The Kroger Co. and Albertsons Cos. have announced that they have entered into a definitive merger agreement a day after reports emerged about ongoing negotiations between the two companies.
The merger agreement, which has been unanimously approved by the board of directors of each company, will allow Kroger to acquire all outstanding shares of Albertsons common and preferred stock for an estimated total consideration of $34.10 per share, implying a total enterprise value of approximately $24.6 billion, including the assumption of approximately $4.7 billion of Albertsons net debt. To make the merger acceptable to United States federal regulators, a store divestiture process will occur, and the cash component of the $34.10 per share consideration may be reduced by the per-share value of a newly created standalone public company, SpinCo, that Albertsons is prepared to spin off at closing. As part of the transaction, Albertsons will pay a special cash dividend of up to $4 billion to its shareholders. So the cash component of the $34.10 per share consideration will be reduced by the per share amount of the special cash dividend, expected to be approximately $6.85 per share, according to the companies.
In its own press release, Albertson stated that the special dividend will be payable on November 7 to stockholders of record as of the close of business on October 24.
The press statement went on to declare that the purchase price represents a premium of approximately 32.8% to the unaffected closing price of Albertsons Cos. common stock on October 12 and 29.7% to the 30-day volume-weighted average price.
The day before the merger announcement came, Bloomberg published a report that Kroger and Albertsons were in merger talks.
In a Retail Buzz note, Pulse Ratings pointed out that the United States Federal Trade Commission would likely scrutinize the deal to determine how it would affect the competitive landscape in U.S. retailing.
On its website, Albertsons notes that it operates stores in 34 states, mostly in the West and Northeast, although it does have stores in Iowa, Illinois and Indiana as well as Louisiana and Arkansas. Kroger has stores in 35 states and operates in Florida as a delivery-only business. It also plans delivery operations in the Northeast. Kroger only lacks a presence in the Northeast, Oklahoma, North Dakota and South Dakota.
Kroger shares opened at $45.76 on October 13, the day Bloomberg published the story, and stood at $46.57 at closing on Wall Street. Albertsons stock opened the day at $25.54 and stood at $28.63 when Wall Street closed. Albertsons stock opened at $27.03 but had slipped to $26.81 by mid-morning on October 14. That same day, Kroger shares opened at $45.15 and fell to $44.82 by mid-morning.
In the top U.S. retail sales rankings, a combined Kroger and Albertsons would not surpass Walmart for the first position. According to the National Retail Federation, Kroger, with retail sales of $136.49 billion, is in the number 5 slot among top operators, and Albertsons, with retail sales of $71.87 billion, is number 10 on the list. Together, they would not overtake number one Walmart, with U.S. retail sales of $459.51 billion. However, the combined entity would surpass Costco to land in third place in the NRF U.S. retail sales table just a bit behind second-place Amazon.
In their statement, Albertsons and Kroger noted that they currently employ more than 710,000 associates and operate a total of 4,996 stores, 66 distribution centers, 52 manufacturing plants, 3,972 pharmacies and 2,015 fuel centers. The combination creates an enterprise operating in 48 states and the District of Columbia.
Consistent with how it handled prior transactions, Kroger plans to reinvest approximately half a billion dollars of cost savings from synergies at the combined company to reduce prices for customers. It also will invest an incremental $1.3 billion into Albertsons Cos. stores to enhance the customer experience. Kroger also intends to build on its recent investments in associate wages, training and benefits. Plans call for the combined company to invest $1 billion to continue raising associate wages and provide comprehensive benefits.
The statement indicated that the transaction would advance Kroger’s strategy of Leading with Fresh, Accelerating with Digital and enable the combined company to build on Kroger’s go-to-market strategy that includes Fresh, Our Brands, Personalization and Seamless. It added that Kroger looks forward to bringing the best of Albertsons Cos.’ own omnichannel capabilities to more customers to improve the shopping experience.
Among the anticipated merger results, as expressed by the companies:
- Enables Kroger to Serve America with Fresher Food, Faster. Using Kroger’s End-to-End Fresh initiative across a broader network will enable the combined company to optimize its supply chain and deliver the freshest products from field to table to more customers more quickly. By bringing together Kroger’s Fresh for Everyone strategy and Albertsons Cos.’ Customers for Life strategy, the new operation will expand its portfolio of fresh products, extend shelf lives and accelerate the penetration of its Fresh portfolio.
