Taking Stock

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Harris Teeter SEC Filing

“At an industry meeting that occurred in April 2011, the President of Party A (a supermarket chain) approached Mr. Morganthall, the president of Harris Teeter, to make an informal inquiry as to whether Harris Teeter would be interested in discussing a combination with Party A. On June 1, 2011, Harris Teeter and Party A entered into a confidentiality agreement. A meeting was arranged, and the chief executive officer of Harris Teeter, Mr. Dickson, met with the chairman of Party A in July 2011. In connection with the meeting, Mr. Dickson toured some of Party A’s stores. A subsequent visit was arranged in August 2011, at which three senior executives of Party A met with Mr. Dickson and Mr. Morganthall to visit some Harris Teeter stores. The discussions were very general and remained at a high level. At the regularly scheduled August 18, 2011 meeting of the Harris Teeter Board, Mr. Dickson reported on the visits.

During the remainder of 2011 and early 2012, Harris Teeter exchanged additional high-level information with Party A, but no serious discussions regarding a strategic combination took place. At the May 17, 2012 regular quarterly meeting of the Harris Teeter Board, Mr. Dickson informed the Harris Teeter Board that discussions with Party A had moved very slowly, but that the Party A CEO remained interested in continuing discussions about a transaction. The Harris Teeter Board discussed the possibility of engaging a financial advisor to facilitate discussions, but, in light of the slow movement of Party A, the Harris Teeter Board made no decision on the engagement of financial advisors at that time. Ultimately, Party A chose not to pursue a combination with Harris Teeter.

In May 2012, representatives of Party B, a private equity firm, visited Harris Teeter’s offices to meet with Mr. Dickson and Harris Teeter’s Chief Financial Officer, Mr. (John) Woodlief. In June 2012, representatives of Party C, another private equity firm, also visited Harris Teeter’s offices and spoke with Mr. Dickson, Mr. Morganthall and Mr. Woodlief. Both Party B and Party C discussed their interest and relevant transaction expertise in the food retail sector and expressed a desire to learn more about Harris Teeter. Mr. Dickson thanked each of Party B and Party C for their interest and indicated he would update the Harris Teeter Board on their inquiry. He further indicated that management was in the annual process of preparing Harris Teeter’s five-year strategic plan, and that it would not make sense to have further discussions until the plan was completed, since the Harris Teeter Board would want to assess Harris Teeter’s prospects for continuing to operate as an independent company before evaluating strategic alternatives.

At the regular quarterly meeting of the Harris Teeter Board held on August 16, 2012, Harris Teeter’s management made its annual presentation to the Harris Teeter Board of the five-year strategic plan and Mr. Dickson informed the Harris Teeter Board of the visits from Party B and Party C. Party B and Party C continued to make inquiries of Harris Teeter and ask for follow-up visits, but no further substantive discussions were held with Party B or Party C until after J.P. Morgan had been formally engaged as Harris Teeter’s financial advisor (on November 16, 2012). At the Harris Teeter Board meeting on August 16, 2012, following management’s presentation of the five-year strategic plan and Mr. Dickson’s presentation regarding his discussions with Parties B and C, the Harris Teeter Board encouraged management to take a more active approach in the exploration of strategic alternatives.

Between the August 16, 2012 Board meeting and the regular quarterly Harris Teeter Board meeting held on November 15, 2012, Harris Teeter’s management discussed with J.P. Morgan its potential engagement as financial advisor to Harris Teeter in connection with (a) evaluating the merits of a potential sale, merger, joint venture and/or other business combination and (b) comparing the merits of such a transaction to the prospects of Harris Teeter as a standalone public company. On November 15, 2012, the Harris Teeter Board discussed J.P. Morgan’s extensive advisory and transaction experience in the retail sector, and in the food retail industry in particular. Management reviewed with the Harris Teeter Board the principal terms of the proposed engagement with J.P. Morgan, including the proposed fees, and compared the proposed fees to fees charged by other investment bankers in connection with similar engagements. The Harris Teeter Board expressed its support for the exploration of strategic alternatives and the engagement of J.P. Morgan and determined that the process would be overseen by the Harris Teeter Board as a whole.

