Kroger agrees to buy Harris Teeter for $2.5 billion

7/9/2013

CHICAGO — Kroger Co., the largest U.S. grocery- store chain, has agreed to buy Harris Teeter Supermarkets Inc. for $2.5 billion in cash to bolster its presence in the southeast part of the country.

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 Tuesday.

The buyout gives Kroger control of a chain that had revenue of $4.54 billion last year and 212 stores in southeastern 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.”

The deal will 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, higher than the median of 7 times for deals of more than $100 million in the industry over the past 10 years.

Harris Teeter disclosed in February that it hired JPMorgan Chase 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.