Can investor Edelman get Lucky this time?
Asher Edelman, Lucky Stores  

Discount Store News,  Oct 13, 1986 
Can Investor Edelman Get Lucky This Time?

Asher and Michelle Edleman- 2004

DUBLIN, Calif. -- Lucky Stores' board at press time was due to hold its second meeting to review an unfriendly $1.79 billion takeover bid from New York investor Asher Edelman.

The board adjourned an earlier meeting to await "additional information from management and financial advisors" on Edelman's offer of $35 a share for the diversifed retailer' 51.2 million shares. Lucky operates food stores, Gemco discount stores and specialty stores.

Edelman, meanwhile, appeared likely to launch a tender offer directly to stockholders. He reportedly has obtained financing from two banks and retained a brokerage house as an advisor.

In any case, the takeover bid threatens Gemco. The discount store division is rumored to be on the block, with Lucky trying to sell it as part of a restructuring that would include a stock buyback.

Edelman is expected to sell Gemco to raise monies to finance the Lucky takeover.

Lucky's stock hit $36.50 at press time. Jeff Atkin of Kunath Karren && Rinne, said, "Either Edelman will have to raise his bid or Lucky will find someone to pay more." 

What remains to be seen in whether closing the Gemco stores will be a viable strategy for any new owner of Lucky stores. Those stores do include food stores and it is also uncertain that buyers can be found for those 80 units.

Gemco's continued weakness was the door opener for Edelman's takeover bid for Lucky. Lucky had revenues of $9.4 billion and net income of $86.5 million in the fiscal year ended Feb. 2, 1986. Of that, Gemco accounted for $2.4 billion of sales. Pretax earnings of the Gemco division were $15.9 million, down from $22.8 million the year before.

For the first six months of the current fiscal year, Gemco suffered a pretax loss of $28 million. In the second quarter, almost all of Lucky's $10 million decline in earnings was attributed to Gemco (70 stores in California; 4 in Nevada; and 6 in Arizona).

Ongoing efforts to stage a turnaround at the Gemco chain include a remodeling program and installation of POS equipment in all stores by the end of this year.

Gemco customers became confused when the chain first began to experiment with upgraded looks in the early '80s, according to a former store manager. Outside competition has also heated up with Target now 30 stores strong in L.A. and K mart upgrading some of its stores there. Zody's, the only other discount chain in L.A., closed down this year.

Most recently, the chain promoted Stan Brenner, who had been brought in as president early last year, to chairman and promoted Samuel Parker to president. The strategy is to have Brenner concentrate on merchandising and marketing and to have Parker handle operations, warehousing and distribution.

Last summer, analysts had told DSN it would take at least until the end of this year for signs of a rebound at Gemco.

If Lucky had sold off Gemco earlier, would it have been able to dodge the takeover bullet? "No," says Ronald Rotter, analyst with Weidler Amdec Securities, Los Angeles, "because management doesn't own enough stock; therefore, it has no tight control over terms of ownership. Safeway had no Gemco albatross, but its stock ownership was also too fragmented to prevent a takeover."

Jeff Atkin has a different view: "Gemco accounts for about 25% of Lucky's sales, so there is a good chance the takeover could have been avoided if Gemco had been sold two years ago. That would have enhanced pershare earnings 15% to 20%.

"If done then, Lucky could have gone one of two ways. One, invested the proceeds in Treasury bills at the money market rate. This would have eliminated operating losses and resulted in a better return. The second way: To put the money into the stores. For example, it could h ave added 50 stores in Northern California, a strong market.

Going this way would have given them a fair amount of operating leverage as contrasted with T bills.

Atkin adds that, "Either way, Lucky would have maximized the return of its assets, and when that happens, it discourages takeovers because the buyer would have to pay a high premium." If that's the case, why didn't Lucky restructure sooner?

"Because," says Atkin, "where there is no immediate threat, the company feels it has more time--until it's too late."

Lucky is now in "play," and a proxy fight looms.

The opening shot was Edelman's letter to Lucky's board which is of a corporate "Dear John" nature: that is, making the offer and then saying, "I would welcome the opportunity to meet with the board to discuss this proposal."

Lucky's response is also typical: The board deftly turned down the request for a meeting by saying, "The proposal will be reviewed by the board at Lucky's previously scheduled meeting of October 2 . . . if a meeting will be helpful at that time, we'll call you."

Meanwhile, Lucky has enlisted the advisory services of Goldman, Sachs & Co. and is reported to have retained the law firm of Wachtell, Lipton, Rosen & Katz, experts in defending takeover attempts.

The battle lines will tauten. One "poison pill" is a fair price amendment which requires approval by shareholders of 80% of the company's stock before any tender offer not approved by the board can be completed. If a takeover does take place, then a plan called "shareholders rights" would allow Lucky shareholders to buy stock in the surviving company at half price.

Will the Lucky's scenario parallel that of the recently bought California-based Safeway supermarkets?

Safeway rebuffed the Dart Group and then rolled out the welcome mat for Kohlberg Kravis Roberts & Co., who acquired the company in a leveraged buyout valued at $4.2 billion. Even if Lucky is contemplating such a move, top management is not saying at this time.

Another similarity to Safeway--and one that feeds takeover fever--is Lucky's undervalued real estate which is not reflected in the price of the stock. According to Lucky's 1985 annual report, the original cost of the land is $83.4 million and cost of the buildings is $215.6 million, less depreciation. Kenneth W. Cope, Lucky's senior vp-administration, told Discount Store NEws that, "Most of the property was acquired many years ago, and since then, property values have gone up--especially in California."

As for Edelman, What is his track record as a corporate raider? In the three years he has been in the takeover business, he has become a force to be reckoned with.

In 1983, he took over a real estate holding company and, after spin-offs, made $40 million. In 1984, he banked $10.5 million from a takeover/liquidation deal with Management Assistance (computer hardware and service).

In 1985, Edelman won a proxy fight to control Datapoint (computer company) and, after spinning off a service unit, wound up with a $10 million profit.

And in 1986, he lost a bid to take over Fruehauf (auto parts manufacturer) but emerged with a reported profit of $39 million.

True, Edelman lost between $4 and $6 million after gaining control of Mohawk Data Sciences in 1985, but overall, gains have far exceeded losses. That kind of box score is World Series vintage in any financial league.
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