Kroger, Albertsons to merge in $24.6 billion deal

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After news of negotiations leaked out yesterday, The Kroger Co. and Albertsons Cos. today unveiled a definitive agreement to merge in a deal valued at $24.6 billion.

Under the deal, Cincinnati-based Kroger plans to acquire all outstanding shares of Albertsons common and preferred stock for about $34.10 per share. The total enterprise value of the transaction includes the assumption of roughly $4.7 billion of Albertsons’ net debt. Also as part of the transaction, Albertsons is slated to pay a special cash dividend of up to $4 billion, or about $6.85 per share, to its shareholders. The cash portion of the $34.10 per-share consideration will be reduced by the share amount of the special dividend, due to be payable on Nov. 7.

The deal will join the first- (Kroger) and second-largest (Albertsons) U.S. supermarket retailers, creating a national company with 4,996 stores, 66 distribution centers, 52 manufacturing plants, 2,015 fuel centers and more than 710,000 associates across 48 states and the District of Columbia. The merged entity also would be the fifth-largest retail pharmacy operator, with 3,972 pharmacy locations.

Kroger's Rodney McMullen, who would serve as chairman and CEO of the merged company, said Albertsons will bring a complementary store footprint and 'operates in several parts of the country with very few or no Kroger stores.'

“We are bringing together two purpose-driven organizations to deliver superior value to customers, associates, communities and shareholders,” Kroger Chairman and CEO Rodney McMullen said in a statement. “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.

Related:Analysis: Would Kroger-Albertsons merger pass muster with regulators?

“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 [private-label] portfolio and delivering personalized value and savings,” McMullen explained. “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.”

Spin-off planned for store divestitures

To help clear the way for regulatory approval of the merger, Kroger and Boise, Idaho-based Albertsons plan to form an Albertsons Cos. subsidiary dubbed SpinCo that would be spun off to Albertsons shareholders immediately before the transaction’s closing and operate as a stand-alone public company. Kroger and Albertsons said store divestitures are expected, and the retailers would work together to determine which locations would become part of SpinCo, as well as the entity’s pro forma capitalization.

Related:Kroger, Albertsons reportedly in merger talks

They estimated that SpinCo would comprise 100 to 375 stores and said it would “create a new, agile competitor with quality stores, experienced management, operational flexibility, a strong balance sheet, and focused allocation of capital and resources to provide customers with continued value and quality service and associates with ongoing compelling career opportunities.”

Albertsons Cos. CEO Vivek Sankaran said the combined company will be able to deliver 'even more value and greater access to fresh food and essential pharmacy services.'

Kroger’s McMullen tabbed as CEO

Plans call for McMullen to serve as chairman and CEO and Kroger Chief Financial Officer Gary Millerchip as CFO of the merged Kroger-Albertsons company.

Kroger and Albertsons said no further action by Albertsons Cos.’ shareholders will be needed or solicited in connection with the merger. The companies said Albertsons Cos. shareholders holding more than a majority of the retailer’s common stock have provided or committed to delivering a written consent approving the transaction no later than Oct. 18, while shareholders holding more than a majority of Albertsons’ preferred stock have already approved the transaction.

The merger transaction is slated to close in early 2024, pending regulatory approval and other customary closing conditions, including clearance under the Hart-Scott-Rodino Antitrust Improvements Act.

“We have been on a transformational journey to evolve Albertsons Cos. into a modern and efficient omnichannel food and drug retailer focused on building deep and lasting relationships with our customers and communities. I am proud of what our 290,000 associates have accomplished, delivering top-tier performance while furthering our purpose to bring people together around the joys of food and to inspire well-being. Today's announcement is a testament to their success,” stated Albertsons Cos. CEO Vivek Sankaran.

“Together with Kroger, our combined iconic banners will be able to provide customers with even more value and greater access to fresh food and essential pharmacy services,” Sankaran noted. “Given the similarities in the culture and values at Kroger and Albertsons Cos., I am confident that the combination will also have a positive impact on our associates and the communities we are proud to serve. We look forward to working together with Kroger to capture the compelling opportunities ahead.”

Kroger expects accelerated strategic plan

Kroger noted that the merger with Albertsons would spur its strategy of “Leading with Fresh, Accelerating with Digital,” driven by strength in fresh food departments, private label (Our Brands), personalization and the development of a seamless omnichannel shopping experience. The added scale from combining the nation’s two biggest supermarket operators will expand Kroger’s network of stores and distribution centers, fuel and pharmacy businesses, and base of suppliers.

In stores, the blending of Kroger’s “Fresh for Everyone” and Albertsons ‘ “Customers for Life” strategies stands to bring a broader assortment of fresh products with extended shelf lives and deeper market penetration, according to Kroger. To that end, Kroger said its End-to-End Fresh initiative will optimize the combined supply chain to get products from “field to table” and to more customers faster, providing a higher level of freshness.

Kroger said the merger will step up its 'Leading with Fresh, Accelerating with Digital' game plan, including an expanded assortment of fresh foods.

