By Matilda Oculy and Filip Stoilov (University of Manchester), Sameer Jain and Micheal Akullo (Wharton School)
Photo: No Revisions (Unsplash)
Overview of the deal
Acquirer: The Kroger Company
Target: Albertsons Company
Implied Equity Value: $18.75bn
Total Transaction Size: $24.6bn
Closed date: Expected early 2024
Target advisor: Goldman Sachs & Co. LLC, Credit Suisse Group AG
Acquirer advisor: Citigroup Inc., Wells Fargo Securities, LLC
The Kroger Co. (NYSE: KR) has entered an agreement to acquire Albertsons Companies Inc. (NYSE: ACI) for $24.6 billion. Kroger plans to finance the transaction using cash on hand and proceeds from new debt financing, having in place $17.4 billion of fully committed bridge financing from Citi and Wells Fargo.
A merger of Kroger, the largest US grocer, and Albertsons will create a company with 710,000 employees and 4,996 stores across 48 of the 50 states in the US, helping it in competing with the likes of Amazon (Whole Foods), Walmart, and Costco in the cut-throat grocery industry, where reported operating margins are usually 5% at best.
The deal is expected to face severe scrutiny from antitrust authorities during times of high inflation, which have taken a tougher view under the current Democratic administration. In order to appease regulators, Kroger plans to invest approximately $500 million from cost savings to reduce consumer prices, in addition to spending $1 billion to boost wages.
“With 60% of grocery sales concentrated among just five national chains, a Kroger-Albertsons deal would squeeze consumers already struggling to afford food, crush workers fighting for fair wages, and destroy independent, community stores. This merger is a cut and dry case of monopoly power, and enforcers should block it.” - Sarah Miller, Executive Director of the American Economic Liberties Project
Company Details (Acquirer - The Kroger Company)
The Kroger Company operates as a retailer in the United States with nearly 2,800 stores, making it the largest grocer in the country. The company operates combination food and drug stores, multi-department stores, marketplace stores, and price impact warehouses.
Founded in 1883, headquartered in Cincinnati, Ohio/United States
CEO: Rodney McMullen
Number of employees: 465,000
Market Cap: $33.5bn (as of 30/10/2022)
EV: $52.7bn
LTM Revenue: $144.2bn
LTM EBITDA: $7.3bn
LTM EV/Revenue: 0.4x
LTM EV/EBITDA: 6.5x
Company Details (Albertsons Companies, Inc.)
Albertsons is one of the largest food and drug retailers in the United States, operating over 2,276 stores across 34 states through various subsidiaries. These subsidiaries offer a range of grocery products, general merchandise, health and beauty care products, pharmacy, and fuel. Albertsons also manufactures and processes food products available for sale in stores.
Founded in 1939, headquartered in Boise, Idaho/United States
CEO: Vivek Sankaran
Number of employees: 290,000
Market Cap: $10.9bn (as of 30/10/2022)
EV: $22.2bn
LTM Revenue: $75.3bn
LTM EBITDA: $4.3bn
LTM EV/Revenue: 0.3x
LTM EV/EBITDA: 5.2x
Projections and Assumptions
Short-term consequences
The proposed merger of the two largest supermarket operators, Kroger and Albertsons, is set to create a giant in the grocery retail industry in the US, second only to Walmart. The combined entity would employ 710,000 employees, operate 4,996 stores and 66 distribution centres nationwide, with great geographical expansion potential in the West and the Mountain regions for Kroger. The merged entity would further reach 11% of market share in consumer packaged goods and a total of 85 million households, which represents two in three US shoppers across 48 states. Kroger’s customer base will therefore widely expand, especially so in urban areas, where customers tend to shop more sustainably and who would be interested in Kroger’s expanding premium, organic and natural products. With a combined 3,972 pharmacies, Kroger would also become the fifth largest retail pharmacy in the country. The deal is therefore set to create a nationwide retail giant with extensive coverage and consumer market share.
In terms of financial data, Kroger expects to create value and boost its returns, with current combined entities generating $210bn in revenue. Cost synergies estimated at $1 billion per annum for the first four years would arise through the optimization of manufacturing processes and distribution networks, and investments in technology. A divestiture of Albertsons, SpinCo, comprising between 100 and 375 stores is also to be expected.
However, this supermarket consolidation deal is under great scrutiny, as antitrust regulations investigate the potential impact on consumers, at a time when inflation is soaring.
Long-term Upsides
The successful closing of this deal would result in the creation of a grocer with a market share rivalling Walmart, which saw $218bn in grocery sales last year, compared to a combined annual revenue of $209bn for Kroger and Albertsons. Kroger’s management cites the value of Albertsons’ complementary footprint, as it operates stores in parts of the US where Kroger has a limited or nonexistent foothold. In an effort to surpass regulatory hurdles, the two companies have announced plans to divest some overlapping stores, and J.P. Morgan analysts estimate the combined entity will subsequently command 13% of food-retail sales in the US, short of Walmart’s 22%. A strong union presence at many of the roughly 400 overlapping stores has obscured the emergence of a clear buyer.
From an operational standpoint, the rise of a strong No. 2 in the grocery space would give the combined company improved leverage in negotiations with vendors over cost increases. Management plans to direct $500 million in anticipated cost savings toward lowering customer prices, and another $1.3 billion toward in-store customer experience improvements, though regulators remain sceptical about the impact of the merger on consumers already struggling with inflated food and grocery prices. Supply chain integration will shorten the time required to get products onto store shelves. A pooling of customer-related data would allow the combined entity to sharpen its approach to marketing and promotion. Even with a potential recession on the horizon, grocers continue to ride the wave of a broad boost brought about by the pandemic. As inflation reaches a tipping point and consumer spending ultimately pulls back, the cost synergies attached to this deal - along with management’s rhetoric surrounding consumer-friendly pricing - will be put to the test.
Risks and Uncertainties
Antitrust scrutiny is a salient risk affecting the potential success of Kroger and Albertsons’ proposed merger. The two companies operate in many of the same areas and may be forced to divest overlapping stores, with Wells Fargo analysts estimating that 25% of Albertsons’ store base may have to be sold. This poses the question of who would be open to buying unionised grocery stores and at what price. Furthermore, store closures as a result of overlapping operations may lead to many communities not having a grocer, leading to more US food deserts. Prices are another factor to consider, especially in this consumer-facing industry. Price hikes have followed grocery mergers in the past due to the loss of store brands, which tend to be more affordable than other brands. Mergers lead to fewer options for consumers, which may be of particular concern as only a handful of companies already control a large portion of the market share for groceries.
Senators Elizabeth Warren and Bernie Sanders wrote to the FTC opposing the proposed merger, citing Kroger and Albertsons' alleged history of price gouging and unfair labour practices as a risk to consumers and workers. Additionally, the deal would bolster the merged entities' market share, giving them more power to stifle competition. Principally, smaller local and regional grocers would suffer the most.
It is clear that despite its upsides, the merger will face great regulatory scrutiny as such a deal may have profound impacts on consumers, workers, and competitors.
"We are bringing together two purpose-driven organisations to deliver superior value to customers, associates, communities and shareholders." - said Rodney McMullen, Kroger Chairman and Chief Executive Officer