Kroger buying Albertsons for $24.6 billion to create grocery giant, will sell hundreds of stores – Orange County Register

By Brendan Case, Michelle F. Davis and Ruth David | Bloomberg

Kroger Co. has agreed to purchase Albertsons Cos. in a deal worth an enterprise value of $24.6 billion that would create an American grocery giant with nearly 5,000 stores and annual revenue of around $200 billion .

Investors will receive $34.10 for each Albertsons share, which includes a special dividend, the companies said in a statement Friday. That reflects a roughly 33% premium to the October 12 closing price, the day before Bloomberg News’ first report on the talks. The companies plan to sell up to 375 stores through a spin-off.

The proposed combination creates a grocery giant with increased buying power and an opportunity to save costs as brick-and-mortar retailers invest heavily to improve their online offerings. Although the deal would create a stronger competitor for Walmart Inc. and other rivals, it is certain to come under intense antitrust scrutiny as U.S. regulators under President Joe Biden cast a more skeptical eye. on major mergers.

RELATED: Kroger seeks to merge with Albertsons, creating an American grocery giant

“This combination will expand customer reach and improve proximity to deliver fresh, affordable food to approximately 85 million households,” the companies said in the release. “Consistent with previous transactions, Kroger plans to invest in lower prices for customers and expects to reinvest approximately half a billion dollars in cost savings from synergies to lower prices for customers.”

Kroger shares fell 4% at 9:37 a.m. PT, while Albertsons fell 5.7% after a big gain on Thursday. Kroger was up 1.7% this year through Oct. 12, the day before Bloomberg News reported on the talks. Albertsons fell 15% over the same period, while an S&P index of consumer staples companies fell 12%.

northeast entrance

The combination ranks among the retail industry’s largest deals in years, evoking deals such as Inc.’s 2017 purchase of Whole Foods Market for $13.7 billion and the Albertsons was acquired for $9.8 billion in 2006 by CVS Health Corp., Supervalu and an investment group led by Cerberus Capital Management. The New York-based private equity firm still owns nearly 30% of the Albertsons, according to data compiled by Bloomberg.

A rapprochement would give Kroger an entry into the northeast, completing its national footprint. The Cincinnati-based parent company of Ralphs and Fred Meyer is the second-largest grocery seller in the United States, with a 9.9% market share compared to Walmart’s nearly 21%, according to Numerator. Albertsons ranks fourth with 5.7% and its portfolio includes Acme, Jewel-Osco, Safeway, Shaw’s and Tom Thumb chains as well as its namesake stores.

The companies said they would drive about $1 billion in “annual” cost savings in the first four years after the deal was struck, net of divestments, through improved procurement, technology investments and the optimization of manufacturing and distribution networks. They will use $500 million in savings to cut prices.

Excluding one-time costs, Kroger said the combination would boost earnings in the first year after closing and be “double-digit earnings accretive by year four.” The transaction will generate total shareholder returns “well above” Kroger’s standalone model of 8% to 11%, according to the release.

The retailer said it would spend $1.3 billion on improving Albertsons stores and invest $1 billion to continue raising employee wages and benefits. Together, the two companies currently have approximately 710,000 employees.

Kroger said it has $17.4 billion in fully committed bridge financing from Citigroup Inc. and Wells Fargo & Co. The deal includes assuming $4.7 billion of net debt and is expected to close in early 2024, the companies said. Kroger CEO Rodney McMullen will lead the combined company.

Kroger is “very confident” of obtaining Federal Trade Commission approval, McMullen said during a conference call with analysts and investors. Still, the transaction is likely to face a lengthy antitrust review with an uncertain outcome. Both Kroger and Albertsons have strong footprints on the West Coast, as well as in Arizona, Nevada, Colorado, Illinois and parts of Texas.

“A combination could offer substantial synergies and opportunities for cost savings, revenue and profit growth,” Bloomberg Intelligence analyst Jennifer Bartashus said in a report Thursday. “But significant overlap in operations can make it difficult to get approval, forcing potential divestments.”

Historically, food retail transactions “have not been the panacea for structurally higher margins/profits or long-term shareholder value creation,” said Morgan Stanley analyst Simeon Gutman. in a note to customers.

fierce competition

Indeed, the savings achieved through many mergers have been eroded by fierce competition in a relatively fragmented industry. The Kroger-Albertsons deal may be a clue that the companies think this time is different after years of mergers that have given major players in the grocery industry a larger market share.

“Perhaps the industry has reached a point of consolidation where a potential merger of this magnitude could lead to structurally higher margins,” Gutman said. “The industry may be closer to oligopoly than we think.”

But it’s all the more reason for antitrust regulators to put the deal under a microscope. Soaring food prices are a key driver of inflation in the United States and a potential political flashpoint.

Yet the merged company would face a comparably sized competitor in grocery sales: Walmart. In their last fiscal years, Kroger and Albertsons had combined revenue of $209.8 billion. Walmart’s US stores generated $218.9 billion in groceries. This excludes sales at Sam’s Club, Walmart’s chain of warehouse stores.

“Kroger and Albertsons may believe this fact allows the proposed merger to proceed more smoothly than it otherwise would,” Bob Hoyler, senior consultant at Euromonitor International, said in an email.

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