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Tickers in this Article: KR, HTSI, SVU, SWY
With expansion plans in key south-eastern and mid-Atlantic states, one of the largest grocery retailers The Kroger Co. (KR) has announced its decision to acquire all the shares of regional grocer Harris Teeter Supermarkets Inc. (HTSI) for $2.44 billion in cash. Per the deal, Kroger will pay $49.38 for each Harris Teeter share and will assume the latter’s outstanding debt of about $100 million.

The deal has been approved by the boards of both companies. However, Harris Teeter has yet to receive shareholder approval.

Kroger will finance the deal with debt, and will therefore allocate some free cash flow to reduce its current debt burden in the subsequent quarters. Kroger expects net accretion to earnings per share in the range of 6 – 9 cents in year-one after the merger.

After the completion of the deal, Harris Teeter will become a subsidiary of Kroger. It will retain Harris Teeter’s senior management and its headquarters at Matthews, NC. Kroger will not sell any of the Harris Teeter stores until there is an overlap in any of the Harris Teeter’s markets.

Kroger is impressed with Harris Teeter’s strong management team and variety of store formats located in high-growth markets. Harris Teeter operates stores in the Carolinas, Virginia, Maryland, Tennessee, Delaware, Florida, Georgia and the District of Columbia. The bulk of its stores are in North Carolina.

Harris Teeter’s fresh and prepared foods section is also expected to allow Kroger to expand its food business. Kroger also expects to benefit from Harris Teeter’s online shopping system.

The deal will be a strategic fit for Kroger. It will provide the company with an opportunity to expand its footprint in several attractive and high-growth markets including Delaware, Florida, Maryland and Washington, DC, where Kroger currently does not have a presence. Kroger will also get hold of Harris Teeter’s distribution centers for grocery, frozen and perishable foods in Greensboro and Indian Trail, NC and a dairy facility in High Point, NC.

However, it is speculated that Kroger is undervaluing Harris Teeter. Harris Teeter thus have an option to re-consider the deal to provide best value to its shareholders.

Kroger's acquisition of Harris Teeter is the second biggest deal in the U.S. grocery industry in 2013 and the second-largest acquisition for Kroger after its purchase of Fred Meyer Inc for $13.89 billion in 1999.

Notably, the U.S. grocery industry has been consolidating from quite some time as chains like Harris Teeter have struggled to maintain market share against big retailers, dollar stores as well as drugstores. Retailers like Supervalu Inc (SVU) and Safeway Inc (SWY) are also selling off their assets.

In June 2013, Safeway agreed to sell its Canadian operations to Sobeys operator Empire Co Ltd while Supervalu struck a $3.3 billion deal to reduce debt by selling five of its chains to an investor group led by Cerberus Capital Management LP in Jan 2013.

We believe that the Kroger-Harris Teeter deal will provide excellent value in an increasingly competitive market. The combined business is expected operate 2,631 supermarkets in 34 states and the District of Columbia, with over 368,300 employees. Kroger holds a Zacks Rank #2 (Buy).

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