By Annie Gasparro and Julie Jargon
Kroger Co. (KR) agreed to acquire U.S. grocery chain Harris
Teeter Supermarkets Inc. (HTSI) for $2.44 billion, its largest deal
in nearly 15 years, as the supermarket owner expands further in the
southeastern United States.
Harris Teeter, a chain of 200 higher-end grocery stores, had
been exploring a possible sale for many months, and had reportedly
received a bid from Cerberus Capital Management LP, the private
equity firm that earlier this year led a group to buy five grocery
chains from Supervalu Inc. (SVU)
Harris Teeter's presence along the coast from Florida to
Delaware adds to Kroger's mid-Atlantic region and increases
Kroger's store count by about 10%.
While the two companies have little overlap, and Harris Teeter's
higher-margin stores make for an attractive acquisition, the deal
comes as somewhat of a surprise given Kroger's selective attitude
regarding acquisitions in the past.
Kroger's last major deal was its purchase of Fred Meyer in 1999
for about $13 billion in stock and assumed debt.
Traditional grocery stores face increasing competition from mass
retailers like Wal-Mart Stores Inc. (WMT) and discounters like
Dollar General Corp. (DG), which have started selling more
groceries in recent years.
Through more than a decade of price reductions, Kroger has
meaningfully narrowed the price gap between itself and these
relatively new competitors. The move was unpopular at first, both
with investors and some executives within the company, as profit
margins declined. But it ultimately helped keep customers from
shopping elsewhere.
More recently, Kroger has added more premium items such as
dry-aged beef and expensive cheese to stores in affluent markets in
a bid to lure customers from higher-end chains like Whole Foods
Market Inc. (WFM). The high-low strategy has turned Kroger into a
hybrid of sorts: offering a high-end shopping experience but with
low prices on staples such as bread and milk.
In turn, Kroger has outpaced peers like Safeway Inc. (SWY) and
Supervalu. Kroger reported last month that its fiscal first-quarter
earnings rose 9.6% as sales rose to $30.04 billion.
Harris Teeter reported in May that its fiscal second-quarter
profit increased 8.7%. The company had revenue of approximately
$4.5 billion for fiscal year 2012.
Together, the combined company will operate 2,631 supermarkets
across 34 U.S. states and the District of Columbia. Harris Teeter
management will continue to operate its locations.
Shareholders will receive $49.38 a share, a 1.8% premium to the
regional supermarket company's closing price Monday and a 34%
premium to its close on Jan. 18, the day media reports surfaced
that the company was exploring options.
In premarket trading Tuesday, Harris Teeter shares added 0.9% to
$48.94, while Kroger shares rose 2% to $36.90.
Kroger will finance the transaction with debt. Kroger also
intends to assume Harris Teeter's outstanding debt of about $100
million.
Kroger expects the deal to add between six cents and nine cents
to its per-share earnings a year after the deal closes.
--Tess Stynes contributed to this report.
Write to Annie Gasparro at annie.gasparro@dowjones.com
Subscribe to WSJ: http://online.wsj.com?mod=djnwires