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Despite Buzz, No LBO Seen for Kroger

Is Kroger Co. a leveraged buyout candidate?

Though the company maintains that it is not, Wall Street websites keep buzzing with speculation.

Writing on earlier this month, “Takeover Analyst,” who is not identified, wrote, “I expect takeover offers to draw near for Kroger,” based on its favorable financial results.

“The company has delivered top-line growth every year since 1987,” the author wrote, “but it is still cheaper than 99% of companies listed in the S&P 500 [when] measured by the forward price-to-sales ratio. It is also the largest grocery store chain and still has impressive room for expansion into high-growth geographies.”

Industry analysts contacted by SN doubt an LBO is in the offing.

Neil Currie, an industry specialist, said Kroger’s name recurs in LBO discussions “because supermarkets have low valuations relative to other types of retail, and Kroger is a market-share gainer.

“But it would be a large acquisition, which would make it relatively prohibitive other than perhaps for a private equity firm.

“And while I never rule anything out, it’s hard to see how a new owner could improve the business model — though a financial buyer could potentially make more money by raising margins.”

According to Chuck Cerankosky, an analyst with Northcoast Research, Cleveland, Kroger’s name surfaces as an LBO candidate “because its balance sheet is in such good shape.

“It would be a pretty large target for a private equity group to go after but when people are looking for investments, the valuation at Kroger is low, it throws off a lot of cash and it’s a best-in-class retailer,” he said.

Another analyst, who declined to be named, said an LBO would be difficult for a company as large as Kroger. “People aren’t idiots, and I don’t understand why anyone would think about going after Kroger,” the analyst said.

“It may be the low valuation that makes it attractive and the fact it’s doing better than other supermarket operators and is not leveraged.

“But I don’t believe anyone is seriously considering Kroger as a potential LBO candidate.”

In response to previous speculation about an LBO, David Dillon, Kroger’s chairman and chief executive officer, said in 2007, “Neither management nor our board of directors has any interest in pursuing a leveraged buyout transaction.”

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