On November 16, 2012, Harris Teeter engaged J.P. Morgan as its financial advisor. J.P. Morgan advised that Harris Teeter should consider continuing its discussions with Party B and Party C and initiating discussions with other potential purchasers.

Over the course of the next two weeks, management and J.P. Morgan worked together to develop a list of additional potential purchasers. During the period beginning November 21, 2012 and ending December 3, 2012, J.P. Morgan contacted eleven additional potential purchasers, each of which had demonstrated expertise in food retail and the financial capacity to consummate an acquisition of, or combination with, Harris Teeter. Between December 5, 2012 and December 20, 2012, Harris Teeter executed eight confidentiality agreements, including with each of Party B and Party C, as well as Party D, Party E, Party F, Party G, Party H and Party I, respectively.

Between December 7, 2012 and December 20, 2012, J.P. Morgan sent summary information regarding Harris Teeter to each of the eight parties, discussed with each of them the materials that had been distributed to them and answered their questions regarding Harris Teeter. Also between December 7, 2012 and December 20, 2012, J.P. Morgan submitted an instruction letter to each of the parties. The instruction letter, among other things, requested that preliminary nonbinding indications of interest be submitted by December 21, 2012.

J.P. Morgan received preliminary nonbinding indications of interest on December 21, 2012 from Party B, Party C, Party D, Party E, Party F and Party I. A preliminary indication of interest was received from Party H on January 4, 2013. Party G did not submit an indication of interest and did not continue to participate in the process.

The preliminary nonbinding indications of interest received ranged from $44 to $50 per share. Party B’s indication of interest was at $50 per share, but included a requirement for an immediate 45-day exclusivity period in order for Party B to conduct due diligence and negotiate a purchase agreement. Harris Teeter, following discussions with its financial and legal advisors and members of the Harris Teeter Board, determined that it was not in the best interest of its shareholders to suspend the process for the purpose of allowing Party B, which had not yet conducted any due diligence, to determine whether it was interested in pursuing a transaction. Party B was informed that it would not be granted a 45-day exclusivity period, and Party B elected not to further participate in the process. Party F’s preliminary indication of interest was at the low end of the range, and Party F was excluded from the process.

All preliminary nonbinding indications of interest were expressly conditioned on the completion of due diligence and the negotiation of satisfactory definitive agreements.

From January 25, 2013 through February 7, 2013, Harris Teeter’s management met with, made presentations to and provided store tours to each of Party C, Party D, Party E, Party H and Party I.

The potential buyers who attended the management presentations were given access to a virtual data room prepared by Harris Teeter with the assistance of J.P. Morgan and McGuireWoods LLP, Harris Teeter’s corporate and securities counsel. During the week of February 11, 2013, all of the potential buyers submitted requests for additional information in order to complete their analysis. In response to these diligence requests, Harris Teeter provided access to extensive data through the virtual data room.

During the 52-week period ended January 18, 2013, Harris Teeter stock traded in a range from $35.72 to $44.40 per share. On January 18, 2013, the closing price of Harris Teeter stock was $36.94 per share. After the market closed on that day, Mergermarket reported that Harris Teeter was conducting a strategic review. On the following day, the closing price for Harris Teeter stock was $39.31, a 6.4 percent increase over the previous closing price. On January 31, 2013, Harris Teeter’s stock closed at $41.49. Following the close of the market that day, Harris Teeter announced its earnings for the first quarter of its 2013 fiscal year, and the following day the stock closed at $37.67, a 9.2 percent decrease.

On February 12, 2013 at 3:50 p.m., The Wall Street Journal reported that Harris Teeter was considering a sale and that it had retained J.P. Morgan as its financial advisor. Harris Teeter stock had opened that day at $37.04; it closed at $39.50, a 6.6 percent increase. The articles in Mergermarket and The Wall Street Journal , along with other online and print publications, created significant uncertainty among Harris Teeter’s employees, vendors and customers. As a result, Harris Teeter issued a press release on February 13, 2013 following the closing of the market, confirming that it had retained J.P. Morgan as its financial advisor to explore strategic alternatives. Harris Teeter stock closed at $41.39 the following day. The announcement by Harris Teeter received substantial press coverage. Following Harris Teeter’s public confirmation that it had engaged J.P. Morgan as its financial advisor, J.P. Morgan received calls from several additional interested parties, including Party J, Party K, Party L, Party M, Party N and Party O.

