Lawsuit: Halt Safeway merger

Remember the news about Albertsons acquiring Safeway Stores? Well, if you shop at one of the three Salinas-area Safeways, don’t toss out your reusable bags just yet. A lawsuit filed on behalf of Safeway shareholders alleges management failed to disclose material information when it announced the $9 billion deal in March.

The suit is asking a judge to issue an injunction to stop the deal in its tracks.

The lawsuit, filed by shareholder attorneys at San Diego-based Robbins Arroyo LLP in U.S. District Court in Oakland, alleges that “omitted and/or misrepresented information is believed to be material to Safeway shareholders’ ability to make an informed decision whether to approve the proposed transaction,” according to the lawsuit.

If the 86-page complaint is proven true, it could be a violation of U.S. Securities and Exchange Commission regulations.

Key to the lawsuit is the use of the word “material.” In investment context, “material” means any information that could affect stock-price movement, either negatively or positively.

The issue stems from a March 6 press release (http://bit.ly/1gMdmf9) announcing that Safeway had agreed to merge into the Albertsons chain. The release stated that Safeway shareholders would receive, for each Safeway share they own, $32.50 in cash and other benefits adding another $3.65 per share.

Robbins Arroyo argues that shareholders should have received between $48 and $67 per share. Safeway shares (NYSE: SWY) closed Tuesday at $34.34 a share.

The complaint argues that Safeway’s board of directors “inexplicably decided to sell the company now, following a deeply flawed and conflicted sales process spearheaded by Robert Edwards,” Safeway’s chief executive officer. Bloomberg called the deal the cheapest in the retail food industry in nearly 10 years.

Unnamed defendents are poised to not only receive a lucrative seven-figure severance package, but have also secured high-ranking positions in the merged company, the lawsuti alleges. To put it another way, Safeway officers will walk away filthy rich, but the pension fund shareholders will get less than a fair price for their shares.

Also important in the suit is that attorneys at Robbins Arroyo are asking for injunctive relief, meaning they are in effect asking a judge to halt the merger, at least on a temporary basis.

Management, in an attempt to secure shareholder approval of the merger, filed a “materially false and misleading preliminary proxy statement on Schedule 14A with the SEC in violation of the Exchange Act and their duties of candor and full disclosure,” according to the lawsuit. A proxy statement is required to notify shareholders of pertinant information they will need in order to make an informed decision to vote for or against, in this case, a merger.

Calls placed to both Safeway’s media relations and investor releations were not immediately returned Tuesday.

The principal plaintiff is listed as Steamfitters Local 449 Pension Fund, not condsidered a major shareholder. The preponderance of shares are owned by corporate officers, investment banks or mutual funds.

No date has been set for hearings.

The proposed merger would join more than 2,400 stores, something the national consumer group Food & Water Watch has taken issue with. The group estimated that increased retail grocery concentration in the markets where the two chains currently compete could increase consumer grocery prices between $900 million and $2 billion every year.

The group also suggested that the merger could harm farmers that are selling into Safeway’s “locally grown” program.

For decades, vegetable producers in the Salinas Valley have faced pricing pressures as giant food retailers merge and buy each other out, forcing shippers to sell to an increasingly limited number of buyers.

The Albertsons-Safeway merger is an example of a trend mega-grocers have been following for more than a decade, much of it in response to Wal-Mart and other big-box discount retailers entering the food business. The purchasing power of the big-box stores is both a blessing and a curse for growers.

“The growth of single-source buyers from large chain stores such as Wal-Mart has created an environment in which lettuce producers have an increasingly smaller number of potential buyers for their product,” wrote Roland Fumasi, Wayne Howard and Jay Noel in a report from California Polytechnic State University, San Luis Obispo.

Growers here have consistently complained that produce prices are set by the large retail outlets, and producers have little say in how much their vegetables can fetch in such a restricted market.

On the other hand, large buyers have the capacity to commit to purchasing the entire output of individual producers, a way to remove risk from price fluctuations in the market, a benefit to growers.

The deal involves an investment group led by New York-based Cerberus Capital Management, the owner of Albertsons and several other supermarket chains. Unless an injuction is handed down by a judge, the deal is expected to close in the fourth quarter of this year.

Dennis L. Taylor covers business for The Californian. Follow him on Twitter @taylor_salnews.