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    Kroger Acquires Harris Teeter

    Months of speculation on the fate of Harris Teeter’s new owner was put to rest today with news that The Kroger Co. will acquire the Matthews, N.C.-based regional supermarket chain in a transaction valued at approximately $2.5 billion, under which Kroger will purchase all outstanding shares of Harris Teeter for $49.38 per share in cash.

    The transaction price represents a premium of 33.7 percent to the Harris Teeter closing share price on Jan. 18, 2013, the day of the first media report that Harris Teeter was evaluating strategic alternatives.

    Terms of the agreement were approved by the boards of directors of both companies, the combination of which will include 2,631 supermarkets and over 368,300 associates across 34 states and the District of Columbia.

    The deal with Harris Teeter, which will keep intact its banner, management teams, new store growth plan and headquarters base, distribution and manufacturing facilities in North Carolina, gives the nation’s largest supermarket retailer an exceptional brand and complementary base of 212 stores in the southeast and mid-Atlantic markets, including Washington, D.C. The stores are located primarily in high-growth markets, vacation destinations and university communities in North Carolina, Virginia, South Carolina, Maryland, Tennessee, Delaware, Florida, Georgia and the District of Columbia.

    Harris Teeter, which also operates grocery, frozen and perishable distribution centers in Greensboro and Indian Trail, N.C., as well as a dairy facility in High Point, N.C., had revenues of approximately $4.5 billion for fiscal year 2012.

    “Harris Teeter is an exceptional company with a great brand, friendly and talented associates, and attractive store formats in vibrant markets run by a first-class management team,” said David B. Dillon, Kroger’s chairman/CEO. “They share our customer-centric approach to everything we do – from store format and merchandising to innovative loyalty programs. This is a financially and strategically compelling transaction and a unique opportunity for our shareholders and associates. We look forward to bringing together the best of Kroger and Harris Teeter while continuing to operate and grow the Harris Teeter brands. Together, we can continue to deepen our connections with customers across all of our markets.”

    Noting Harris Teeter’s “long track record of creating shareholder value,” Thomas W. Dickson, chairman and CEO, said the deal “is the culmination of…efforts over many years. We are excited about becoming part of The Kroger Co., one of the best food retailers in the U.S., while maintaining the Harris Teeter banner, our management teams, our new store growth plan, our distribution and manufacturing facilities in North Carolina as well as our headquarters in Matthews, NC. As part of Kroger, Harris Teeter will be well equipped to continue to provide our customers outstanding quality and customer service as well as excellent value in an increasingly competitive market.”

    Kroger will finance the transaction with debt, and intends to assume Harris Teeter’s outstanding debt of approximately $100 million. Consistent with both companies’ shared long-term commitment to returning cash to shareholders, Kroger further intends to continue its quarterly dividend and share repurchase program while managing free cash flow to reduce the leverage taken on from this merger. Although the ratio will increase at the time the merger closes, Kroger expects to allocate some free cash flow to debt reduction to re-establish and maintain its 2.00-2.20 net debt to EBITDA ratio over the next 18-24 months. Kroger is committed to maintaining its current investment grade credit rating.

    Including the effect of allocating some free cash flow to debt reduction, Kroger expects net accretion to earnings per diluted share in the range of $0.06-$0.09 in the first full year after the merger, excluding transition and transaction expenses, as well as maintaining its current 8 percent to 11 percent long-term net earnings per share growth rate off of this higher earnings base.

    In the realm of anticipated cost savings resulting from the deal, Kroger expects to net approximately $40 to $50 million over the next three to four years, much of which is expected to come from the benefits of Kroger’s scale and record of achieving synergy goals.

    Following closing, Harris Teeter will continue to operate its stores as a subsidiary of The Kroger Co. and will continue to be led by key members of Harris Teeter’s senior management team. There are no plans to close stores, and associates will continue to have employment opportunities with both companies. Kroger headquarters will remain in Cincinnati and Harris Teeter will keep its Matthews, N.C., headquarters.

    BofA Merrill Lynch is acting as exclusive financial advisor to Kroger and Arnold & Porter, LLP is acting as legal advisor to Kroger. J.P. Morgan Securities LLC is acting as exclusive financial advisor to Harris Teeter and provided a fairness opinion to its Board of Directors. McGuireWoods LLP is acting as legal advisor to Harris Teeter.

    PG will provide continuing coverage of this important story with updates as they become available.
     

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