Party J called J.P. Morgan on February 25, 2013 to express its interest in acquiring Harris Teeter. After reviewing public information, Party J decided not to pursue a transaction.

Party K reached out to J.P. Morgan on February 26, 2013 and requested a confidentiality agreement, which J.P. Morgan provided that same day. However, Party K decided neither to sign the confidentiality agreement nor to continue to pursue a transaction with Harris Teeter.

A financial advisor to Party L contacted J.P. Morgan on February 26, 2013 to register its interest in a transaction with Harris Teeter. Representatives from Party L as well as representatives from Party L’s financial advisor met with Harris Teeter management in New York on March 14, 2013. After this meeting, both parties mutually decided not to engage in further discussions regarding a transaction.

J.P. Morgan contacted Party M on March 1, 2013 to determine Party M’s interest in a potential transaction with Harris Teeter. Party M decided not to pursue a transaction with Harris Teeter.

Party N contacted J.P. Morgan on March 17, 2013, but decided not to pursue a transaction with Harris Teeter.

On February 21, 2013, the Harris Teeter Board held its regular quarterly meeting. At that meeting, McGuireWoods advised the directors of their fiduciary duties in connection with a possible transaction. Mr. Dickson reported to the Harris Teeter Board that Harris Teeter had entered into an engagement letter with J.P. Morgan in accordance with the terms outlined at the November 15, 2012 meeting of the Harris Teeter Board. Mr. Dickson advised the Harris Teeter Board regarding the status of the discussions with each of the prospective buyers and of the anticipated next steps in the process. The Harris Teeter Board also discussed the potential for continuing to operate independently, and discussed ways in which Harris Teeter could continue to operate effectively if no strategic transaction occurred.

Harris Teeter entered into confidentiality agreements with three parties who had contacted J.P. Morgan following the February 13, 2013 announcement — Party O, Party P and Kroger. Information regarding Harris Teeter was distributed to each of these three prospective buyers. Party O executed a confidentiality agreement on March 11, 2013 and received summary information regarding Harris Teeter. Party P executed a confidentiality agreement on March 7, 2013. Kroger executed a confidentiality agreement on March 12, 2013. On March 27, 2013, Party O informed J.P. Morgan that it would no longer be continuing with the process.

Following the management presentations in January and February and continuing through mid-March, discussions continued with Party C, Party D, Party E, Party H and Party I. By March 18, 2013, each of these parties had exited the process and had informed J.P. Morgan that it was unwilling to enter into a transaction at Harris Teeter’s then-current trading level, which was in the low $40s.

On April 2, 2013, Kroger informed J.P. Morgan that it had engaged Merrill Lynch, Pierce, Fenner & Smith Incorporated (‘BofA Merrill Lynch’) as its financial advisor. On April 8, 2013, Kroger submitted a preliminary nonbinding initial indication of interest. Kroger indicated that it would be prepared to purchase all of the shares of Harris Teeter common stock for between $42 and $45 per share in cash. The indication of interest was subject to several conditions, including satisfactory completion of due diligence, negotiation of a mutually satisfactory definitive agreement and regulatory approval (including antitrust regulatory approval). Following discussions with Harris Teeter, J.P. Morgan responded to Kroger on April 18, 2013, indicating that it was unlikely that Harris Teeter would entertain a transaction at the indicated range or be prepared to bear any regulatory or antitrust approval risk. J.P. Morgan suggested to Kroger that, with additional access to management and due diligence, Kroger would be able to offer a higher value. In order to facilitate Kroger’s review of Harris Teeter, Harris Teeter gave Kroger access to the virtual data room on April 12, 2013 (but precluded access to competitively sensitive information).

On April 11, 2013, J.P. Morgan received a call from a senior representative of Party P indicating that Party P was very interested in a transaction. Party P indicated that the consideration would be a mixture of cash and stock in a public entity that would be created through a combination of Party P’s supermarket portfolio company (the “Party P Portfolio Company”) and Harris Teeter. The cash portion of the consideration would be $2 billion or $40 per share. Party P offered its assistance to value the stock component given that the Party P Portfolio Company was not a public company and did not have historical audited financial statements.

