Costco, Rival Announce Merger -- New Firm Worth $4 Billion

In a dramatic announcement expected to intensify competition in the membership-warehouse industry, Kirkland-based Costco Wholesale said today it will merge with a chief rival, Price Co. of San Diego, Calif.

The two will form a company worth about $4 billion on Wall Street, with annual sales of $16 billion, 196 stores and more than 28,000 employees. If the merger had been in effect in 1992, the company would have ranked second in the Northwestin sales, behind only Boeing's $30 billion.

Both stocks jumped at the opening today. Price soared $3 a share to $35.25, and Costco gained 75 cents a share to $17.75.

Price's founder, Sol Price, is considered the founder of discount-warehouse retailing. He debuted the discount Fed-Mart chain in 1954. Today, Price has 94 stores, Costco 102.

The two companies had been battling for second place behind the industry leader, Wal-Mart's Sam's Club, with more than 250 stores. But Sam's Club's total annual sales would be less than Costco and Price combined.

Both Price and Costco operate in California and New Jersey but otherwise have little overlap. Robert Price, Price chairman, said at this point he does not expect any stores to close.

"We feel very excited and positive about the coming together of these two clubs," Price said today. "Combining the forces of these two companies will result in a much stronger company."

Price said the stores will continue to be called either Costco or Price Co.

Shareholders in the companies - both are traded on NASDAQ's National Market System - will exchange their shares for shares of the new company. Costco holders will get one new share for each existing share. Price holders, whose shares cost about twice as much, will get 2.13 new shares per existing share. In the end, Price holders will own 48 percent and Costco holders 52 percent.

The merger is expected to be completed by year's end. The new company will be called Price/Costco and will maintain headquarters in both Kirkland and San Diego.

Robert Price will be chairman of the new company. Jeff Brotman, Costco founder and chairman, will be vice chairman and will be in charge of acquiring real estate.

Jim Sinegal, Costco president and chief executive, will be president and chief executive of the new company.

Consolidation in the industry has been predicted as more and more new stores takes sales away from existing stores. In the past year, both Price and Costco reported steep declines in the amount of sales for stores open more than a year, or same-store sales.

Today, Costco reported that same-store sales for the 12 weeks ended May 9 were up only 2 percent. At one time, double-digit sales growth was common. Overall sales rose 14 percent, to $1.7 billion from $1.5 billion. Profits sank 13 percent, to $17.7 million, or 15 cents a share, from $20.4 million, or 17 cents a share, a year ago.

In Costco's most recent fiscal year, ended last August, sales were $6.6 billion. Price's sales over the same period were $7.3 billion.

The companies said major shareholders already have agreed to the deal announced today. A $50 million fee must be paid under certain circumstances if the merger falls through.

"The new company is being created as a partnership between the Price Co. and Costco," Sinegal and Price said in a statement. "All important decisions regarding personnel, merchandising direction, expansion and overall allocation of human resources and capital will be jointly agreed upon by the two of us."

The two companies said management information systems and accounts payable and receivable for U.S. club operations will be consolidated in San Diego. A large part of the U.S. buying and merchandising activities will be based in Kirkland. Costco employs 18,100 people nationwide; Price Co. employs 10,200.