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Private U.S. investment firm Yucaipa Cos. is suing Safeway Inc., charging that the retailer has engaged in a "biased and unfair sale process" designed to prevent it from acquiring the 114-store Dominick's chain in Chicago. Yucaipa also charged that Safeway forced it to sign an "extortionate" letter promising to "use its best good faith efforts to procure bargaining agreements with Dominick's unions" on behalf of whatever company ended up buying the retailer.

Yucaipa, which owned Dominick's until 1998, when it sold the company to Safeway for $1.8 billion, generally is perceived to have a better relationship with the unions than Safeway.

The suit claims that "Safeway intended to use Yucaipa as a 'stalking horse' to gain union support for the 'anyone but Yucaipa' company who would ultimately be chosen by Safeway to purchase Dominick's." Yucaipa demands that Safeway reopen the bidding in a "fair and impartial way."

Safeway has denied the charges.

According to several press reports, Yucaipa offered $300 million in cash and $50 million in preferred stock for Dominick's, but Safeway was willing to take less - $315 million - from another, unnamed company that almost everyone assumes is Supervalu.

Safeway originally put Dominick's on the market last year when a deteriorating relationship with the labor unions, rising costs and falling sales forced its hand. The unions reportedly are not making the sale easy for Dominick's, resisting the idea that the company be broken up into pieces and asking that prospective buyers guarantee existing benefits.

This lawsuit, if it further delays the sale of Dominick's, could end up dropping the value of the chain even further, since its sales figures continue to fall.

Yucaipa is the Los Angeles-based investment arm of billionaire Ron Burkle. One press report notes that Burkle's track record with Dominick's is somewhat better than Safeway CEO Steve Burd's. While Safeway bought the company for $1.8 billion and has seen its value drop to about less than a fifth of that, Yucaipa purchased Dominick's in 1995 for $693 million and three years later sold it to Safeway for more than double that.
KC's View:
Well, we have to say that we didn’t see this one coming.

But it will only serve to give comfort to all the other companies competing in Chicago, because it takes Dominick's eye off the ball, allowing them to build sales and market share at its expense.

Dominick's has been a mess for Safeway almost from the beginning - in part because it misread the marketplace, and in part because it enforced strategies there that just weren't appropriate. If it can't even sell the company without controversy, at what point does Safeway management start taking a hit?