On April 15, 2013, Party P submitted a preliminary nonbinding indication of interest to combine the Party P Portfolio Company with Harris Teeter in a transaction in which the Harris Teeter shareholders would receive a total cash consideration of $2 billion, or $40 per share in cash, together with what Party P described as “a significant publicly traded minority stake in the combined entity.” The indication of interest submitted by Party P was subject to negotiation of a definitive merger agreement, obtaining debt financing, the confirmation of certain material assumptions, due diligence review and regulatory approvals.

April 14, 2013, J.P. Morgan received a call from a representative of Party Q. Harris Teeter instructed J.P. Morgan to initiate discussions with Party Q. Harris Teeter signed a confidentiality agreement with Party Q as of April 16, 2013. By the end of April 2013, Party Q had decided not to proceed further with the process.

On April 22, 2013, a special meeting of the Harris Teeter Board was held. At the meeting, J.P. Morgan representatives provided an update on the process, including a report on the preliminary nonbinding indications of interest received from Kroger and Party P, which were the only two parties actively engaged in the process at that time. J.P. Morgan indicated the key next steps for each party in the event that the Harris Teeter Board decided to continue with that party in the process. For Party P, J.P. Morgan indicated that the next steps in the process included completion of business due diligence, commencement of Harris Teeter reverse due diligence on the Party P Portfolio Company, conducting a detailed review of the synergy opportunity, obtaining a revised indication of value with clarification and quantification of the percentage ownership and implied immediate trading value of the “significant publicly traded minority stake in the combined entity”, and developing a refined view of the pro forma capital structure. For Kroger, J.P. Morgan indicated that the next steps included completion of business due diligence, confirmation that Kroger was willing to bear antitrust and regulatory risk and obtaining a revised indication of value. The Harris Teeter Board authorized J.P. Morgan to contact each party.

On April 23, 2013, J.P. Morgan spoke with Party P’s financial advisor and BofA Merrill Lynch to discuss the next steps in the process.

On April 25, 2013, Party R called J.P. Morgan and said a combination with Harris Teeter made strategic sense and expressed its interest in joining the process. Party R subsequently did not execute a confidentiality agreement.

During the months of April and May 2013, Kroger and Party P conducted extensive due diligence on Harris Teeter, and Harris Teeter conducted extensive reverse due diligence on the Party P Portfolio Company. Party P was given access to Harris Teeter’s virtual data room on May 1, 2013.

On May 2, 2013, following the closing of the market, Harris Teeter announced its earnings for the second quarter of the 2013 fiscal year, and the closing price on the day following the announcement was $44.10, an increase of 8.0 percent.

On May 3, 2013, Harris Teeter entered into a mutual confidentiality agreement with Party P and the Party P Portfolio Company, in order to provide for reverse due diligence by Harris Teeter on the Party P Portfolio Company. This mutual confidentiality agreement replaced the confidentiality agreement entered into between Harris Teeter and Party P on March 7, 2013.

On May 6 and 7, 2013, members of Harris Teeter management met with, made presentations to and participated in meetings with representatives of Kroger and BofA Merrill Lynch regarding Harris Teeter’s business operations.

On May 9, 2013, Kroger conducted additional site visits of Harris Teeter locations.

On four separate days in May 2013, senior members of Harris Teeter visited stores of the Party P Portfolio Company.

On May 14, 2013, J.P. Morgan spoke with Party P’s financial advisor to confirm its continued interest in Harris Teeter and its preliminary nonbinding indication of interest.

On May 16, 2013, a regular quarterly meeting of the Harris Teeter Board was held, during which representatives from J.P. Morgan and McGuireWoods were present. J.P. Morgan updated the Harris Teeter Board on the diligence progress of Kroger and Party P. J.P. Morgan informed the Harris Teeter Board that Party P believed that the consideration that it offered ($2 billion or $40 per share plus “a significant publicly traded minority stake in the combined entity”) had the potential to offer a value in excess of $50 per share. Party P stated that this valuation was based on a number of important assumptions, including anticipated levels of combined EBITDA, significant potential synergies, prevailing public market multiples and substantial debt reduction over a five-year time period. The Harris Teeter Board authorized J.P. Morgan to deliver feedback to each of Kroger and Party P.

