Kroger has agreed to acquire rival Albertsons for $24.6bn in a deal that would create one of the US’s largest grocery store chains if it can overcome significant antitrust hurdles.
The Cincinnati, Ohio-based company has agreed to pay $34.10 per Albertsons share, an almost 33 per cent premium to the group’s share price as of October 12. The price includes $4.7bn in debt.
As part of the deal, Albertsons will pay a special cash dividend of about $6.85 per share, worth about $4bn, to its shareholders this year that will be subtracted from the overall cash offer.
The cash portion of the deal will also be reduced by the shares Albertsons shareholders receive in a newly spun-off entity that will house between 100 and 375 stores divested by the two companies.
While a combination would help the pair compete with the likes of Walmart and Amazon, the deal is expected to face severe scrutiny from regulators at a time when US consumers are already feeling the pinch from high inflation.
Jointly the two companies employ more than 710,000 people across 4,996 stores that operate in 48 out of 50 US states. The two companies said they are prepared to make significant concessions to address potential antitrust risks, including selling some stores to rival grocers or private equity groups as well as spinning off a whole chunk of Albertsons’ business.
Lina Khan, the pro-competition chair of the Federal Trade Commission, has said repeatedly that concentration in the supermarket industry has hurt consumers and suppliers.
“Family ranchers and small farmers told us about their struggles to get their products to market because of the anti-competitive practices of large supermarket chains and dominant agribusiness firms,” Khan said last month in testimony to a congressional committee.
Kroger chair and chief executive Rodney McMullen will continue in those roles at the combined company.
In an effort to win over regulators and politicians, Kroger said it would invest about $500mn generated from cost savings to reduce prices for customers and spend $1bn to boost wages and benefits for its employees.
For private equity backer Cerberus Capital Management and a consortium of real estate investors, the merger marks a large potential windfall after they began to acquire grocers beginning in 2005 with their purchase of 655 Albertsons stores and 100 distribution centres.
In 2013, the Cerberus-led group added to the bet, buying hundreds of grocery stores from ailing Supervalu for just $100mn in equity and the assumption of $3.2bn in debt. In 2014, the portfolio of grocers, named Albertsons, acquired Safeway for $9.7bn, a deal it financed with nearly $8bn debt.
Cerberus will receive $5.2bn for its Albertsons shares, making many multiples of its initial investment, an outcome that depends in part on how the spun-off company trades. A Cerberus representative did not immediately respond to requests for comment.