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Kroger execs: Asset sale to C&S ‘checks off the boxes’ for Albertsons merger approval
Wall Street sees divestiture deal as positive step, while UFCW remains cautious about potential impact on workers.
11 Min Read
Kroger CEO Rodney McMullen and CFO Gary Millerchip said the C&S transaction boosts their confidence that the Albertsons acquisition will close in early 2024. / Photos: Shutterstock
The Kroger Co.’s top executives think the supermarket giant has done its due diligence for regulatory approval of its pending acquisition of Albertsons Cos. through the $1.9 billion divestiture deal with C&S Wholesale Grocers announced on Friday.
When unveiling the $24.6 billion merger agreement with Albertsons last fall, Cincinnati-based Kroger said the transaction wouldn’t result in store closings or job cuts as the companies worked with the Federal Trade Commission on antitrust clearance. Kroger Chairman and CEO Rodney McMullen also has reiterated in media interviews and earnings calls since then that potential suitors for divested stores would need to be financially sound, experienced grocery operators and committed to a unionized workforce at the locations sold.
In a conference call Friday on Kroger’s second-quarter results, he told analysts that those conditions have been met in the multi-pronged transaction with C&S.
“We feel incredibly excited about C&S and what they bring to the table. They’ll be an incredibly fierce competitor,” McMullen said in the call.
“If you look at the commitments that we made in October last year when we announced the [Albertsons] transaction, and if you look at the stores we’re selling to C&S, we’ve been able to check off every one of those boxes. And we’re also including eight distribution centers, two regional offices and five private-label brands in addition to the stores. So this is going to be an amazing, great business for C&S that they’ll be able to operate and grow from an incredible base with talented people. We think we’ve addressed all the things and questions the FTC would have. We also found a buyer that would recognize the labor contracts as well. So we feel like all those things that you would have on a check-off list, we’ve met all of those and exceeded them as well.” (Call transcript provided by AlphaSense.)
Source: The Kroger Co., divestiture plan investor presentation
Under the divestiture transaction, Kroger-Albertsons plans to sell 413 stores, eight distribution centers and two offices in 17 states and the District of Columbia to C&S. The deal—due to close in early 2024, when Kroger finalizes the Albertsons acquisition—also includes the sale of Albertsons’ Debi Lilly Design, Primo Taglio, Open Nature, ReadyMeals and Waterfront Bistro own brands to C&S.
Keene, New Hampshire-based C&S also would acquire Kroger’s QFC retail banner in the Pacific Northwest, upscale Mariano’s brand in Illinois and Albertsons’ Carrs chain in Alaska, along with exclusive licensing rights to the Albertsons brand in Arizona, California, Colorado and Wyoming.
Kroger and Albertsons had estimated they would need to shed 100 to 375 stores for their merger transaction to earn approval from the FTC. The deal also had set a 650-store ceiling on divestitures, at which point they could revisit the agreement. For the divestitures, stores would be sold directly to other operators and/or through a new spinoff company dubbed SpinCo.
With the sale to C&S, the SpinCo option is no longer need, McMullen noted in the Q2 call. The divestiture agreement, too, could require C&S to buy another 237 stores based on Kroger and Albertsons securing FTC and other regulatory approval for their merger, which would be the nation’s largest ever between supermarket companies.
“We feel very good about the plan. We think the plan is very well-thought-through,” Kroger Chief Financial Officer Gary Millerchip said in the call.
“We spent almost 10 months now really working with different potential buyers and pulling together both the plan around how we make sure we find the right buyer that will be able to continue to grow those stores successfully in the future, and putting an overall structure around the number of stores that provide the right concentration for a successful model going forward and provide all the infrastructure to support it,” Millerchip explained. “We did include in the agreement, when we announced the deal originally, that our agreement with Albertsons has a sort of a break point, if you like, of where Kroger would have the option to not move forward with the transaction if we reach 650 stores as potential divestitures. So what you saw in the [C&S] announcement was that we essentially wanted to make sure we align the agreements between Albertsons, C&S and ourselves to make sure that there is a commitment to be able to flex up if that was needed.”