On May 18, 2013, J.P. Morgan spoke to Party P to discuss next steps in the process including (a) completion of diligence of Harris Teeter, (b) ongoing reverse diligence of Harris Teeter on the Party P Portfolio Company, (c) Harris Teeter’s timeline to deliver a pro forma financial model for the combined Party P Portfolio Company/Harris Teeter public entity and (d) joint work on synergies.

On May 19, 2013, J.P. Morgan spoke to BofA Merrill Lynch, who requested additional diligence information that Kroger required before being in a position to submit a revised indication of interest. On May 20, 2013, J.P. Morgan provided the requested information to BofA Merrill Lynch.

On May 20, 2013, J.P. Morgan spoke to BofA Merrill Lynch to indicate that the three next steps in the process included completing all due diligence, facilitating a call between Harris Teeter’s and Kroger’s antitrust counsel and revising its preliminary nonbinding indication of interest.

On May 21 and 22, 2013, J.P. Morgan spoke to Party P’s financial advisor and noted the Harris Teeter Board’s concerns regarding key areas of uncertainty with Party P’s preliminary nonbinding indication of interest including the immediate trading value of the equity consideration, the nature and amount of the Party P Portfolio Company’s off-balance-sheet liabilities, the lack of audited financials and the timing for delivering them, as well as recent Party P Portfolio Company financial performance.

On June 3, 2013, J.P. Morgan had conversations with BofA Merrill Lynch, during which BofA Merrill Lynch, at Kroger’s direction, verbally gave J.P. Morgan a revised preliminary nonbinding indication of interest of $45.50 to $47.50 per share and indicated to J.P. Morgan that there was additional diligence to be completed in order to narrow the offer to a single point of value.

On June 6, 2013, Harris Teeter delivered a revised financial model to Party P and the Party P Portfolio Company. An in-person diligence session was held with Party P and the Party P Portfolio Company in New York City on June 11, 2013 to review the model again for the purpose of continuing to refine the model for a contemplated combined company. On this date, J.P. Morgan communicated to Party P the overall status of the process and anticipated timing of next steps in the process and indicated Harris Teeter’s desire for an announcement in early July 2013. J.P. Morgan informed Party P of the next Harris Teeter Board meeting on June 24, 2013. J.P. Morgan requested that Party P deliver a revised preliminary nonbinding indication of interest by June 20, 2013.

On June 13, 2013, J.P. Morgan spoke to BofA Merrill Lynch and informed them of the next Harris Teeter Board meeting on June 24, 2013. J.P. Morgan discussed the overall status of the process and anticipated timing of next steps in the process and indicated Harris Teeter’s desire for an announcement in early July 2013. J.P. Morgan requested that Kroger deliver a revised preliminary nonbinding indication of interest by June 20, 2013.

On June 18, 2013, Harris Teeter provided Kroger with a proposed merger agreement drafted for a strategic buyer and provided Party P with a proposed merger agreement drafted for a financial buyer.

On June 19, 2013, BofA Merrill Lynch informed J.P. Morgan that Kroger had revised its proposal from a range of $45.50 to $47.50 per share to a single point proposal of $47.50 per share. J.P. Morgan asked BofA Merrill Lynch to have Kroger reflect its revised proposal in writing and also indicate Kroger’s timing for completing due diligence and signing a definitive agreement. On June 21, 2013, Harris Teeter received Kroger’s revised preliminary nonbinding indication of interest. Kroger delivered a written proposal, confirming the earlier verbal proposal, of $47.50 per share in cash. The proposal anticipated the completion of due diligence and negotiation of definitive agreements within two to three weeks.

