The offer of $49.38 per share is 34 percent more than Harris Teeter’s closing price on Jan. 18, the day of the first media report that the chain was evaluating strategic alternatives, according to a statement today.
The buyout gives Kroger a chain that had revenue of $4.54 billion last year and 212 stores in states including North Carolina, Virginia and South Carolina. Kroger, which will finance the transaction with debt, said the combination will bring annual savings of $40 million to $60 million in the next three to four years.
“It strengthens Kroger’s position in the southeast, especially the quarter from Charlotte through Baltimore,” Charles Cerankosky, a Cleveland-based analyst at Northcoast Research, said in an interview. “Harris Teeter has a very strong quality and service profile. They have great value, but you don’t go there to buy cheap seafood, you go there to buy great seafood.”
Harris Teeter, based in Matthews, North Carolina, rose 1.5 percent to $49.26 at the close in New York. The shares have gained 28 percent this year. Cincinnati-based Kroger increased 2.7 percent to $37.15 and has advanced 43 percent this year.
Bank of America Corp. structured a loan to fund the transaction, Keith Dailey, a Kroger spokesman, said in an e-mail. The Charlotte, North Carolina-based bank is expected to ask lenders in Kroger’s existing credit pact to participate in the financing, he said.
Publix Super Markets Inc. (PUSH) and Royal Ahold NV may consider competing bids for Harris Teeter, Jason DeRise, an analyst at UBS AG in New York, said in a research note. Harris Teeter has “strong brand equity, has a loyal high-income shopper base, highly invested stores, no union, no debt, no pension issues,” he said.
While the agreement prohibits Harris Teeter from soliciting alternative bids, other companies may still come in with offers, Kroger Chief Financial Officer Mike Schlotman said during a webcast today. There are break-up fees if the deal doesn’t close, he said.
Representatives of Amsterdam-based Ahold and Lakeland, Florida-based Publix didn’t immediately return phone messages seeking comment.
Employee-owned Publix has more than 1,000 locations in Florida, Georgia, Alabama, South Carolina and Tennessee, according to its website. Kroger also will face competition from Delhaize Group SA (DELB)’s Food Lion brand and Wal-Mart Stores Inc. (WMT) in the region.
The deal would be the fourth-largest acquisition of a North American food retailer in the past 10 years, according to data compiled by Bloomberg. It’s also Kroger’s biggest takeover since 1998, when it bought Fred Meyer for more than $12 billion.
Kroger is paying 7.9 times earnings before interest, taxes, depreciation and amortization for Harris Teeter, the data show. That would be the highest multiple for a U.S. food retailer deal larger than $100 million since December 2007, when Pathmark Stores Inc. was acquired by Great Atlantic & Pacific Tea Co. for 9.9 times Ebitda, the data show.
Harris Teeter disclosed in February that it hired JPMorgan Chase & Co. to evaluate options after receiving advances from two private-equity firms. The grocer has reported six straight quarters of sales increases, and revenue is expected to increase 5.2 percent to $4.77 billion in the year ending in September, according to analysts’ estimates compiled by Bloomberg.
Kroger last month boosted its full-year adjusted profit forecast to as much as $2.80 a share after first-quarter sales increased. Revenue at the company, which last year introduced its own brand of organic foods called Simple Truth, has been helped by its private-label business.
Kroger had $247 million in cash and near-cash items as of May 25, according to a filing with the U.S. Securities and Exchange Commission. It had $7.53 billion in debt, excluding capital leases and financing obligations, the filing shows.
With Harris Teeter’s stores, Kroger will have 2,631 supermarkets and more than 368,300 employees, the companies said. There are no plan to close any stores, and Kroger plans to keep the Harris Teeter brand name.
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