Kroger's McMullen said the sale to C&S "includes more than just a collection of stores but also a robust operational infrastructure." / Photo courtesy of Kroger
According to McMullen, Kroger and Albertsons conducted a “robust and thoughtful [due] diligence process” and gauged “dozens of buyers,” ranging from private and public, to union and non-union, and to domestic and international companies. That led to C&S, “a well-qualified buyer that meets all the criteria necessary to complete our transaction,” he said.
The largest privately held U.S. grocery distributor, C&S totals about $30 billion in revenue annually and supplies over 7,500 independent supermarkets, chain stores, military bases and institutions, offering more than 100,000 products via 33 distribution centers/warehouses in 15 states across the country. On the retail side, C&S operates 160 stores, mostly under the Piggly Wiggly banner in the Midwest and Carolinas but also including 11 Grand Union stores in upstate New York and Vermont. Overall, C&S licenses the Piggly Wiggly banner to roughly 500 independent supermarkets in 17 states via its Piggly Wiggly LLC subsidiary.
C&S’ existing facilities and personnel will be supplemented by another eight distribution centers, two more regional headquarters plus “expert district, division and functional associates” along with the 413 stores to be acquired, Kroger reported.
“To help support the immediate and long-term success of the divested business, the divestiture plan includes more than just a collection of stores but also a robust operational infrastructure,” said McMullen. “Included in the sale are centrally located distribution facilities, regional headquarters and strong teams with deep industry expertise.”
Wall Street gives thumbs-up to divestiture plan
Grocery industry analysts described the deal with C&S as a lift for Kroger and Albertsons’ pending $24.6 billion merger, yet they noted that the FTC’s response remains uncertain.
“While this is just a plan and not final approval, we think it gives investors some confidence of this deal going through, especially as it involves divesting 400-plus stores (and possibly another 200) relative to the initial SpinCo plan of 100 to 375,” Jefferies analyst Rob Dickerson wrote in a research note on Friday.
The asset mix slated to be acquired by C&S—including hundreds of stores (about half Kroger, half Albertsons), DCs and offices across geographies as well as private brands—to a large, strong and veteran grocery company should sit well with the FTC, analysts noted.
The nation's largest privately held grocery distributor, C&S Wholesale Grocers would gain another eight distribution centers and two regional HQs. / Photo courtesy of C&S
“This news should be seen as an incremental positive, as C&S has both the experience and capital necessary to operate a grocery business and intends to honor existing labor agreements,” CFRA Research analyst Arun Sundaram said in a Friday research note.
Both Sundaram and Dickerson, however, raised questions about the valuation of the stores to be sold to C&S.
“While Kroger didn’t proceed with the formation of a separate stand-alone company (i.e. SpinCo) for the divested stores, the valuation multiple of these divested stores does seem to fall short of the 3x four-wall EBITDA multiple initially shared last October,” according to Sundaram. “We estimate the EV/EBITDA multiple to be 2.5x, which may raise questions or concerns regarding the profitability or viability of these divested stores.”
Likewise, Dickerson observed, “The year-one accretive / dilutive nature of the deal hinges on profitability profile of the divested stores relative to what will be kept, how much reinvestment is needed on price to move volumes in a consumer-challenged environment, and how quickly the business can reduce debt/interest expense. By our math and estimates, assuming 413 stores are divested with about half coming from each of Kroger and Albertsons, and assuming those stores have the same sales/margin profiles as their total respective companies, we estimate the pro-forma entity could post $5.38 EPS in fiscal year 2023 and use that as our base earnings power.
“News of the store divestment plan is a plus,” he added, “but there are still many unknowns associated with this deal to gauge the full impact it can have on the business.”
With the divestiture to C&S, Kroger’s McMullen and Millerchip remained bullish on the merger’s prospects to be completed as planned.
“This key step keeps us on track to close our proposed merger with Albertsons in early 2024,” McMullen said in the call. “In terms of integration planning, we are progressing well. And it's been exciting to see the talent from both the Kroger and Albertsons teams work together to plan on how the combined company will deliver an even stronger omnichannel food retail experience post-close,” he added.