On June 20, 2013, Party P delivered a revised written preliminary nonbinding indication of interest to Harris Teeter. Under the proposal, Party P would contribute the Party P Portfolio Company into Harris Teeter and lever the combined entity to result in Harris Teeter shareholders receiving $2.08 billion in cash consideration ($52 per share in cash for 40 million (of the 49.5 million) shares of Harris Teeter common stock) with the remaining shares to be acquired in exchange for common stock in the combined entity (such that Harris Teeter shareholders would own 30 percent of the combined company). It was contemplated that the combined entity would be a publicly traded company on the New York Stock Exchange. The proposal contemplated that the Harris Teeter shareholders would have the ability to make a cash/stock election as to the consideration they received, with proration in the event cash or stock were oversubscribed (i.e., if all Harris Teeter shareholders elected cash, each would receive $42 per share in cash and the balance in stock consideration). Party P’s proposal was subject to negotiation of the definitive merger agreement, confirmation of the accuracy of significant financing assumptions, attaining financing commitments from lenders (drafts of which were provided with the preliminary nonbinding indication of interest), and the completion of confirmatory due diligence and other matters. The proposal noted that the Party P Portfolio Company did not have audited financial statements, and estimated that audited financial statements could be obtained in November 2013. On June 21, 2013, following receipt of a preliminary nonbinding indication of interest, J.P. Morgan spoke with Party P’s financial advisor to clarify Party P’s proposal.

On June 21, 2013, Harris Teeter provided Kroger and Party P with a draft of the disclosure schedules to the merger agreement.

On June 24, 2013, a special meeting of the Harris Teeter Board was held. Representatives of both McGuireWoods and J.P. Morgan attended the meeting. J.P. Morgan representatives informed the Harris Teeter Board of the extensive due diligence that had occurred since the last meeting of the Harris Teeter Board, indicating that both Kroger and Party P remained very interested in a transaction. McGuireWoods provided the Harris Teeter Board with a summary of the key terms contained in the draft merger agreements provided to Kroger and Party P.

The Harris Teeter Board instructed J.P. Morgan to focus on three issues with respect to Kroger’s proposal: a higher purchase price, assumption of the regulatory approval risk by Kroger and certainty to closure.

In addition, J.P. Morgan reviewed the proposal from Party P in detail with the Harris Teeter Board. J.P. Morgan highlighted that cash consideration had increased from $2 billion to $2.08 billion (i.e., upon 100 percent proration, from $40 to $42 per share in cash) and Harris Teeter’s equity participation in the combined entity had now been specified to be 30 percent. J.P. Morgan noted there had been significant detailed work completed by both the Party P Portfolio Company and Harris Teeter regarding the composition, quantification and timing of synergies. J.P. Morgan pointed out that the combined entity would carry leverage levels of 6.4x total debt / LTM EBITDA(Last Twelve Months Earnings before Interest, Taxes, Depreciation, Amortization) and 6.8x adjusted debt /LTM EBITDAR (Last Twelve Months before Earnings Before Interest, Taxes, Depreciation, Amortization, Rent) without synergies and 5.3x total debt / LTM EBITDA and 5.8x adjusted debt / LTM EBITDAR with full run-rate synergies (as estimated by Harris Teeter management and Party P Portfolio Company management) included. The terms used in this paragraph are defined as follows: (a) “LTM” means last twelve months; (b) “EBITDA” means earnings before interest, taxes, depreciation and amortization; (c) “adjusted debt” means total debt plus rent expense capitalized at 8.0x (per Moody’s methodology); (d) “EBITDAR” means earnings before interest, taxes, depreciation, amortization and rent expense and (e) “run-rate synergies” means total annual synergies expected upon completing the integration of the two entities.

J.P. Morgan summarized its views of Party P’s proposal by enumerating to the Harris Teeter Board six benefits as well as several areas of concern with the proposal. The benefits were: (a) the increase in cash consideration offered from $2 billion to $2.08 billion, (b) the election mechanism afforded to Harris Teeter shareholders by which they could choose the form of consideration they receive, (c) the significant ownership percentage of the combined entity that would be afforded to Harris Teeter shareholders (30 percent of the combined company), (d) the improved financing structure as well as the draft commitment papers from two global financial institutions, (e) the significant detailed synergy work that had been completed by both parties and (f) the meaningful upside opportunity coming from the underperforming Party P Portfolio Company stores.

