Kroger Co. agreed to buy Albertsons Cos. in a deal valued at $2.6 billion that would create a U.S. grocery giant with nearly 5,000 stores and about $200 billion in annual sales. Investors will receive $3.10 for each Albertson share, which includes a special dividend, the companies said in a statement Friday that reflects a premium of about 33% to the closing price on Oct. 12, the day before Bloomberg News first reported the trade talks. The companies plan to sell up to 375 stores through the spin-off.
The proposed merger will create a grocery giant with increased buying power and potential savings as brick-and-mortar retailers invest heavily in improving their online offerings. While the deal would create a stronger competitor for Walmart Inc. and others, it is sure to come under intense antitrust scrutiny as regulators led by US President Joe Biden grow increasingly skeptical of big mergers.
The companies said in a statement that the combination will expand customer reach and improve proximity to deliver fresh, affordable food to approximately 85 million homes. “Consistent with past transactions, Kroger plans to invest in lowering prices for customers and will reinvest approximately half a billion dollars in savings from synergies to lower prices for customers.” Kroger’s shares were down 3% at 9:37 a.m. New York time, while Albertsons was down 5.7% after Thursday’s big gain. Kroger was up 1.7% this year through Oct. 12, a day before Bloomberg News reported the talks. Albertsons fell 15 percent over the same period, while the S&P index of consumer goods companies fell 12 percent.
The combination is among the biggest retail deals of the year, reminiscent of deals like Amazon.com Inc. The $13.7 billion purchase of Whole Foods Market in 2017 and Albertsons’ $9.8 billion purchase of CVS Health in 2006. Corp., an investment group led by Supervalu and Cerberus Capital Management. According to Bloomberg data, the New York-based private equity firm still owns nearly 30% of Albertsons. Link would give Kroger access to the Northeast and complement its national footprint.
The Cincinnati-based parent of Ralphs and Fred Meyer is the second-largest grocer in the U.S. with a 9.9 percent market share, according to Numerator, while Walmart’s market share is nearly 21 percent. Albertsons is fourth with 5.7 percent, and its portfolio includes the Acme, Jewel-Osco, Safeway, Shaw’s, and Tom Thumb chains and namesake stores. The companies reported $1 billion in annual savings in the first four years after closing, excluding sales, due to improved purchasing, technology investments, and optimized manufacturing and distribution networks. They are using $500 million in savings to lower prices.
Excluding one-time costs, Kroger said the combination would gain revenue in the first year after the closing and add “double earnings by the fourth year.” According to the statement, the deal will provide total shareholder returns that exceed Kroger’s standalone model by 8 percent to 11 percent.
The retailer said it will spend $1.3 billion to improve Albertsons stores and invest another $1 billion to continue raising employee wages and benefits. Together, the two companies currently have approximately 710,000 employees.
Kroger said it has $17.6 billion in bridge financing from Citigroup Inc. and Wells Fargo & Co. According to the companies, the transaction will involve $.7 billion in net debt and is expected to close in early 2020. Kroger CEO Rodney McMullen will lead the combined company.
Kroger is “very confident” it will win approval from the Federal Trade Commission, McMullen said on a conference call with analysts and investors. However, the agreement is likely to be reviewed over a long period of time and its outcome is uncertain. Kroger and Albertsons have strong footprints on the West Coast as well as in Arizona, Nevada, Colorado, Illinois, and parts of Texas.
In a report on Thursday, Bloomberg Intelligence analyst Jennifer Bartashus said the combination could provide significant synergies and cost savings, as well as revenue and earnings growth opportunities. However, significant duplication of activities could make it difficult to obtain approval and force potential divestments. Food retailing has not historically been a panacea for structurally higher margins, profitability, or long-term shareholder value creation, according to Morgan Stanley analyst Simeon Gutman in a note to clients. Strong Competition.
This is because the savings from many mergers have weakened fierce competition in a relatively fragmented industry. The Kroger-Albertsons deal could be a sign that the companies believe this time is different after years of mergers that have increased the market share of major grocery players.
“Perhaps the industry has reached a point of consolidation where a potential merger of this size could lead to structurally higher margins,” Gutman said. “The industry may be closer to an oligopoly than we think.”
But that’s all the more reason antitrust regulators need to scrutinize the deal. Rising food prices are a major d
river of US inflation and a potential political flashpoint.
However, the combined company faces a competitor of similar size in the grocery business: Walmart. In their most recent fiscal years, Kroger and Albertsons brought in $209.8 billion in sales. Walmart’s US stores produced $218.9 billion worth of groceries. This does not include sales at Sam’s Club, Walmart’s department store chain.
“Kroger and Albertsons can take this fact into account, allowing the proposed merger to proceed more smoothly than otherwise,” Bob Hoyler, a senior consultant at Euromonitor International, said in an email.