Harris Teeter Supermarkets might be on the selling block. That possibility was raised last month when the upscale, growing and very profitable 211 store chain said it has engaged financial services firm J.P. Morgan to explore strategic alternatives.
Officially, here’s what the Matthews, NC publicly-traded retailer stated:
“While it is the long-standing policy of Harris Teeter Supermarkets, Inc. not to comment on rumors regarding mergers and acquisitions, in response to certain media articles as well as to remove any disruption to the conduct of its business and its associates, the company confirmed today that it has retained J.P. Morgan Securities LLC (“J.P. Morgan”) to assist the company in holding discussions with certain parties regarding strategic alternatives. The company was approached by two private equity firms who expressed an interest in purchasing the company. In order to fulfill its duty to its shareholders to evaluate opportunities to increase shareholder value, the company retained J.P. Morgan to assist it in conducting discussions with certain highly qualified parties. The company intends to continue its strategic new store growth plan and maintain the employment of its associates in its stores, and its distribution and manufacturing facilities in Indian Trail, Greensboro, and High Point, NC, as well as at its corporate headquarters in Matthews, NC. There can be no assurance that these discussions will result in any transaction. If a transaction were entered into, there can be no assurance as to the price, timing or other terms of such transaction. The company does not plan to provide any additional information until such discussions are concluded.”
This probably is not the first time that an inquiry has been made about Harris Teeter’s interest in selling. However, the closely-held firm might be viewing its perspective differently now, because of certain factors, industry observers noted.
“As the retail food industry has separated itself into two more clearly defined groups – the ‘haves’ and the ‘have-nots’ – Harris Teeter’s perception and value have escalated,” said one former supermarket industry CEO. “Fred Morganthall (president) has done an excellent job of expanding Teeter’s market base, performing at a high level and not losing sight of the fundamentals of the business such as training, store conditions and private label growth. And the fact that Harris Teeter operates as a non-union company is a big asset as well.”
Another current supermarket executive noted that as the industry continues to evolve, the timing seems right for the Dickson family and shareholders to consider a sale.
“Look at current events. From an internal perspective, is there a perpetuation plan for the Dickson family? Are there estate planning issues to consider (patriarch R. Stuart Dickson is 82 and no longer on the board; his brother Alan died last year. R. Stuart’s son, Tad, is currently CEO, but is not a grocer by trade)? On the plus side, the company is performing at a very high level, has maintained its dominant share in its core Charlotte market and has successfully penetrated the DC market. Its share price continues to rise and it knows its customers very well,” said the supermarket executive. “On the other hand, Publix will prove to be a thorn in Harris Teeter’s side as they make a big push into Charlotte. Although as the new kid in town, Publix, won’t have the leverage it usually has, it is a patient company, and like it did in Atlanta 20 years ago, it will sink a lot of money into building stores and growing market share over a sustained period of time.”
Last year, Publix announced the formation of a new Charlotte division (Chuck Roskovich has been named division vice president) and last fall opened two stores in suburban Charlotte (Indian Land, SC and Tega Key, SC) and will open its first North Carolina unit, a 56,000 square foot unit in the tony Ballantyne area of the city, early next year.
Although it has traditionally grown organically, it would seem logical that the hugely successful Lakeland, FL-based based chain would be interested in potentially acquiring Harris Teeter as it attempts to continue its northward expansion. The two regional chains currently compete in other parts of South Carolina, Tennessee and in the Jacksonville area of Florida where Harris Teeter operates one store (in Fernandina Beach).
Besides interest as a financial play from private equity organizations, other potential strategic buyers include Ahold and Kroger.
Ahold would seem well suited to go aggressively after Harris Teeter. With nearly $6 billion of free cash at its disposal, Ahold would find that Harris Teeter would also blend nicely into its U.S. portfolio – a non-union, upscale, high-low regional chain with market adjacencies to Ahold’s current U.S. holdings. There would be some market overlap with Giant/Landover in the Baltimore-Washington area and Charlottesville and with Giant/Carlisle-Martin’s with one store in Williamsburg,VA.
Kroger might be interested, too, given the “fit” a company like Harris Teeter could provide. It would also have some store overlap issues with Harris Teeter in the Charlottesville and Tidewater areas of Virginia and in parts of North Carolina, South Carolina and in the Nashville, TN market. However, Kroger has been cautious about getting into the acquisition game for quite some time now (its last big deal was the purchase of Fred Meyer from Yucaipa Cos. for $12.8 billion in 1999) and observers believe that Supervalu’s Jewel-Osco operation in the Chicago market would be a better fit for Kroger if that SVU division is put on the sales block.
In the next few months, expect a prospectus to be issued detailing real estate and other pertinent data on Harris Teeter. At that point, more will certainly be revealed.
Several Wall Street analysts told us that they expect bidders to offer Harris Teeter a healthy earnings multiple and that the company may fetch as much as $2.5 billion.