The primary risks discussed with the Harris Teeter Board related to the speed and lack of certainty of closing and the uncertain valuation of the equity in the combined company. J.P. Morgan discussed with the Harris Teeter Board the following factors as, collectively, creating the risk of delay and also significant risk to shareholders of a transaction with Party P ultimately failing to close: (a) the lack of historical audited financial statements of the Party P Portfolio Company and the substantial length of time that it would take to prepare appropriate financial statements and have them audited, (b) the financing contingency associated with the proposal and (c) the general lack of readiness of the Party P Portfolio Company to be a public company or part of a public company. J.P. Morgan also discussed with the Harris Teeter Board the following factors as risks relating to the value of the stock of the combined entity: (a) certain significant contingent liabilities affecting the Party P Portfolio Company, (b) the negative comparative same store sales experienced by the Party P Portfolio Company in recent periods, (c) the need for significant capital expenditures to modernize the stores operated by the Party P Portfolio Company, (d) the execution risk of the combined company’s performance against plan, (e) operating a business with such high leverage, (f) pension plan matters, (g) ongoing negotiations with the unions representing employees at the Party P Portfolio Company and (h) the expectation that it would take a period of years for the synergies to be realized and uncertainty as to the ultimate stock value to be achieved.

The Harris Teeter Board instructed J.P. Morgan to highlight these areas of concern to Party P and to encourage Party P to propose to Harris Teeter ways to minimize these risks.

On June 25, 2013, J.P. Morgan called Party P and delivered a message consistent with the benefits and considerations noted above. J.P. Morgan communicated that Harris Teeter now had a better understanding of the upside and downside of the proposal and that the timing of the availability of a quality of earnings report and audited financials was a concern.

On June 25, 2013, J.P. Morgan also called BofA Merrill Lynch, during which J.P. Morgan communicated that Kroger was behind a competing bidder on value and J.P. Morgan believed it was unlikely that the Harris Teeter Board would approve the transaction at the value indicated by Kroger’s most recent proposal. J.P. Morgan encouraged Kroger to address any antitrust or regulatory approval risk, to complete all of its due diligence and to provide a markup of the merger agreement as soon as possible.

On June 26, 2013, J.P. Morgan and the financial advisors to Party P discussed outstanding diligence items over the phone. The financial advisors to Party P provided a timeline to the announcement of a potential transaction in the beginning of September 2013. Also, in order to facilitate the rapid completion of diligence in the interim, J.P. Morgan and Party P agreed to schedule an in-person meeting with Harris Teeter management as well as Party P Portfolio Company management in Charlotte for late in the week of July 15, 2013.

On June 27, 2013, J.P. Morgan and the advisors to Party P spoke over the phone regarding diligence matters.

On July 1, 2013, J.P. Morgan spoke over the phone with Party P and Party P indicated that it did not intend to submit an offer of higher value.

On July 2, 2013, J.P. Morgan, Kroger and BofA Merrill Lynch had a call in which Kroger stated that it was not prepared to change its offer price and would be submitting a revised draft of the merger agreement, which BofA Merrill Lynch did submit to J.P. Morgan later that day. In Harris Teeter’s view, the most significant changes proposed by Kroger were the following: (a) revising the covenants that required Kroger to use its “best efforts” to avoid or eliminate every impediment under any antitrust law in order to enable the closing to occur as soon as possible to a “reasonable best efforts” standard, (b) the removal of the regulatory termination fee that required Kroger to pay Harris Teeter if clearance under the HSR Act had not occurred or any other injunction or order relating to antitrust laws prevented the closing, (c) the increase in the termination fee payable by Harris Teeter upon the occurrence of certain events from 2percent of the deal value to $100,000,000 (approximately 4.3 percent of the deal value at the then-current offer price of $47.50 per share) and (d) the elimination of a “go-shop” provision permitting Harris Teeter to continue to seek other prospective buyers during a 60 day period after the signing of the merger agreement.

On July 2, 2013, J.P. Morgan and a member of Harris Teeter’s management team spoke over the phone with members of Party P and the financial advisors to Party P regarding outstanding diligence items.

On July 3, 2013, McGuireWoods revised the merger agreement and J.P. Morgan sent it to BofA Merrill Lynch. The revised draft reinstated the ‘best efforts’ language regarding regulatory matters, reinstated the regulatory termination fee provision and rejected Kroger’s proposed increase in the termination fee. For reasons discussed below, the “go-shop” provision was not reinserted. Subsequent to that, Harris Teeter and Kroger negotiated and exchanged several drafts of the draft merger agreement and disclosure schedules.

