The Kroger Co. (KR Quick QuoteKR ) is constantly making strategic endeavors to strengthen its position in the industry. In a latest development, this mega grocery retailer and Albertsons Companies (ACI Quick QuoteACI ) inked a definitive agreement under which both companies will combine their iconic brands to create a national foothold and unite KR’s Purpose to Feed the Human Spirit. The deal, likely to close in early 2024 and unanimously approved by both companies’ boards, will boost KR’s go-to-market plan, and reinforce its value-creation model to boost profitability and generate higher returns.
Per the terms of the agreement, Kroger will acquire the total outstanding shares of the latter’s common and preferred stock (on a converted basis) for an expected overall consideration of $34.10 per share. This comes to the total enterprise value of $24.6 billion, assuming $4.7 billion of ACI’s net debt.
We note that the transaction is contingent on the receipt of a necessary regulatory clearance and other customary closing conditions, with the receipt of clearance under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. Regarding the receipt of a required regulatory clearance for the transaction, Kroger and Albertsons Companies are likely to make store divestitures. Subject to the divestiture process, ACI is expected to establish its subsidiary SpinCo, which will be a spin-off to Albertsons Companies’ shareholders before the closing of the merger. SpinCo, which will operate as a standalone public company, will include around 100-375 stores and establish a new competitor with quality stores, management and a sturdy balance sheet.
The cash component of $34.10 per share consideration might be lowered by the per-share value of SpinCo. According to the terms of the transaction, ACI will pay a special cash dividend of up to $4 billion. The cash part of the consideration of $34.10 per share might get reduced by the per-share value of the special cash dividend, which may be $6.85. This dividend is payable Nov 7, 2022, to ACI’s shareholders of record as of Oct 24.
The aforesaid transaction is likely to boost KR’s strategy of Leading with Fresh, Accelerating with Digital, thus enabling the new organization to support its go-to-market strategy comprising Fresh, Our Brands, Personalization and Seamless. Kroger also looks to bring ACI’s finest omni-channel capabilities to enrich its customers’ shopping experience.
We note that Kroger holds on to its share repurchase program to prioritize de-leveraging following the merger. KR looks to accomplish a net leverage target of 2.5X EBITDA during the first 18-24 months after the merger’s closure. In second-quarter fiscal 2022, KR bought back $309 million shares and management had authorized a new $1-billion share buyback program. At the end of the second quarter, KR had a net total debt of $12,426 million.
Regarding the reduction of prices for consumers, Kroger anticipates reinvesting roughly half a billion dollars of cost savings from synergies. An incremental $1.3-billion will also be invested in ACI’s outlets to boost the customer experience. The newly-formed entity is likely to invest $1 billion to increase associate wages and comprehensive benefits post close.
Kroger and Albertsons Companies presently employ more than 710,000 associates, operating a total of 4,996 outlets, 66 distribution centers, 52 manufacturing plants, 3,972 pharmacies and 2,015 fuel centers. The merger of two purpose-driven companies into a grocery giant will offer customers the best shopping experience across stores and digital channels.
Shares of this currently Zacks Rank #2 (Buy) player have increased 9.1% in the past year against the industry’s 9.6% decline.
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