L.A.'s supermarket king has struck again.
Ron Burkle, chairman of Century City-based Yucaipa Cos., established himself as a major presence in the grocery business long ago.
But then, last month, the son of a Claremont grocer upped the stakes even higher through a $4.8 billion deal that would create the nation's fourth-largest grocery chain. Subject to approval from the Federal Trade Commission and California attorney general, it would merge Compton-based Ralphs Grocery Co., Portland, Ore.-based Fred Meyer Inc. and Stamford, Conn.-based Quality Food Centers Inc.
And 44-year-old Burkle, who never finished college and started his career boxing groceries for his father, would become chairman of the new 818-store, $15 billion-in-annual-revenues grocery chain, which would operate under the Fred Meyer corporate umbrella.
The deal gives Yucaipa an equity stake in Fred Meyer that, as of last week, was valued at $662.4 million.
Where Burkle fits into those numbers is unclear. Yucaipa is a private company, and Burkle himself is known to be press-shy; he declined to be interviewed by the Business Journal, and even declined to send the paper his resume.
But, as one L.A. investment banker puts it, Burkle is well on his way to becoming "the Sam Walton of supermarkets."
"Burkle is using the capital markets to build a very large, strategically linked business," said James Zukin, nameplate partner at Century City-based Houlihan Lokey Howard & Zukin, a financial shop that has worked for Burkle since the mid-1980s. "This has been Burkle's vision from the very beginning. He never took his eye off of the ball. He has built this huge thing, he has his toehold, and he has total access to the capital markets. He has moved into a new zone I call him a 'New Industrialist.' "
If that's true, then New Industrialists love debt, and lots of it. Ralphs, with about $5 billion in annual sales, is heavily leveraged, owing $2.2 billion to creditors.
In fact, Moody's Investors Service Inc. rates Ralphs bonds as B1 or Ba3, both sub-investment grade, while the rating for Ralphs' parent Food 4 Less Holding Inc. is Caa1 "poor to default."
Ralphs loses money because of the more than $200 million it must pony up annually to cover bond payments. But on an operational basis the chain has been improving, posting profits of $47.7 million for the second quarter ended July 20, compared with $34.3 million for the like period a year ago.
Still, Burkle's debt load at Ralphs is heavy: For every $1 that shoppers spend at the check-out stands, about a nickel goes to debt-holders this, in an industry where profits run about 2.5 cents on every dollar of goods sold. (Ralphs is required to publicly disclose its financial results because of its outstanding debt.)
The Ralphs merger with Fred Meyer should improve matters the latter chain is not so heavily leveraged and has been profitable on a net basis. And the deal is a stock swap, with no additional borrowing required.
That, plus the resulting efficiencies, has prompted Moody's to place Ralphs' debt on review for a possible upgrade.
Still, don't expect Burkle to back away from the IOU bar anytime soon. It was by borrowing and acquiring that he got where is today.
Burkle, advised by Ken Moelis, managing partner of Donaldson Lufkin & Jenrette Securities Corp. in Century City, has issued big IOUs over the years to acquire controlling stakes in Salt Lake City-based Smith's Food & Drug Inc., Phoenix-based Smitty's Inc. and Chicago-based Dominick's Finer Foods Inc.
Moelis doesn't figure Burkle will stop borrowing now. "Ralphs is losing money, but doing well on cash flow. They got a lot of coverage," he said.
DLJ and other financial backers support Burkle because of his proven ability to make money for investors. "Ron is a fabulous dealmaker and operator, which is tough to find in one person. That's what makes him unique," Moelis said.
He is believed to have well-established relationships with big-time financial backers, such as Apollo Advisers, the financial powerhouse run by Leon Black, and funds managed by George Soros, the legendary currency trader and investor.
Perhaps that's why there is an alternative view of Burkle: that he is as much a creature of his financial backers as his own man participating in a symbiotic relationship with partners who themselves leverage heavily.
Through Burkle, his backers have a vehicle for eventually acquiring a dominant role in the food distribution business in the United States a business as recession-proof as any. People are not going to stop eating.
