CINCINNATI — Investors seemed to like the idea of a Kroger-Harris Teeter merger as shares of both companies rose following news of the planned $2.5 billion transaction.
“We think this is a very good acquisition for Kroger, given the quality of the asset and its operations in high-growth markets,” said Meredith Adler, a New York-based analyst at Barclays.
She said the price Kroger Co., based here, agreed to pay — $49.38 per share, plus the assumption of $100 million in debt — was “reasonable.”
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Harris Teeter, based in Matthews, N.C., had disclosed earlier this year that it was seeking strategic alternatives, after being contacted by investment firms. Kroger had indicated during the past year that while it remained cautious when evaluating acquisition opportunities, it was considering entering new markets. If the acquisition is completed — pending shareholder approval — it would be the largest acquisition in 15 years for Kroger.
Kroger said Harris Teeter’s strong position in growing markets made it a compelling target.
“Harris Teeter is located in the exciting, high-growth mid-Atlantic and Southeastern U.S. markets. Their store footprint is highly complementary to Kroger’s,” said Michael Schlottman, Kroger’s chief financial officer, in a conference call with analysts on Tuesday. “They share our customer-centric approach to everything we do — from store format and merchandising to disciplined execution across the organization.”
Acquiring Harris Teeter allows it to enter new markets like Charlotte, N.C., and Washington, D.C., at less cost than moving in organically through new-store development, Schlottman explained.
Kroger said it did not anticipate closing any stores, but noted that the two companies have some “minor overlap” in a handful of markets, including Raleigh, N.C.; Charlottesville and Hampton Roads, Va.; and Nashville, Tenn. “We are making plans now as to how we will operate in each of these markets over the long term,” Schlottman said.
Read more: Kroger to Buy Harris Teeter
Harris Teeter operates 138 locations in North Carolina, including 55 in the Charlotte area. It has another 31 locations in the Washington market. Harris Teeter also has stores several stores in “affluent vacation destinations and university communities,” Schlottman noted.
In the conference call, Kroger said it admired Harris Teeter’s strong connection with local consumers, and said it hoped to apply its own customer analytics — through its DunnhumbyUSA joint venture — to Harris Teeter’s loyalty database. It also said it hoped to learn from Harris Teeter’s strong perishables offering, its expertise at running upscale urban stores and its “click and collect” online strategy.
Kroger is expected to retain the Harris Teeter name and said it also planned to retain certain “key” management personnel.
Although Harris Teeter is non-union and Kroger operates mostly unionized stores, Adler of Barclays said she does not anticipate that the Harris Teeter stores — which operate primarily in non-union markets — would become organized.
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