Kroger and Albertsons Companies last week announced that they have entered into a definitive agreement under which the companies will merge through Kroger’s 24.6 billion acquisition.
The deal has Kroger paying $34.10 a share and it will create two complementary organizations aiming to establish a national footprint and unite around Kroger’s Purpose to Feed the Human Spirit.
Kroger is the second-largest grocer by market share in the United States, behind Walmart, and Albertsons is fourth, after Costco, according to CNBC.
This combination will expand customer reach and improve proximity to deliver fresh and affordable food to approximately 85 million households with a premier omnichannel experience, according to a release.
Kroger captured about 9.9% of the U.S. grocery market in the 12 months ended June 30, according to market researcher Numerator. Albertsons’ share was 5.7%.
Recent data from foot traffic analytics firm Placer.ai shows that Albertsons has been outperforming Kroger in terms of visit numbers, with the most recent figures (from the week of Oct. 3) showing that visits to Albertsons locations were up 2.9% compared to the same week in 2019, while they were down 6.7% at Kroger stores.
“With Albertsons in the fold, Kroger could get a much-needed shot in the arm to help boost its visit numbers in the short term and create an even more formidable grocery giant over the long term,” Placer.ai tells GlobeSt.com.
Both companies’ boards unanimously approved the agreement, which will also need regulatory approval.
Challenge Will Be Backfilling Closing Stores
Matt Hammond, partner, Coreland Companies, tells GlobeSt.com, “The acquisition might provide Kroger more efficiencies and improved profitability, but it could come at a significant cost to consumers and the shopping center industry.
“With more than 5,000 stores combined, they will likely be forced to sell or close locations,” Hammond said.
“We will feel the impact of closures in California where both Ralphs and Albertsons have a significant stake. The industry has several active competitors, specifically specialty and discount grocers, but not many that can easily back-fill a traditional grocer’s footprint. Navigating will demand creativity and investment.”
Closing Stores Could Help Competitors, Walmart and Amazon
Margaret Caldwell, Stan Johnson Company managing director and partner, tells GlobeSt.com, that the “big question” is: Why is Kroger buying Albertsons?
“I assume that this acquisition is driven by the significantly higher costs of groceries, more economies of scale and efficiencies in distribution so Kroger can ultimately compete more effectively against Amazon and Walmart.
“It will be interesting to see how many stores are closed in markets where they have overlap such as Southern California, Seattle and Texas.
“It will be difficult for Kroger to close these stores and hand back the real estate because they could potentially be back filled by Walmart or Amazon.
“I think we will continue to see more consolidation in the grocery sector for the reasons that Kroger is acquiring Albertsons.”
Special Dividend Payable Nov. 7
The cash component of the $34.10 per share consideration will be reduced by the per share amount of the special cash dividend, which is expected to be approximately $6.85 per share.
This cash dividend will be payable on Nov. 7 to shareholders of record as of the close of business on Oct. 24.
Combining Two ‘Purpose-Driven’ Organizations
Rodney McMullen, Kroger chairman and CEO, who will continue serving as Chairman and CEO of the combined company, said in prepared remarks, “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, McMullen said, the company 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.”
Summary of Advisors
Citi and Wells Fargo Securities, LLC are serving as financial advisors and Weil, Gotshal & Manges LLP and Arnold & Porter Kaye Scholer LLP are serving as legal counsel to Kroger.
Goldman Sachs & Co. LLC and Credit Suisse are serving as financial advisors and Jenner & Block LLP is serving as corporate legal counsel and White & Case LLP and Debevoise & Plimpton LLP are serving as antitrust legal counsel to Albertsons Cos.
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