CINCINNATI - The Kroger Co. stands to lose market share leadership in Los Angeles and fall from second to third place in Dallas if private equity firm Cerberus Capital Management completes its announced acquisition of the Safeway grocery chain, a Deutsche Bank analyst predicted recently.
"A Cerberus and Safeway combination would create a powerful new coast-to-coast grocer that would rival Kroger in some respects," wrote analyst Karen Short.
The companies announced a deal worth more than $9 billion Thursday. It would combine 1,325 Safeway stores with the 1,100 already operated by Cerberus – including Albertson’s, Jewel-Osco, Lucky and Shaw’s.
The deal is subject to approval by shareholders and federal regulators. It is said to be worth $40 per share to owners of Safeway stock, including $32.50 in cash. Safeway stock declined more than 3 percent to $38.14 in extended trading after the deal was announced. At least two law firms have announced investigations into possible shareholder lawsuits over the deal.
Various media reports have indicated that Kroger is interested in acquiring all or part of Safeway, but company officials haven’t confirmed those reports. The deal with Cerberus allows Safeway to review other offers and Cerberus could sell Safeway stores post acquisition. Kroger executives had nothing to say about Safeway in the company’s fourth quarter earnings call Wednesday.
Chief Financial Officer Mike Schlotman said it “just doesn’t do us any good to comment” on what he called “the elephant in the room question.”
Schlotman offered some hints about Kroger’s acquisition potential, saying the company is committed to restoring its debt ratios to its one-year-ago levels, prior to the $2.5 billion acquisition of Harris Teeter Stores Inc.
Chief Operating Officer Michael Ellis reaffirmed Kroger’s reputation as a picky buyer.
“The thing that was attractive about Harris Teeter as a transaction is it's a well-run company that overall we've admired a whole lot,” Ellis said. “What we have not liked over time is poorly-run companies.”
Deutsche Bank published an extensive analysis of Cerberus and Kroger as potential buyers for Safeway on Feb. 26.
“We believe the combined (Cerberus and Safeway) business would become a more formidable competitor for (Kroger) in the West, particularly in some key markets such as Phoenix, Denver, Los Angeles and Dallas,” the report stated. “In Tucson, Grand Junction and Los Angeles, KR’s market share position would slip from #1 to #2, while it would move from #2 to #3 in Dallas. Interestingly, KR’s market position would improve in markets where it has less of presence, such as San Diego and Spokane.”
Short predicted that Safeway would have to sell 15 stores in San Diego to avoid antitrust scrutiny. That could be an opportunity for Kroger to pick up more than $300 million in revenue. Short identified four other cities where Cerberus might have to divest 10 additional stores: Santa Barbara, Calif., Butte, Mont., and Wyoming cities, Casper and Cheyenne.
She said Safeway has “unusually high” margins in the markets where Cerberus is most likely to divest, another factor that could entice a Kroger offer.