It’s Official: Kroger Completes $2.48 Billion Harris Teeter Acquisition

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The Kroger Co. officially completed its acquisition of Harris Teeter Supermarkets on January 28, a $2.48 billion deal in which Harris Teeter shareholders will receive $49.38 per share of Harris Teeter common stock. The transaction was first announced last July, but needed Harris Teeter shareholder approval (which was granted on October 3) and clearance from the Federal Trade Commission (which sanctioned the deal late last month).

Somewhat surprising to trade analysts was the FTC authorization of the deal without forcing Kroger to divest any store that they deemed overlapping and therefore anti-competitive.

Both retailers compete against each other in the Hampton Roads and Charlottesville markets in Virginia and in the Raleigh-Durham area of North Carolina. Kroger said it intends to keep all stores open.

“We are pleased that our merger is complete and look forward to bringing together the best of Kroger and Harris Teeter to benefit our customers, associates and shareholders,” said W. Rodney McMullen, Kroger’s new CEO, who succeeded veteran chief executive Dave Dillon last month. “This merger brings the exceptional Harris Teeter brand and a complementary base of stores in attractive markets to the Kroger family. We have long respected Harris Teeter’s customer orientation, friendly and professional associates, strong management team, and company values – which are consistent with ours. Together, through our Customer 1st Strategy, we are going to be an outstanding combination.”

Commenting on the Kroger purchase, Harris Teeter’s longtime chairman and CEO Thomas W. “Tad” Dickson stated, “We are excited that Kroger, one of the best food retailers in the U.S., has recognized the value in Harris Teeter. This successful transaction is, first and foremost, a tribute to our outstanding management teams and associates. Their tireless commitment to delivering great value and excellent customer service has been instrumental in building Harris Teeter into the unique brand that it is today. The merger with Kroger provides the opportunity to continue to expand the Harris Teeter brand as well as to provide future employment and career advancement opportunities for our associates in an increasingly competitive market. The merger also is the culmination of a long track record of delivering substantial value to our shareholders.”

After the deal was closed, Dickson announced his retirement.

“Tad has done an outstanding job as the CEO for the past 16 years,” said McMullen. “During his tenure as CEO, the management team of Harris Teeter has more than doubled the sales of the company and increased the operating profit fourfold by building over 100 new stores, expanding into new markets and improving the overall operating performance of the company. We look forward to working closely with the management team to continue to expand the Harris Teeter brand.”

Veteran Harris Teeter president Fred Morganthall, who ran day-today operations at HT prior to the acquisition, will remain at the helm of Harris Teeter.

The transaction allows Kroger to expand Harris Teeter’s upscale brand and a base of 227 stores in the fast-growing and demographically attractive Southeastern and Mid-Atlantic.

Harris Teeter also operates distribution centers for grocery, frozen and perishable foods in Greensboro, NC and Indian Trail, NC and a dairy facility in High Point, NC. Harris Teeter will continue to operate its stores under the Harris Teeter brand name as a subsidiary of The Kroger Co. Harris Teeter had revenues of $4.7 billion for fiscal year 2013.

Kroger financed the transaction through a combination of debt issued in December 2013 and commercial paper. Although Kroger’s net debt to EBITDA ratio increased due to the merger close, the company expects to allocate some free cash flow to debt reduction to re-establish and maintain its 2.00-2.20 net debt to EBITDA ratio over the next 18-24 months. Kroger is committed to maintaining its current investment grade credit rating. In addition, consistent with its long-term commitment to returning cash to shareholders, Kroger intends to continue its quarterly dividend and share repurchase program while managing free cash flow to reduce the leverage taken on in this merger.

Including the effect of allocating some free cash flow to debt reduction, Kroger continues to expect net accretion to earnings per diluted share in the range of $0.06-$0.09 in the first full year after the merger, excluding transition and transaction expenses, after taking into account the company’s current 8-11 percent long-term net earnings per diluted share growth rate. Kroger expects to achieve cost savings of approximately $40 to $50 million, largely from the benefits of Kroger’s enhanced scale, within the next four years.

Together, the company will operate 2,641 supermarkets and employ more than 368,000 associates across 34 states and the District of Columbia. Harris Teeter will continue to operate

its stores as a subsidiary of The Kroger Co. There are no plans to close stores, and associates will continue to have employment opportunities. Kroger is headquartered in Cincinnati, OH and Harris Teeter’s headquarters remains in Matthews, NC.

Kroger and Harris Teeter both strive to play a vital role in all of the communities they serve. In 2012, Kroger invested more than $250 million in local communities to provide hunger relief and support for the military and their families, breast cancer awareness programs and more than 30,000 schools and grassroots organizations. Harris Teeter similarly focuses community investments on feeding the hungry, supporting the military, and investing in local schools and youth sports organizations. Harris Teeter’s 2013 donations totaled nearly $8.3 million.

Kroger and Harris Teeter also announced the resignation of John Woodlief, executive VP, who has served as chief financial officer at Harris Teeter since 1999. Prior to that time, he served as managing partner of the PricewaterhouseCoopers Carolinas offices. Independence rules concerning Woodlief’s previous position with PricewaterhouseCoopers, who serve as Kroger’s independent accountants, prohibits him from serving in a financial role with Kroger. He will pursue other interests and will be available for consultation to the company.