Albertsons’ strategic review is over. It ended late on October 13 when the Boise, ID-based retailer announced that it would merge with rival Kroger in a deal that both parties hope to finalize by early 2024.
Under the terms of the agreement, which would bring together the number one and number two pure-play supermarket retailers in the U.S. (Walmart/Sam’s Club will remain the overall retail food leader by a wide margin), Kroger would acquire all of the outstanding shares of Albertsons Companies, Inc. common and preferred stock (on an as-converted basis) for an estimated total consideration of $34.10 per share, implying a total enterprise value of approximately $24.6 billion, including the assumption of approximately $4.7 billion of Albertsons Cos. net debt. Subject to the outcome of a store divestiture process, the cash component of the $34.10 per share consideration may be reduced by the per share value of a newly created standalone public company – SpinCo – that Albertsons is prepared to spin off at closing in conjunction with the regulatory clearance process.
SpinCo would be spun-off to Albertsons Cos. shareholders immediately prior to the merger closing and would operate as a standalone public company. Kroger and Albertsons Cos. have agreed to work together to determine which stores would comprise SpinCo, as well as the pro forma capitalization of SpinCo. The establishment of SpinCo, which is estimated to comprise between 100 and 375 stores, would create a new, agile competitor with quality stores, experienced management, operational flexibility, a strong balance sheet, and focused allocation of capital and resources to provide customers with continued value and quality service and associates with ongoing compelling career opportunities, both companies said.
“We really see SpinCo as one option to be able to address those divestitures,” said CFO Gary Millerchip at Kroger’s conference call held on October 14. “We think it’s a really clean option in the sense that that could potentially be a faster way to package up the strategy around divestitures and from a Kroger perspective, it gives us confidence in the level of price that we achieve for those stores.”
However, trade analysts have pegged the number of stores that the Federal Trade Commission (FTC) might force the retailers to divest at a much higher figure. Of the nearly 5,000 stores in their combined portfolios, there are distinct overlaps in Arizona, California, Colorado, Illinois, Maryland, Oregon, Texas, Virginia, Washington and the District of Columbia.
In an interview with the Wall Street Journal, Kroger CEO and chairman Rodney McMullen said, “We would hope and expect that the (FTC) would understand this supports union jobs,” adding that the deal will also allow the companies to compete better with bigger food sellers by investing in keeping prices low, technology and other operations.
According to McMullen, the companies expect the full integration to take about four years Moreover, the combined entity will have a new name, with the companies’ current store names staying the same. Both McMullen and Millerchip will remain in their current positions when the transaction is completed.
Additionally, as part of the agreement, Albertsons will pay a special cash dividend of up to $4 billion to its shareholders. The cash component of the $34.10 per share consideration will be reduced by the per share amount of the special cash dividend, which is expected to be approximately $6.85 per share. This cash dividend will be payable on November 7, 2022, to shareholders of record as of the close of business on October 24, 2022.
The purchase price represents a premium of approximately 32.8 percent to the unaffected closing price of Albertsons Cos. common stock on October 12, 2022, and 29.7 percent to the 30-day volume-weighted average price.
Together, Albertsons Cos. and Kroger currently employ more than 710,000 associates and operate a total of 4,996 stores, 66 distribution centers, 52 manufacturing plants, 3,972 pharmacies and 2,015 fuel centers. By combining, the retail organizations would operate supermarkets in 48 states and the District of Columbia.
In an 8-K filing, Kroger said it plans to invest in lowering prices for customers and expects to reinvest approximately half a billion dollars of cost savings from synergies to reduce prices for customers. An incremental $1.3 billion will also be invested into Albertsons Cos. stores to enhance the customer experience. The Cincinnati-based chain also stated that it will build on recent investments in associate wages, training and benefits. Kroger has invested an incremental $1.2 billion in associate compensation and benefits since 2018. The combined company expects to invest $1 billion to continue raising associate wages and comprehensive benefits after close.
