Britain's No. 1 food chain, Sainsbury, to pay $325 million for stake in Giant

October 04, 1994|By Jay Hancock | Jay Hancock,Sun Staff Writer

In a deal that could be the first step toward a British takeover of Giant Food Inc. and an empire of Giant-affiliated stores stretching from Virginia to Maine, J. Sainsbury PLC said yesterday that it will take a big ownership stake in the Landover-based grocer.

Sainsbury, the United Kingdom's No. 1 food chain, said it will buy all the Giant stock owned by the Lehrman family, which co-founded the company in 1935.

The $325 million deal, the latest trans-Atlantic supermarket marriage, won't change control of Giant.

But it will end nearly 60 years of family ownership of Giant's voting shares.

It gives Sainsbury a substantial say in Giant's operations, including three seats on the seven-member board of directors and 16 percent of total ownership.

And the British company might not stop there. Yesterday's announcement could lead to more Sainsbury stock purchases and control of Giant's board, although it might not happen for years, industry analysts said.

"I don't think Sainsbury would have gotten into this situation if they didn't intend to buy the whole thing," said Ed Comeau, a retail analyst with New York investment house Lehman Bros. "That's their goal, usually. They want it."

Giant, Baltimore and Washington's biggest supermarket chain, forcefully discounted the possibility of a takeover. The company's remaining four board seats are controlled by Israel Cohen, its 82-year-old chairman and chief executive.

"I have no intention to sell any of my shares," Mr. Cohen said in a memo distributed yesterday to employees.

But Sainsbury has been in a merger mode and already has one U.S. takeover under its belt. Its chairman did little to quash speculation that its piece of Giant could eventually grow.

"This is very much a first step, but if Mr. Cohen's stake comes on the market, or if he decides to sell his stake, we will look into the opportunities," Chairman David Sainsbury told reporters in London yesterday.

Sainsbury's purchase is not likely to have much immediate effect on Giant's 24,500 workers or its shoppers. Indeed, other trans-Atlantic alliances suggest that even a full takeover by Sainsbury would minimize layoffs, headquarters shrinkage and other trauma typical of some corporate mergers.

U.S. grocers Food Lion Inc. and the Great Atlantic and Pacific Tea Co. have European owners, for example. But selling lettuce and milk and spaghetti sauce is an intensely local enterprise, and both Food Lion and A&P maintain substantial, largely autonomous U.S. headquarters, analysts said.

But Sainsbury's Giant directors, who haven't been identified yet, won't be passive, either, analysts said.

In the next few years, they may push to accelerate Giant's as-yet cautious expansion into the Philadelphia area.

"Over here, Sainsbury's has been opening a lot of stores every year," said David McCarthy, a London analyst for financial house Barclays de Zoete Wedd. "That is one of the items on Giant's agenda -- can they grow that business more quickly. It's something that Sainsbury's can contribute."

Giant officials said, however, that Sainsbury has no plans to provide any capital.

Sainsbury may also urge Giant to increase sales of its house-brand "Super G" products.

In Sainsbury's British stores, house brands account for as much as 50 percent of sales, compared with less than half that at Giant, analysts said.

Eventually, if Sainsbury gains control, it may build stores up the East Coast, reaching territory covered by its 87-store Shaw's supermarket chain, acquired in the 1980s. But that might not happen for 10 years or more, if ever, analysts said.

Giant has 160 stores spread from Virginia to Delaware. Shaw's stores run from Maine to Connecticut.

Giant President Pete Manos said in an interview that the Lehrman/Sainsbury deal was negotiated directly between the parties and came together "just in the last week." Mr. Manos said he's met David Sainsbury once.

The deal requires approval from antitrust regulators. Analysts expect it.

The Giant foray follows Sainsbury's unsuccessful attempt last summer to grow on its home island by trying to buy William Low, a Scottish supermarket group. Sainsbury was outbid by Tesco, the No. 2 food retailer in Britain.

"In the recent year or so, it has become more difficult" for Sainsbury to grow in Britain, Mr. Sainsbury told reporters. "We consider the North American markets as one of the main markets for growth."

While analysts expected Sainsbury to buy into a chain with stores closer to Shaw's, Giant fits its bill in other respects. Giant is No. 1 in its longtime markets. Its stores are modern and clean. Its management is far-sighted, and it has fought off increasing competition from membership warehouses, discount chains and other "nontraditional" food sellers.

And while its earnings growth has been lackluster in recent years, Giant generates "more cash than they know what to do with right now," said Guy W. Ford, an analyst with Scott & Stringfellow Inc., a Richmond, Va., investment company.

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