THE DUBIOUS PROSPECTS FOR UNITING KROGER, ALBERTSONS

David Merrefield

Much speculation has surfaced in recent days that some kind of deal could be struck that would result in Kroger owning Albertsons. Let's take a look at what's being said, and contemplate how realistic the chatter is.

As is well known, Albertsons decided early last month to give it up and seek a buyer. Since that time, speculation has centered on the fact that such a decision is tantamount to chopping Albertsons to bits since it's highly unlikely that a buyer would or could obtain Albertsons in its present form, then simply continue to operate it. And, sure enough, as has been reported in these pages in recent weeks, a variety of venture-capital firms have been mentioned as possible buyers. Those buyers would be likely to plump up the best parts of Albertsons, then flip them to synergistic buyers.

Now, though, Kroger has been identified in publications such as the Wall Street Journal and the New York Times as a possible buyer. You'll see more about that on Page 1 of this week's SN. Perhaps needless to relate, neither Kroger nor Albertsons will speak to the matter, so let's figure it out for ourselves.

The idea that Kroger might be interested in Albertsons isn't preposterous on its face. After all, Kroger is no stranger to growth by acquisition. In 1999, for instance, Kroger merged with Fred Meyer Inc. in a $13 billion deal. That transaction handed Kroger the title of nation's largest conventional supermarket concern. A few smaller deals occurred at about that time too. Kroger proved to be a more successful integrator of acquired assets than some of its industry peers. In more recent years, Kroger's acquisition activity has become quiescent. Moreover, and perhaps more important to the present time, Kroger and Albertsons operate stores that are somewhat similar and maybe it's possible that Albertsons stores, rebannered as Kroger and operated by the superior management Kroger would bring, could become quite successful. Finally, it could be that Kroger sees a chance to become a truly national supermarket company, giving it closer parity to the kind of mass that Wal-Mart possesses, since the two supermarket companies would approach $100 billion in sales, on a pro forma basis.

Upon closer examination, though, none of this reasoning seems compelling enough to support the prediction that such a union is in the offing. One of the first hurdles is the complexity of the deal. Kroger would surely face regulatory issues with a buyout of that scope and might end up with a relatively small segment of Albertsons. That would saddle Kroger with the Herculean task of disposing of real-estate assets on a massive scale. What might make more sense for Kroger is a surgical approach. Of particular interest to Kroger might be the Shaw's and Acme chains Albertsons owns, together with some opportunistic buys of smaller store groups. That would bring Kroger into under-represented geography.

Viewed from the perspective of adding mass so Kroger can better compete with Wal-Mart, the deal also doesn't make much sense: That strategy was trotted out and tried several years ago. Wal-Mart just continued to add stores and several supermarket chains ended up with underperforming assets.