On July 5, 2013, Kroger submitted a revised offer of $48.75 per share. J.P. Morgan again indicated that, at that price, J.P. Morgan believed that it was unlikely that Harris Teeter would enter into a transaction.

Over the course of July 5 to July 7, 2013, Harris Teeter, J.P. Morgan, McGuireWoods, Kroger, BofA Merrill Lynch and Arnold & Porter LLP, Kroger’s external legal counsel, engaged in extensive negotiations over the terms of the merger agreement. During the course of the negotiations, Harris Teeter and Kroger reached agreement regarding the best efforts language related to regulatory matters, the regulatory break-up fee was agreed to be $200,000,000 and the termination fee was set at $75,000,000. Harris Teeter posted additional information to the virtual data room in conjunction with changes to the draft merger agreement and disclosure schedules.

On July 7, 2013, Kroger submitted a revised offer of $49.38 per share. At Kroger’s direction, BofA Merrill Lynch expressed that this offer was contingent on it being accepted and the merger agreement being adopted by the Harris Teeter Board at its meeting scheduled for July 8, 2013. On the evening of July 7, 2013, Kroger’s Chairman and CEO, Mr. Dillon, and Mr. Dickson spoke by telephone, and they agreed that all major issues had been resolved.

On July 8, 2013, the Harris Teeter Board held a special meeting at the Charlotte offices of McGuireWoods. Members of Harris Teeter’s senior management, as well as representatives of J.P. Morgan and McGuireWoods, attended the meeting. Representatives of J.P. Morgan informed the Harris Teeter Board that the Kroger Board of Directors was meeting simultaneously, and was expected to approve a merger agreement that would result in the holders of Harris Teeter common stock receiving $49.38 per share in cash. During the course of the meeting, J.P. Morgan reported that a call had been received from BofA Merrill Lynch, who reported that the Kroger Board of Directors had approved the merger agreement pursuant to which the holders of Harris Teeter common stock would receive $49.38 per share in cash. Representatives of J.P. Morgan reviewed the history of the transaction, discussed with the Harris Teeter Board its financial analysis of the offer made by Kroger and answered all of the Harris Teeter Board’s questions. J.P. Morgan representatives also reviewed the Party P proposal, the details of which remained the same as those presented at the June 24, 2013 Harris Teeter Board meeting. The Harris Teeter Board expressed the same concerns regarding the Party P proposal that had been discussed at the June 24, 2013 meeting, summarized as the uncertain value of the equity component of the proposal, significant execution risks and a lengthy period to execute. McGuireWoods made a presentation to the Harris Teeter Board concerning the material terms and conditions of the final merger agreement and discussed the final terms of the merger agreement that had been negotiated with Kroger and its counsel. In connection with a discussion by McGuireWoods of fiduciary duties of the Harris Teeter Board as it evaluated the transaction, the Harris Teeter Board discussed the removal of the “go-shop” provision, and concluded that the inclusion of a “go-shop” provision was not necessary since the transaction had received broad publicity and neither Harris Teeter nor J.P. Morgan could identify any likely buyers that had not either participated in the process, been contacted about the process or indicated a lack of interest in the process. In light of Kroger’s insistence that the “go-shop” provision be removed as a condition of moving forward, and in consideration of Kroger’s cash offer price, Kroger’s acceptance of regulatory risk, Harris Teeter’s ability to pursue a potential superior proposal if one were to emerge and the high probability of closing the transaction, the Harris Teeter Board determined that it was in the best interest of the shareholders to proceed without a “go-shop” provision.

J.P. Morgan then delivered its oral opinion to the Harris Teeter Board, which opinion was confirmed in writing, to the effect that, as of July 8, 2013, and based upon and subject to the factors, procedures, assumptions, qualifications and limitations set forth therein, the consideration to be paid by Kroger to holders of Harris Teeter common stock pursuant to the merger agreement was fair, from a financial point of view, to such shareholders. The Harris Teeter Board then adopted the merger agreement, and authorized the officers of Harris Teeter to sign the merger agreement.”