, the founder of Price Co., pioneered the warehouse club in 1976. The idea was to sell bulk items, such as 10-pound boxes of laundry detergent and cartons of 24 paper towel rolls, to members at the lowest possible price. Following in Price's footsteps, Costco opened its first store in 1983.

"Price/Costco is going to be the industry leader in terms of sales and profitability," said Janet Mangano, an analyst at Burnham Securities.

The stocks of both companies jumped on the news. Price's shares closed up $6.25 at $38.50, and Costco's closed up $2 at $19.

Wal-Mart's shares closed down 75 cents at $25.75 amid investors' concerns that Sam's Clubs will face more competition.

Based on Costco's closing price, the merger is valued at $2.26 billion.

Price has 55.8 million shares, and Costco has 128.3 million shares outstanding on a fully diluted basis. After the merger, Price's shareholders will own 48 percent of the new company, Costco's the rest.

The merger, expected to be completed by the end of the year, is subject to shareholder approval and federal antitrust clearances.

The Costco and Price union would be one of the top 10 mergers in 1993, according to Securities Data Co., a financial research business.

It also would be the first big transaction in the retail industry since the buying and merging frenzy of the mid-1980s.

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