Few, if any, who have worked with Burkle would call him a pawn indeed, he is viewed as insightful, level-headed and even charismatic.
"He looks like the commander-in-chief from central casting," said Zukin. "He has presence. He takes charge."
And now, because Fred Meyer is a public company, he will have access to Wall Street capital, which could further accelerate the growth of his supermarket chain.
One insider hinted that Burkle may go to the public markets in the future to raise capital, rather than to private equity investors, such as Apollo.
"He is now in charge of a very large public company that will require huge amounts of capital to grow. The spectacular returns of the past may not be there. This is a more mature operation now. He will likely issue stocks and bonds, not private equity," said one influential investment player.
Locally, the deal will further increase Burkle's domination of the Southern California grocery industry: About one-third of all food and beverages consumed in Southern California homes are sold by one of the 397 supermarkets that Fred Meyer will get in the deal. (Those local stores currently operate under the Ralphs, Hughes and Food 4 Less names.)
"Ron is very competitive. I don't think he wants a bigger share of the market because he is greedy, but because he is very bottom-line-oriented," said Eli Broad, chairman of Century City-based SunAmerica Inc. "He wants the buying power (that comes with larger size). He doesn't do things for vanity, he does things because they are good business."
Burkle is so business-oriented that he rarely takes vacations and he even cut short a yacht trip to the Mediterranean that he once took with Broad.
"He was constantly in communication (back home) on the phone or fax," recalled Broad. "Then, on the last trip, he left a couple days before the vacation was over."
But back at his Beverly Hills estate, Burkle also is a prolific party-thrower. (Burkle bought his home, called Green Acres, in 1993 for $18 million. It is the former estate of silent screen star Harold Lloyd, and department store heir Ted Field.)
At Green Acres, Burkle has hosted fund-raisers for President Clinton, Gov. Pete Wilson, Los Angeles Mayor Richard Riordan and San Francisco Mayor Willie Brown. "I hold about 30 to 40 events a year, and they span the political spectrum," Burkle told Forbes magazine last year.
In all, Burkle gave $132,000 to the Democratic Party in 1996, but more importantly, his house parties raised large amounts Burkle's celebrity bash last September raised $4 million for the Democrats.
Clinton returned the favor by inviting Burkle and his family to stay overnight at the White House, according to the Washington Post. (Those overnight stays have become the subject of a federal investigation into the Clinton administration's campaign fund-raising activities.)
The Burkle story is the sort of Horatio Alger stuff that business dreams are made of. Never finishing college, he worked in food retailing, becoming a vice president at Stater Bros. Supermarkets Inc., based in Colton.
At age 29, he and his father, who was president of Stater Bros., attempted a leveraged buyout of the chain. They were rebuffed, and then fired. (Burkle's father, Joe Burkle, as of the most recent press account in 1995, was working as chief executive for one of Yucaipa's smaller chains, Topeka, Kan.-based Falley's.)
For a while, Burkle invested in car dealerships and a candy manufacturer. But then he jumped back into the grocery business in 1986, acquiring La Habra-based Food 4 Less Holding Inc. Then came Alpha Beta, Boys, ABC Markets and Cala Foods.
There are only about 20 people who work with Burkle in a low-profile office in Century City, just outside the Beverly Hills city limit. This nerve center of Burkle's food empire is known as Yucaipa Cos., which in turn controls Food 4 Less Holding.
"Ron's organization is pretty deep," said Moelis. "Ron's a collaborative guy. He is very focused on the plan, and he accepts input. To keep quality people, they want to be a part of the process, and add something to the process. I've seen some pretty healthy debates there. But Ron is the driving force."
Not only is Burkle possibly maneuvering to become the No. 1 food retailer in America, he is credited with aggressively moving to broaden the role supermarkets play in consumers' lives. He has integrated banking (through a subleasing deal with Wells Fargo Bank), video rentals and a host of other services into Ralphs stores.
And Burkle insiders said further subleasing activities are imminent.
"I just don't see a ceiling on Burkle," said Zukin. "He has a golden name."
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