KROGER HOPES RAISED BY MERGER

ELLIOT ZWIEBACH

NEW YORK -- Kroger Co., Cincinnati, is "raising the bar" on anticipated financial performance in the wake of its pending merger with Fred Meyer, Inc., Portland, Ore., Joseph A. Pichler, chairman and chief executive officer, told an investors meeting here. "The primary driver of this transaction is growth and not consolidation," Pichler said at the Morgan Stanley Dean Witter Food & Drug Retail Conference.

Rodney McMullen, Kroger's chief financial officer, outlined at the conference a detailed timetable for the deal's progression and quantified the company's performance expectations.

He noted that Kroger is raising its earnings per share growth target from 15-17% a year up to 16-18%, "and we expect to achieve this new target in 2000," McMullen said. He said the combination of the two chains will result in "multiple drivers of earnings growth," including sales growth, economies of size and scale, realization of cost savings, deleveraging through strong free cash flow and new store growth in existing markets. Pichler said the merger will generate "tremendous economies of scale, with significantly greater purchasing power.

"Deriving strength from our combined size, we will be able to generate economies of scale from volume-based purchasing in a number of different areas from food, health and beauty products, general merchandise and seasonal items to supplies and equipment and even to raw materials," he said.

"We also will be able to leverage capital expenditures across a much broader store base, which is particularly significant in the areas of information technology and manufacturing/distribution -- areas that are becoming more and more important to increasing profitability."

Although growth, not consolidation, was the driving force behind the merger, "we do have significant cost-savings opportunities," Pichler said.

"We expect to achieve about $75 million in cost savings in the first 12 months and at least $225 million in annual cost savings within three years, in addition to the $155 million of synergies Fred Meyer had previously announced.

"By the time the merger closes, Fred Meyer will have achieved over $90 million of its projected synergy savings. There are also significant earnings synergies, which we have not attempted to quantify at this point.

"We expect to achieve these synergies from purchasing and merchandising efficiencies, manufacturing/distribution and in-market efficiencies and general and administrative savings."

McMullen said Kroger expects smooth sailing for the merger. He said the companies expect to file a proxy this month with the Securities and Exchange Commission, mail it to shareholders of both companies around year-end, hold shareholder meetings in January or February "and then close the transaction.

"The timetable is straightforward -- we don't anticipate any antitrust issues," McMullen said.

In his talk Pichler listed several ways he expects each company will benefit the other. "Fred Meyer will add value to Kroger by its proven ability to operate multidepartment stores and warehouse store formats," he said. "In addition, Fred Meyer brings Kroger leading market shares in some of the fastest-growing markets in the West."

Kroger will add value to Fred Meyer through its purchasing power and merchandising expertise in seasonal products and general-merchandise categories, Pichler said.

"And Kroger's powerful private-label brand is a growing and highly profitable segment of the business, and Fred Meyer will benefit greatly from Kroger's expertise in the private-label area," he added.

"Fred Meyer will also benefit from Kroger's experience in operating more than 1,100 pharmacies in food and drug combination stores. Together the combined company will have more than 1,300 pharmacies.

"In addition, the combination allows us to share best practices of both companies to optimize operating efficiency. For example, Fred Meyer's experience with multidepartment and warehouse formats will better enable the combined company to compete in an increasingly crowded marketplace."