- Creates a Broader Selection of Our Brands Products to Offer Customers Higher Quality and Better Value. The combination will be able to relieve the inflationary pressures facing shoppers with a combined portfolio of approximately 34,000 total private label products across premium, natural and organic, and opening price point brands. The new company’s innovation capabilities increased manufacturing footprint and expanded national reach will drive improved quality and efficiency allowing its Our Brands portfolio to accelerate growth and profitability while remaining affordable.
- Offers Customers Best-in-Class Personalized Experience. The combined company will generate stronger customer insights and offer improved tailor-made experiences. It will provide an upgraded customer experience by offering more relevant recommendations and promotions to save customers time and money and to discover healthier alternatives to popular products as part of Kroger’s Food as Medicine initiative.
- Delivers an Enhanced Seamless Customer Experience Requiring Zero Compromise. The combined company will benefit from shared operational learnings across both large and small store formats, a more extensive and efficient distribution network and an expanded pickup footprint. It will be able to offer customers a more personalized and convenient omnichannel experience including, beyond enhanced pickup, faster delivery times and more capabilities to serve the customer anything, anytime, anywhere with zero compromise on quality, selection and affordability.
- Powers Continued Progress Toward Shared ESG Initiatives. In bringing together the two companies, the combined operation will be in a better position to advance a comprehensive ESG strategy focused on Kroger and Albertsons Cos.’ shared mission to support the communities they serve and pursue a more sustainable future. The addition of Albertsons Cos.’ sustainability program and resources will accelerate Kroger’s Zero Hunger | Zero Waste social and environmental impact plan to create a more equitable and sustainable food system.
The companies also noted that the addition of Albertsons Cos.’ portfolio expands Kroger’s core supermarket, fuel and pharmacy businesses, enhancing the combined company’s ability to drive additional store and virtual traffic. The increase in customer traffic and data will in turn power the combined company’s higher-growth, higher-margin alternative profit businesses, which will support continued reinvestment in the business. On a combined basis, the companies delivered approximately $210 billion in revenue, $3.3 billion in net earnings and $11.6 billion of adjusted EBITDA in fiscal year 2021.
The combination also will be able to reach an expanded national audience of 85 million households nationwide, fueling growth in alternative profit businesses including Retail Media, Kroger Personal Finance and Customer Insights. With an expanded footprint and the addition of the recently launched Albertsons Cos. Media Collective, Kroger will enhance its services to media clients and provide more targeted solutions. The combined capabilities have the potential of accelerating the growth of Kroger’s higher-margin revenue streams by extending the solutions portfolio and accelerating growth.
Kroger and Albertsons express the view that the combined company might achieve approximately $1 billion of annual run-rate synergies net of divestitures within the first four years of combined operations with approximately 50% being achieved within the first two years following the close of the merger transaction. Synergy benefits include improved sourcing, optimization of manufacturing and distribution networks, and technology investment amplification opportunities. The new company also will operate under a more resilient business model, with a devoted customer base and strong cash flows, the statement emphasized, that during the first four years post-closed should deliver TSR well above Kroger’s standalone TSR model of 8% to 11%. Kroger expects the transaction to be accretive to earnings in the first year following close, and double-digit accretive to earnings by year four, excluding one-time costs.
In announcing the merger, Rodney McMullen, Kroger chairman and CEO, said, “We are bringing together two purpose-driven organizations to deliver superior value to customers, associates, communities and shareholders. Albertsons Cos. brings a complementary footprint and operates in several parts of the country with very few or no Kroger stores. This merger advances our commitment to build a more equitable and sustainable food system by expanding our footprint into new geographies to serve more of America with fresh and affordable food and accelerates our position as a more compelling alternative to larger and non-union competitors. As a combined entity, we will be better positioned to advance Kroger’s successful go-to-market strategy by providing an incredible seamless shopping experience, expanding Our Brands portfolio, and delivering personalized value and savings. We’ll also be able to further enhance technology and innovation, promote healthier lifestyles, extend our health care and pharmacy network and grow our alternative profit businesses. We believe this transaction will lead to faster and more profitable growth and generate greater returns for our shareholders.”
McMullen will be chairman and CEO of the combined company.