“We are bringing together two purpose-driven organizations to deliver superior value to customers, associates, communities and shareholders,” said McMullen. “Albertsons Cos. brings a complementary footprint and operates in several parts of the country with very few or no Kroger stores. This merger advances our commitment to build a more equitable and sustainable food system by expanding our footprint into new geographies to serve more of America with fresh and affordable food and accelerates our position as a more compelling alternative to larger and non-union competitors. As a combined entity, we will be better positioned to advance Kroger’s successful go-to-market strategy by providing an incredible seamless shopping experience, expanding ‘Our Brands’ portfolio, and delivering personalized value and savings. We’ll also be able to further enhance technology and innovation, promote healthier lifestyles, extend our health care and pharmacy network and grow our alternative profit businesses. We believe this transaction will lead to faster and more profitable growth and generate greater returns for our shareholders.”
McMullen, who has spent his entire 44-year career with Kroger and became CEO in 2014, added, “This transaction is a testament to the passion and commitment of both Albertsons Cos. and Kroger associates. Supporting and investing in our associates is foundational to both of our organizations and will continue to be a critical pillar of our success. Kroger has a track record of successful integrations that combine the strengths of each company while maintaining and enhancing each organizations’ distinctive banners and storied histories. As a combined company, we will build on our similar values to create a culture that embraces diversity, equity and inclusion and fosters a best-in-class associate experience by enabling, supporting and empowering our associates to unlock their full potential. Importantly, the merger secures union jobs and we will continue to work with local unions across America to serve our communities.”
Albertsons CEO Vivek Sankaran, the ex-PepsiCo executive who was named Albertsons chief executive in 2019, said: “We look forward to bringing the Albertsons Cos. and Kroger families together to create new and exciting career opportunities for associates. We have been on a transformational journey to evolve Albertsons Cos. into a modern and efficient omnichannel food and drug retailer focused on building deep and lasting relationships with our customers and communities. I am proud of what our 290,000 associates have accomplished, delivering top-tier performance while furthering our purpose to bring people together around the joys of food and to inspire well-being. Today’s announcement is a testament to their success. At Albertsons Cos., we are guided by an ambition to create customers for life. Together with Kroger, our combined iconic banners will be able to provide customers with even more value and greater access to fresh food and essential pharmacy services. Given the similarities in the culture and values at Kroger and Albertsons Cos., I am confident that the combination will also have a positive impact on our associates and the communities we are proud to serve. We look forward to working together with Kroger to capture the compelling opportunities ahead.”
Perhaps the happiest person involved with this deal is Chan Galbato, co-chairman of Albertsons (along with former Albertsons CEO Jim Donald). Galbato is also chief executive of Cerberus Operations, a unit of Cerberus Capital Management, the private equity firm that has been Albertsons’ prime investor since 2006 and remains the merchant’s biggest shareholder since Albertsons went public in 2020. Now, with a pathway to potentially divest its 15-year investment, Galbato stated: “Today’s announcement marks the successful outcome of the board-led review of strategic alternatives Albertsons Cos. announced in February. This transaction with Kroger provides substantial value to shareholders and exciting opportunities for associates to be part of a combined organization with the ability to better support the lives and health of millions of Americans.”
If the deal were to stand exactly as it exists when the merger was announced (doubtful because of anti-trust concerns), the two retailers would also become one of the largest CPG firms in the U.S. with more than $43 billion in own brands revenue; the companies currently produce more than 34,000 private label items from their combined 52 manufacturing plants. Additionally, the deal (if approved as is) would reach more than 85 million households nationally and revenue from “fresh” products alone would be nearly $60 billion annually.
On the digital side, Kroger and Albertsons operate 25 fulfillment centers which includes six Kroger automated fulfillment centers (Ocado sheds), 12 Kroger spokes and seven Albertsons automated micro-fulfillment centers. Kroger has at least 10 more automated fulfillments centers planned to open in the next three years.