Kroger merger adds 900 stores

Tuesday, October 20, 1998

BY LISA BIANK FASIG
The Cincinnati Enquirer

[dillon]
David Dillon, president and chief operating officer, announces the merger.

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The Kroger Co. will expand into regions and retail operations it has never before explored with its planned acquisition of Oregon-based Fred Meyer Inc.

The deal, announced Monday, will form the largest company in Cincinnati and assure Kroger's top spot in the grocery store industry.

The $13 billion merger will add to Kroger more than 900 grocery, multidepartment and jewelry stores operating primarily in the West. Together, the companies will operate more than 2,000 food stores from coast to coast and generate annual sales of around $40 billion.

INFOGRAPHICS
  • States where Kroger, Meyer operate
  • Kroger, Meyer by the numbers
  • Industry analysts say the largest acquisition in Kroger's history is fueled by growing competition and a rash of grocery mergers that are yielding fewer, but larger chains. Kroger has been the largest grocery store company in the nation, but pending mergers between other companies threaten to unseat it.

    "Kroger is alive and well and staying in Cincinnati," said David Dillon, president and chief operating officer of Kroger. "This is great news for Cincinnati."

    The new company will be based in Kroger's current offices downtown. All stores will continue to operate under their existing names, and few Fred Meyer executives are expected to migrate to Cincinnati.

    Joseph Pichler will continue as Kroger chairman and chief executive. Robert Miller, vice chairman and CEO of Fred Meyer, will become vice chairman and chief operating officer of the combined company. Mr. Dillon will remain as president.

    Fred Meyer will likely continue to operate offices in Portland, Ore., its base.

    "The corporate headquarters will be in Cincinnati, but we are aware of Kroger's philosophy of operating its various store chains more or less autonomously," said Fred Meyer spokeswoman Mary Burczyk. "We are assuming that (philosophy) will go forward."

    While the merger will have little visible effect in Cincinnati, it does make for a more complex company.

    MORE COVERAGE
  • Freddy's pioneered one-stop
  • Meyer formats new to Kroger
  • Kroger Timeline
  • The new Kroger will expand from being a food store chain to a seller of everything from apples and ground beef to gold chains and furniture. Fred Meyer, until September 1997, operated primarily mass merchandise stores that mixed food and non-food items, such as furniture, apparel and electronics. But in the past year it embarked on an acquisition binge of grocery companies, acquiring three that include a warehouse-type chain.

    Its nameplates include Fred Meyer Marketplace, Quality Food Centers, Ralphs, Food 4 Less, Hughes, Smith's, Smitty's, Bell, Cala, FoodsCo., Falley's, Fox's Jewelers, Fred Meyer Jewelers and Merksamer Jewelers.

    Industry followers call the Meyer merger both a necessary challenge and an opportunity for Kroger, which faces competition not only from grocery chains but other mass merchandisers such as Meijer and Wal-Mart.

    "I think Kroger over the last 10 years has competed against more and more formats," said Charles Cerankosky, an analyst with McDonald & Co. Investments in Cleveland. He said Fred Meyer provides Kroger the chance to explore mass merchandising and warehouse formats.

    Mr. Dillon said Kroger expects to learn from Fred Meyer's experience and expand the mixed-use chains to other markets.

    "They know what they're doing," he said.

    KROGER EARNINGS
    Kroger Co. posted record sales and earnings for the third quarter of the year, pushed by cost cutting and other administrative moves, the company reported Monday.

    The company earned $117.9 million, or 47 cents per share, on sales of $8.0 billion in the quarter ended Oct. 3. That's up from $95.8 million, or 37 cents per share, earned on sales of $7.7 billion a year earlier.

    Year to date, sales rose 4 percent to $20.9 billion compared to a year ago. Net earnings rose 20.7 percent to $347.7 million. Earnings per share were $1.35 in the third quarter, compared to $1.13 a year ago.

    In the deal, shareholders of Fred Meyer will receive one share of the Kroger company for each of their own shares for a total value of about $8 billion. Shares in Kroger and Fred Meyer both tumbled on the news. Kroger shares fell $3.31 1/4 Monday, closing at $45.43 3/4. Shares in Fred Meyer fell almost $5 Monday, to $44.18 3/4

    The deal includes Kroger's assumption of about $4.8 billion in Fred Meyer debt, bringing the new company's debt to almost $8 billion. Analysts and Kroger are not concerned about the debt level because the company's market equity also will be high. Standard & Poor's told Kroger the grocer will maintain its investment-grade credit rating.

    Kroger said the merger should not affect its earnings per share in fiscal 1999, and the deal should improve the company's growth expectations. Kroger had projected annual earnings-per-share growth of 15 to 17 percent. The new company will anticipate growth of 16 to 18 percent over the next three years, Mr. Dillon said.

    Kroger estimates the new company will realize $225 million in cost savings within three years.

    Kroger, with 1997 sales of $26.6 billion, operates almost 1,400 supermarkets and convenience stores, primarily in the South and Midwest. Fred Meyer's sales are estimated to be $15 billion, including revenues from several 1997 acquisitions.

    An interesting Cincinnati-based coincidence: California-based Ralphs Stores, which Fred Meyer acquired in March, had once been owned by Federated Department Stores.

    Though analysts applaud the merger, they also had liked Kroger's practice of steady, internal growth and small acquisitions. Kroger hasn't tackled a major takeover in years.

    "The key thing is that Kroger is the acquirer (and) Cincinnati remains corporate headquarters," said Allan Reich, senior partner at D'Ancona & Phlaum, a Chicago-based corporate securities firm specializing in mergers and acquisitions. "What Kroger will be picking up is the best in the strengths from Fred Meyer.

    "I think this is a positive and necessary merger."

    Necessary, he said, to compete not only against growing grocery store chains such as Safeway and Albertson's, but against new industry entrants, including Meijer and Wal-Mart.

    The Kroger deal joins several recent mergers in the grocery store industry: Royal Ahold and Giant Food Inc.; Safeway Inc. and Dominicks; and Albertson's Inc.'s pending $11.8 billion acquisition of American Stores Co. The last deal would make for the largest grocery store company, if the Kroger merger falls through.

    "Scale is very important in this industry," said George Thompson, an analyst with Prudential Securities.

    "I guess the question you have to ask yourself is, "If Albertson's hadn't bought American, would Kroger still have bought Fred Meyer?' "They might have, but they would have been very hesitant."

    The merger would secure Kroger's position as the largest grocery store chain in the country, with 300,000 workers and stores in 31 states across the country. There is only one state -- Arizona -- where there exists significant market overlap.

    And it gives Kroger a pre-packaged entry into new retail formats. "It's an opportunity because the multidepartment store that (Fred Meyer) runs is one of the very earliest types of super center formats in the United States," Mr. Dillon said.

    "Their non-foods expertise is remarkable."

    Freddy's pioneered one-stop
    Meyer formats new to Kroger
    Kroger Timeline



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