It looks as though the proposed merger between Kroger Co. and Fred Meyer Inc. is all over but the pouring of champagne. As was reported in last week's SN, the merger has been approved in two separate shareholders' meetings, as expected. Anything less than the overwhelming approval registered at the meetings would have come as a profound shock.
Now, it seems, there is little standing in the way of completion of the merger but for approval from the Federal Trade Commission. That's expected in upcoming weeks.
So, this is a good time to take a look at the deal to see how and why it was done, especially since the deal was put in motion at last year's Food Marketing Institute convention in Chicago. The same meeting convenes again next week.
Let's start with how the deal was done. According to information published in the Kroger-Fred Meyer proxy statement last month, and according to information developed by SN's Elliot Zwiebach, the deal got under way at last year's FMI when the retailers' top executives met for coffee and Fred Meyer's chief told Kroger's that he "might be interested in exploring a possible business combination transaction with Kroger."
Next, Fred Meyer officers let Kroger's financial adviser know about its interest in a deal and in September word came back that Kroger was interested too. During that same month the companies held discussions, confidentiality agreements were executed, boards met, due diligence proceeded, valuations were set and Oct. 18, 1998, an agreement was struck. The deal was announced the next day.
And it was quite a deal. As was reported in SN at the time, the companies would form a combination with a pro forma sales volume of $42.2 billion, which would allow Kroger to remain as the nation's largest supermarket chain. It had been thought for a while that the earlier-announced merger of Albertson's and American Stores Co. would produce the nation's largest food retailer.
That brings us to the issue of why such a deal was struck. One good incentive is that the merger is expected to yield annualized operational savings of some $225 million, starting three years hence, atop savings expected to be generated by mergers Fred Meyer completed earlier.
But there were a couple of unseen hands on the levers too. One was that of Wal-Mart Stores, now a huge force in food retailing. Counting food-sales revenue from its Supercenters, its conventional discount stores and its Sam's Clubs, Wal-Mart probably surpassed Kroger's pre-merger food-sales volume long ago. (There's more about Wal-Mart's plans to beef up its Sam's Clubs on Page 1 of this week's issue.)
Wal-Mart's moves, coupled with the earlier proposed Albertson's-American merger, brought about a sea change in the industry's outlook of what constitutes a sufficiently large company.
The other unseen hand was that of Safeway. Prior to the time the Kroger-Fred Meyer deal was announced, there was considerable speculation that Safeway might launch a buyout of Kroger. So the Kroger-Fred Meyer deal might be seen as a dose of a poison pill, intended to discourage the embrace of Safeway.