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Kroger Co. (KR) announces $2.5 billion acquisition of Harris Teeter chain

Deal brings 212 new stores in Southeast

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CINCINNATI - The Kroger Co. announced Tuesday the $2.5 billion acquisition of Harris Teeter Supermarkets Inc., a deal that brings the Cincinnati-based grocery giant 212 additional stores in the Southeast and Mid-Atlantic regions.

"This is a financially and strategically compelling transaction and a unique opportunity for our shareholders and associates," said Kroger CEO David Dillon, in a press release announcing the deal."Harris Teeter is an exceptional company with a great brand, friendly and talented associates, and attractive store formats in vibrant markets run by a first-class management team.  They share our customer-centric approach to everything we do – from store format and merchandising to innovative loyalty programs."

This is Kroger's largest acquisition since the 1999 acquisition of the Fred Meyer chain, a deal that is widely viewed as having a transformational impact on Kroger.

In a conference call with analysts Tuesday, Kroger Chief Financial Officer Mike Schlotman said there is potential for transformational impacts with the Harris Teeter deal as well.

He said Kroger expects to learn from Harris Teeter's marketing of fresh foods and its "click & collect" program that lets shoppers order online and have their grocery bundle waiting for them at the store.

"It's an amazingly great fit, just like when we merged with Fred Meyer," Schlotman said. "This is very consistent with what we said we'd look for over time, a great management team, a customer-centric operating model, well-run stores and contiguous geography where we can leverage a lot of infrastructure."

Investors responded favorably to the idea Tuesday morning. Kroger shares were up 2.7 percent to $37.15 in late morning trades. Harris Teeter stock was up one percent to $49.20. The debt rating agency Fitch affirmed its BBB/F2 ratings on Kroger debt, saying those ratings " are supported by its industry leading sales growth and market share gains."

Kroger spokesman Keith Dailey said the acquisition will not have a big impact on local jobs, as Kroger has already expanded its local headquarters to prepare for future growth.

"As we've done with other banner mergers, a local headquarters will remain" in North Carolina, Dailey. "We'll certainly be looking to learn everything we can from Harris Teeter, a loved brand and successful operator ... we will certainly see some of the best of what they do influence our stores everywhere."

Harris Teeter generated revenue of $4.5 billion in the 2012 fiscal year. Its stores are located in vacation destinations, university towns and high-growth cities in eight states and the District of Columbia. It is the number one market share competitor in Charlotte, N.C. and the sixth-largest grocery chain in Washington, D.C. Kroger expects to achieve between $40 million and $40 million in annual cost savings within four years of completing the transaction, which it will finance with debt. Kroger will also assume $100 million in Harris Teeter debt with the transaction.

Despite taking on additional debt, Kroger said the deal would be accretive to earnings and it maintained its outlook in long-term earnings growth of 8 to 11 percent.

The deal is subject to approval by regulators and Harris Teeter shareholders.

Under terms of the deal, Kroger will pay $49.38 per share for all outstanding Harris Teeter shares. That is a 33.7 percent premium compared to Harris Teeter's closing price Jan. 18, which was the day before Harris Teeter announced it was considering strategic alternatives. It is a 2 percent premium over Monday's closing price for Harris Teeter.

Analysts have been speculating for months that Kroger was in the market for acquisitions, with Harris Teeter among its possible targets.

Retail consultant Mark Heckman said Kroger will be able to improve Harris Teeter's marketing approach by using its cutting-edge data tools developed in partnership with dunnhumby USA, while Kroger could learn from Harris Teeter's approach to customer service and attracting upscale customers.

"If you think about anyone else that's rumored for sale, nobody comes close to having having the size and store volumes that Harris Teeter had," said Heckman, a former Marsh Supermarkets executive now based in Bradenton, Fla. "Usually, you're buying a chain that's on the downward slide. Harris Teeter was not there. They were a going concern. So, it it the best deal they could have made? I can' think of a better one for Kroger."

Food marketing expert Richard George, a business professor at St. Joseph's University near Philadelphia, said the Harris Teeter acquisition could eventually serve as a platform for expansion into the Northeastern U.S. Experts have long wondered when Kroger would tackle the nation's biggest population centers. Professor George said the Harris Teeter deal allows Kroger to inch its way up the east coast with a niche player that can already operate profitably against larger rivals.

"There are riches in niches," George said. "It fills some holes in their markets

with a quality retailer. It can give Kroger some real legs in the Southeast. It's the kind of player that can give Publix a run for its money."




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