Merger signals clubs' maturation; Costco/Price combo sets up duel with Sam's Club for industry supremacy - Costco Wholesale Corp

Discount Store News, July 5, 1993 by Arthur Markowitz

Costco/Price Combo Sets Up Duel with Sam's Club for Industry Supremacy

KIRKLAND, Wash. -- The proposed blockbuster merger between Costco Wholesale and The Price Co.--the latest sign of the consolidation of the membership warehouse business--is directly due to the maturing of what had been the fast growing retailing industry.

The deal, which the two companies describe as a "partnership," will merge the second and third largest clubs, the $7.5 billion The Price Club and the $6.6 billion Costco Wholesale, into an estimated $16 billion powerhouse in 1993, better able to battle Sam's Club, projected to have $15.6 billion in sales this year, for leadership of the $39 billion industry.

The legal material detailing the formation of a holding company to be called Price/Costco is due to be sent to shareholders of both companies by the end of the month, with the deal expected to be consummated by the end of the year. Executives, citing legal requirements, declined to comment on the merger beyond the perfunctory statements announcing the planned agreement.

In the joint release, Price Co. president and chief executive officer Robert Price and James Sinegal, Costco Wholesale president and ceo, noted that "no two merchandising companies could be more alike in terms of their merchandising philosophies, corporate cultures, determination to offer high quality products at great value to consumers and commitment to their employees."

The merger, they said, "bring[s] together two talented management teams which have demonstrated remarkable operating results," and "will enhance long-term shareholder value, broaden opportunities for more employees, and create greater operating efficiencies, which means lower prices for our members."

Price/Costco "will aggressively pursue[e] club expansion in North America" and "will take advantage of international business opportunities," they said.

Trade observers noted that the maturing of the industry means that the price of both companies' stock had about peaked and would likely remain flat or go down in the future. So now was the best time to merge through a stock exchange valued at about $2 billion. Price/Costco will have a market capitalization of about $4 billion after the stock exchange.

Price/Costco will issue one share of stock for 2.13 shares of Price Co.'s fully diluted 55.8 million common or one share of Costco's fully diluted 128.3 million common. Costco shareholders will hold 52% of the new company and Price stockholders, 48%.

The future stock price of the two clubs was of interest to the Price Club's founder, Sol Price, and his family, the largest investors in the company, holding over 13% of the stock. Costco's largest shareholder is Carrefour, the French retailer, with about a 24% stake, while Jeffrey Brotman, the company's chairman, owns about 6% and Sinegal owns about 4%.

The maturing also means that the industry's unbridled growth of past years--industry sales grew 25.6% in 1992 to $32.8 billion from $26.1 billion in 1991 and is expected to increase 18.9% to $39 billion this year--is slowing down and clubs are now trying to take business away from one another as they seek to increase their market share. The merger strengthens Price and Costco in what will now become a duel with Sam's Club.

The merger means that Price/Costco has a dominant position in the West, while Sam's Club is dominant in the Midwest. This leaves the East Coast, particularly the Northeast, as the major battleground between Price/Costco and Sam's Club. The industry's other major players, Pace Membership Warehouse and BJ's Wholesale Club, have a strong presence in the East.

As the industry's growth has leveled off, speculation about consolidation and mergers has grown. One security analyst, Patrick F. McCormack of Dean Witter, recalled in a report issued after the merger announcement that he had "pointed out that Costco and Sam's Club made a great strategic fit because there is little geographic overlap and because Costco, unlike the Price Club, is a non-unionized company." He said that Wal-Mart, Sam's Club's parent, could acquire Costco without diluting its 1994 per share earnings. "We think both Wal-Mart's and Costco's management and boards were keenly aware of this potential, and we wonder if Costco's management heard Wal-Mart's footsteps."

Costco management, including Sinegal and other executives, formerly worked with Sol and Robert Price at Price Co. and at Fedmart, the discounter the Prices' ran in the '60s and '70s.

Barring closing of overlapping stores, Price and Costco will become a 195-club business facing a Sam's Club that started 1993 with 256 clubs and is expected to have 310 stores by the end of 1993.

No decision has been made on closing stores or laying off any headquarters personnel, the companies said. Nor have executives addressed such issues as a common name for the clubs, duplicate memberships and their separate international expansions in Europe. The Price Club has two separate joint ventures in the United Kingdom and Spain, while Costco is due to open its initial club in the United Kingdom this fall and plans for two other stores are being reviewed by local planning authorities.