Millerchip commented to analysts, “We believe it’s a good solution for our shareholders because, as Rodney mentioned, it actually solves for all the elements that are important to a divestiture plan.”
Since announcing the merger agreement with Albertsons last fall, Kroger has said no jobs would be lost with the transaction. / Photo courtesy of Kroger
UFCW scrutinizes divestiture plan
In early May, United Food and Commercial Workers (UFCW) announced its official opposition to the Kroger-Albertsons merger, followed about a month later by the International Brotherhood of Teamsters. UFCW said at the time that it would reject merger deals that “pose a threat to essential workers, their families and the communities they serve.”
According to UFCW International President Marc Perrone, the 1.3 million-member union will take a close look at the C&S divestiture agreement and weigh its potential impact on the workers it represents.
“With respect to the Kroger-Albertsons merger, and the latest announcement of the proposed purchase of 413 Kroger and Albertsons stores by C&S Wholesale Grocers, the UFCW’s highest priority will always be to defend and protect our hard-working union members. Our team of experts will be analyzing every aspect of this proposed deal and will assess the impact—positive or negative—that it may have on our UFCW members, the customers we serve and the communities we call home,” Perrone said in a statement on Friday.
“As we have made clear since the day the proposed Kroger-Albertsons merger was announced, our focus is—and will always be—on a stable and long-term solution that protects our members’ wages, benefits and pensions,” he noted.
Perrone emphasized that no proposed merger or divestiture of stores should endanger or threaten “the vital role” played by their workers, and UFCW will “review this latest merger development fairly and objectively.”
“As we have always said, we seek a transparent relationship with the companies throughout this process,” he added, “and continue to remain open to any dialogue or document review with either Kroger or C&S Wholesale Grocers.”
Still, a coalition of presidents from seven UFCW local unions—John Nunes of UFCW Local 5, Kim Cordova of Local 7, Andrea Zinder of Local 324, Mark Federici of Local 400, Kathy Finn of Local 770, Greg Frazier of Local 1564 and Faye Guenther of Local 3000—on Friday released a statement saying they don’t expect the C&S deal to alleviate their competitive concerns about Kroger’s planned acquisition of Albertsons.
“We have raised alarms about the proposed Kroger/Albertsons merger from the very beginning—from threats of store closures, higher prices and reduced competition, the harm to unionized workers’ ability to negotiate strong contracts, as well as the negative ripple effects lower union density would have on workers throughout the grocery industry. News of a deal with C&S to buy hundreds of stores as part of the proposed merger in no way reduces those alarms. Indeed in many respects this announcement raises the level of concern for our members,” the union local presidents stated.
In particular, they voiced concern about the longer-term viability of divested stores, citing the failed store sale to Haggen as part of the antitrust approval process for the 2015 Albertsons-Safeway merger.
“Workers and shoppers have been seriously harmed by large-scale sell-offs in the past, orchestrated as part of a potential merger. It was only in 2015 that private equity-owned Haggen acquired a large number of stores as part of a divestiture scheme to appease antitrust regulators in the Albertsons/Safeway merger,” the union presidents said. “It took less than a year for that company to go bankrupt and for Albertsons to pick up the very same stores it had divested for a fraction of what Haggen paid only months before, thus undoing the remedy to resolve antitrust concerns. Moreover, thousands of workers lost their jobs and were forced to start over. Today’s announcement of a nearly identical divestiture scheme is a troubling sign that history could repeat itself.”
But in Kroger’s Q2 call, McMullen highlighted C&S’ standing as a big grocery industry player with a solid retail track record and strong company fundamentals.
“C&S is led by an experienced management team, with the financial strength to complete this transaction and invest in the business for future growth. The company’s comprehensive operational infrastructure and purchasing efficiency positions them to successfully operate in today’s competitive environment. The divestiture plan ensures no stores will close as a result of the merger and that all frontline associates will remain employed,” he told analysts in the call. “C&S has also committed to honoring all collective bargaining agreements, which include industry-leading benefits and further investing for growth. Importantly, the company also brings experience with the merger process, having been an FTC-approved divestiture buyer in prior grocery transactions, with a strong record of successfully integrating union employees and collective bargaining agreements.”
