Burkle/27″/mike1st

By JASON BOOTH

Staff Reporter

Ronald Burkle believes that size really does matter.

Last week’s announced purchase of Fred Meyer Inc. by Kroger Co. caps years of buying and selling supermarket chains large and small and it will make the billionaire Burkle wealthier still.

“I think we have created the biggest and the best supermarket chain in the nation,” said Burkle in an interview late last week with the Business Journal. “And I don’t think anyone is going to create a better one.”

As part of the $8 billion merger, the 45-year-old Burkle, who is chairman of Fred Meyer, will become chairman of a new Kroger executive committee though he is not expected to play a major role in the company’s day-to-day operations.

The media-shy Burkle decided to pursue Kroger even though the ink had hardly dried on last year’s complex merger involving Portland, Ore.-based Fred Meyer and Ralphs Grocery Co. and just two weeks after his deal to sell Illinois-based Dominick’s Supermarkets Inc. to Safeway Inc. for $1.85 billion. Burkle said the decision to sell Dominick’s was based on its limited market share as well as Kroger not being interested in the chain.

Burkle has been pushing the consolidation strategy for years, figuring that to survive in the supermarket business, “you have to be a premium operator. So we have a 20 percent market share in every market we participate in.”

A look at his deal making over the last dozen years is indicative of that strategy. He started Yucaipa Cos. as an investment vehicle in 1986 the one-time box boy had once lived in the San Bernardino County community and he has been snapping up supermarket properties ever since, including Ralphs, Boys Markets, Dominick’s and Alpha Beta. Then, in 1997, came the Fred Meyer deal, at the time creating the nation’s fourth-largest grocery store chain (and leaving Yucaipa with 9 percent of Fred Meyer’s stock).

But being fourth was obviously not good enough.

“I saw (the Kroger deal) as a logical step in what we have been doing for the last 12 years,” Burkle said. “We have been the No. 1 proponent of consolidation and have wanted to work with Kroger for a long time. It was a question of the pace of consolidation picking up. Every time there is a merger, there is one less potential partner. I wanted to team up with Kroger while they were still around.”

Leverage is behind much of what Burkle does. Indeed, Yucaipa has raised vast amounts of debt to fuel the acquisition binge. So much so, in fact, that as part of last week’s deal, Kroger will assume almost $5 billion in debt, pushing the Cincinnati-based chain’s total debt load to about $8 billion.

It’s enough to make some on Wall Street nervous.

“The debt has been a concern, pre-merger, and it will continue to be a concern,” said Michael J. Schroeder, chief investment officer at Wasmer, Schroeder & Co. in Naples, Fla. “In a business where margins are thin, they are going to have to produce top-line growth and cost efficiencies. And they have to do it in a low-inflationary environment.”

Burkle discounts such concerns. “I think they are crazy (to criticize the heavy use of debt),” he said. “We never had so much debt that we had to cut back on stores or growth. We have always had the flexibility to grow.”

When Yucaipa was just a year old, it issued $25 million in junk bonds through Drexel Burnham Lambert, using them to buy Falley’s, a Kansas-based supermarket chain that owned 20 Food 4 Less warehouse stores in California.

The deal was considered so small that Burkle wasn’t even permitted to meet Drexel’s junk-bond head Michael Milken. But it set a pattern that Burkle has followed throughout most of his career.

Increasingly, Burkle’s role in his supermarket empire is more as an investor than an operator.

“Every time I have bought, it has been with the understanding that I had better be prepared to be an owner forever,” he said. “But, especially in the last five years, I have been more of an investor in that I let a management team handle the day-to-day workings of the business.”

All of which is a world away from the days when Burkle attempted to orchestrate a management buyout of Stater Brothers with the help of his father, who was then president of the Colton-based chain.

That bid failed, and Burkle was promptly fired. But it didn’t dampen his enthusiasm for the business, and in 1987 Burkle made his first successful acquisition, Falley’s.

And while he may have just orchestrated the creation of the nation’s largest supermarket chain, Burkle makes clear that his eyes are set on new horizons. As is typical, however, he declines to say what those horizons might be. (Burkle says up front that the only reason he is willing to talk about his supermarket holdings is because they are public companies.)

The latest story is that he plans to jump feet-first into an Internet-related venture together with Richard Wolpert, former president of Disney Online.

Burkle, however, says that while he is interested in new technology, the Internet is only a minor part of his overall plans. “It is such a little piece of what we do it is hardly worth mentioning,” he said.

Whatever he does turn his hand to, there is no doubt that Burkle has plenty of cash to employ. His net worth has been pegged most recently at $1 billion, though if the Kroger deal goes through, the figure could leap to over $1.7 billion.

Most of that personal fortune is based on Burkle’s supermarket holdings, and he himself claims to have made more money outside the supermarket industry.

In the past he described himself as a major player in the currency and commodities markets. He also said he has more than $100 million in venture capital investments.

If he plans to transform himself from a supermarket magnate into a high-tech mogul, Burkle will need plenty of cash.

“He leveraged himself in a good market at a good time,” said Tom Burnett, an analyst at Merger Insight in New York. “But that technique might not have worked in other industries, such as high tech. If you have that much debt you can get wiped out in a downturn.”