In Safeway Buyout, a Reminder of a Painful Takeover Years Ago

Safeway, the latest target of a big private equity buyout, once caused a huge headache for the private equity industry.

More than two decades ago, the grocery store chain became a potent symbol of the human toll sometimes extracted when private equity uses large amounts of debt to take over a company. But Safeway is now standing on its own two feet, and for many of its workers, that initial pain is just an entry in the history books.

This week, Safeway again attracted the interest of a private equity firm, with Cerberus Capital Management leading a $9 billion leveraged buyout of the company. But the deal attracted none of the uproar of the earlier saga.

The acquisition shows how a defining flash point for the private equity industry has largely cooled since The Wall Street Journal published a front-page article in 1990 that, among other revelations, included the story of a longtime trucker for Safeway who took his own life a year after being laid off.

The article left a lasting impression on how the private equity business was perceived, coming after a decade in which buyout barons were celebrated in the business press. It particularly stung for Kohlberg Kravis Roberts, the firm that bought Safeway in 1986 and ultimately reaped billions of dollars of profit.

The Journal article continued to resonate as recently as 2009, when one K.K.R. partner who worked on the Safeway deal criticized the article at an investor conference, as part of a primer on private equity.

“The transaction is often looked at through the prism of The Wall Street Journal, which published a story focused on layoffs and wage reductions that occurred after the buyout,” the partner, James H. Greene Jr., said, according to a transcript. “Unfortunately, the article ignored the basic facts that Safeway was a deeply troubled business.”

Whether or not that criticism is fair, the article painted a troubling picture of the steps that owners will take to rehabilitate a business. About 63,000 workers lost their jobs after the buyout, and though many were hired back, their pay was significantly reduced, according to the article. In one case, a husband, wife and daughter who worked at Safeway all received pink slips the same day.

Beyond the trucker who committed suicide, at least two other workers tried to kill themselves, the article said. Peter Magowan, then the chief executive of Safeway, acknowledged that many of the people who were fired in 1986 were “very good” employees and that the cuts were done quickly.

Still, Safeway continued to grow after K.K.R. took it public in 1990. Its work force ultimately expanded to 193,000 employees, Mr. Greene said at the conference. K.K.R. sold the last of its shares in 1999.

“The reality is that value creation takes a long time,” Mr. Greene said.

Even with the criticism, the Safeway deal once inspired admiration and envy on Wall Street. Other investors also saw an opportunity in the grocery store business model, which features large revenue streams but thin profit margins, making it an attractive target for cost-cutting.

“After they did the Safeway deal, any number of private equity firms launched into buying grocery chains and got benefits just from running them well,” Paul S. Levy, managing director of the private equity firm JLL Partners, which he helped start in 1988, recalled on Friday.

Cerberus today is using a somewhat different strategy than K.K.R. did, planning to merge Safeway with Albertsons, which it owns. The news release announcing the deal included this sentence: “No store closures are expected as a result of this transaction.”

Still, Safeway’s current chief executive, Robert Edwards, acknowledged that some stores could be sold in connection with the deal.

A review by the Federal Trade Commission “may result in required divestitures,” Mr. Edwards said on a conference call with analysts on Thursday. “They’re not really classified as closures.”

That Safeway is again returning to private equity hands may help illustrate how the private equity industry has changed since the 1980s.

“In almost a quarter of a century, private equity has gone from a hot button to a mainstream investment activity supported by basically everybody,” Mr. Levy said. “Even in Congress, where they think the carried interest rate should be different, nobody is saying the private equity firms are terrible people.”

The writer of the Journal article, Susan C. Faludi, won a Pulitzer Prize for it in 1991. That prompted a renewed round of criticism from Safeway, which had railed against the story when it first appeared.

Ms. Faludi at the time seemed surprised the story had such a wide resonance. She joked in an interview with The New York Times in 1991 that she thought “only my mother and three other people” had read it.