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Analysts suggest Kroger bid on Safeway

Note: This article was updated on Friday, March 7, to include analysts' comments.

Some analysts are suggesting that Kroger Co. submit a rival bid to acquire Safeway, after Safeway announced it had reached an agreement to merge with Albertsons — creating a much bigger rival for Kroger to compete against.

“We believe Kroger, with a partner, should join the bidding process,” said Scott Mushkin, an analyst with Wolfe Resear8ch, New York, in a research report. “If Kroger is able to usurp Cerberus at a reasonable $35-$37 per share for the supermarket business, the short- and long-term economic benefits are significant.”

Likewise, Karen Short, a New York-based analyst with Deutsche Bank, said Kroger has a “compelling strategic interest” to bid for Safeway.

“In our view, a 2,400-store Albertsons/Safeway would create a formidable competitor for Kroger, particularly in markets such as Phoenix, Denver, L.A., and Dallas,” she wrote in a report. “Cerberus has proven to be a highly effective operator, and we expect them to reinvest cost savings/synergies into lower prices, which could erode Kroger’s pricing advantage.”

Kroger, in a conference call with analysts discussing its year-end results just a few hours before the Albertsons-Safeway merger was announced, declined to comment on reports that had already surfaced that it was exploring a bid to acquire all or part of Safeway.


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“The model that we've outlined in terms of growing our business for our shareholders doesn't require any type of mergers to achieve,” said Rodney McMullen, CEO of Cincinnati-based Kroger, when asked about the company's stance on acquisitions.

Observers noted that Kroger could potentially be considering a rival offer, or an offer for some of Safeway's assets.

In announcing the Safeway-Albertsons deal, Robert Edwards, president and CEO of Safeway, said it was only considering rival offers for the whole chain, and any competing offer would have to pay at least $150 million as a break-up fee to nullify the Albertsons agreement. There is an initial 21-day window before that fee increases to $250 million. Albertsons would owe Safeway $400 million if it scuttles the deal. 

Meanwhile, Kroger reported its 41st consecutive quarter of identical-store sales gains, at 4.3% excluding fuel.

“This strong performance was supported by ID sales growth in every department and every supermarket division,” said Mike Schlotman, EVP and CFO, adding that the company is seeing double-digit growth in ID sales in its natural food categories.

Net income in the fourth quarter totaled $421.9 million, on sales gains of 4.8%, to $23.2 billion adjusted for an extra week in the year-ago period. Kroger said its results were “enhanced by the company’s response to adverse weather in the fourth quarter 2013.”

It also said that Supplemental Nutrition Assistance Program customers continue to spend more of their own money at Kroger in the wake of cuts in the program, known as SNAP.

For the year, net income was $1.52 billion, on sales of $98.4 billion, up 3.9% adjusted for an extra week in the previous year.

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