Customers, too, will find a bigger selection of private-label products with the joining of Kroger’s Our Brands and Albertsons’ Own Brands portfolios. The combined offering will span some 34,000 items, across premium, natural and organic, and opening-price-point brands. More own-brand innovation also is in store, as the companies combine their private-label teams and leverage a larger manufacturing footprint and expanded national reach, in turn raising quality and efficiency, the retailers said.

Amid elevated grocery pricing, Kroger said that the merged company also would invest in lower prices for shoppers. As with past transactions, the retailer noted, plans call for a half-billion dollars of cost savings from merger synergies to be reinvested in reduced pricing at the shelf. An incremental $1.3 billion also is earmarked for investment to enhance the customer experience in Albertsons Cos. stores.

Improved multichannel experience

The combined company, Kroger said, will be able to generate sharper customer insights and offer more personalized experiences. With a customer base of about 85 million households, Kroger-Albertsons will have “one of the most comprehensive” first-party data repositories in the food and retail sectors and be able to leverage Kroger’s 84.51° data science arm to develop “an even more compelling” retail loyalty program, with more relevant recommendations and personalized promotions, the companies said.

By melding Kroger and Albertsons’ technology, infrastructure, and digital and delivery service providers into one seamless ecosystem, the merged company will be able to offer customers a more personalized and convenient omnichannel experience, Kroger and Albertsons said. That includes in-store shopping, enhanced pickup capabilities, faster delivery times, and more capabilities to serve customers “anything, anytime, anywhere,” they noted. This capability will stem from shared operational learnings across both large and small store formats, a more extensive and efficient distribution network of customer fulfillment facilities and capabilities, and an expanded pickup footprint. 

Albertsons and Kroger said they aim to combine their technology, infrastructure, and digital and delivery service providers into 'one seamless ecosystem.'

The expanded national audience of 85 million households also better positions the combined company to drive growth in alternative profit businesses such as retail media, Kroger Personal Finance and customer insights for CPG partners, according to Kroger. With an expanded footprint and the addition of the recently launched Albertsons Cos. Media Collective, Kroger said it will bolster its services to media clients and provide more targeted, sophisticated solutions. The combined capabilities are expected to power the growth of Kroger’s higher-margin revenue streams by extending the portfolio of solutions.

Leveraging benefits of scale

Within the first four years of combined operations, the merged company expects to achieve about $1 billion of annual run-rate synergies net of divestitures, with roughly 50% achieved within the first two years following close, Kroger and Albertsons said. These benefits will come mainly from improved sourcing, optimization of manufacturing and distribution networks, and technology investment amplification opportunities.

Kroger noted that it also will augment its recent investments in associate wages, training and benefits. The retailer said it has invested an incremental $1.2 billion in associate compensation and benefits since 2018, and the merged company expects to invest $1 billion to continue raising associate wages and comprehensive benefits after the transaction closes.

“Importantly, the merger secures union jobs, and we will continue to work with local unions across America to serve our communities,” McMullen stated. “We look forward to bringing the Albertsons Cos. and Kroger families together to create new and exciting career opportunities for associates.”

Kroger brings an omnichannel online grocery delivery network that's still being built out across the country under a four-year-old partnership with Ocado Group.

Combined, Kroger and Albertsons generated approximately $210 billion in revenue, $3.3 billion in net earnings and $11.6 billion of adjusted EBITDA in fiscal-year 2021. The retailers project that the merged company will deliver total shareholder returns “well above” Kroger’s stand-alone TSR model of 8% to 11%.

“The combined company will be one of the largest food retailers in the country and a more formidable competitor to its largest competitor Walmart,” Arun Sundaram, senior equity analyst at CFRA Research, said in an email. “With a combined customer base of 85 million households, Kroger will now have one of the most comprehensive first-party data repositories in the food retail space, which should allow the company to develop a very strong loyalty program and deliver more relevant and personalized promotions to its customers. With the savings realized from cost synergies, Kroger should be able to reduce food prices, raise associate wages, and enhance the overall shopping experience for its customers over time.

“We anticipate Kroger obtaining the necessary regulatory approvals, as Albertsons will divest an estimated 100 to 375 stores prior to the merger, likely in markets where both companies have significant store overlap,” Sundaram added. “Additionally, Kroger will keep its No. 2 market share position behind Walmart. Overall, we view this merger as a win-win for both Kroger and Albertsons shareholders.”

For Albertsons, the merger deal culminates a “review of potential strategic alternatives" that the company’s board of directors initiated more than seven months ago. The effort reflected Albertsons’ concern, in large part, that its business was being undervalued versus those of competitors. Albertsons, previously owned by an investment group led by private-equity firm Cerberus Capital Management, went public in June 2020 following an initial public offering. Cerberus still holds an approximately 29% stake in the grocer retailer.

“Today’s announcement marks the successful outcome of the board-led review of strategic alternatives Albertsons Cos. announced in February,” Chan Galbato, co-chair of the Albertsons board and CEO of Cerberus Operations, said in a statement. “This transaction with Kroger provides substantial value to shareholders and exciting opportunities for associates to be part of a combined organization with the ability to better support the lives and health of millions of Americans.”