Kroger Buys Harris Teeter for ~$2.5 Billion

Deal of the Week: Kroger buys Harris Teeter for ~$2.5 billion

Announcement Date  July 9, 2013 Acquirer  The Kroger Co (NYSE:KR) Acquirer Description  Kroger operates as a retailer in the United States  Founded in 1883 and based in Cincinnati, Ohio Target  Harris Teeter Supermarkets (NYSE:HTSI) Target Description  Harris Teeter engages in the operation of a regional chain of supermarkets in the southeastern and mid-Atlantic United States  Founded in 1891 and headquartered in Charlotte, North Carolina Target Financial Stats  Mkt Cap: $ 1.8 billion  LTM EBITDA: $ 311.9 million  EV: $ 1.9 billion  EV/LTM EBITDA: 6.0x  LTM Revenue: $4.6 billion  LTM P/E: 19.4x Price / Consideration  Price: $2.5 billion  Consideration: Cash Buyer / Target Advisor  Bank of America Merrill Lynch  JP Morgan Rationale  Harris Teeter brings to Kroger an exceptional brand and complementary base of 212 stores located primarily in high-growth markets, vacation destinations and university communities  Kroger said it believes it can cut costs by upwards of $50 million annually over the next three to four years, largely due to the benefits of the buyer's larger scale Of Note  Kroger on Tuesday, July 9, said it would acquire Harris Teeter for approximately $2.5 billion in cash and assumed debt, valuing the target at about 8.0x EBITDA  Terms of the deal call for Cincinnati-based Kroger to pay $49.38 per share in cash for Harris Teeter, and assume outstanding debt of approximately $100 million  The transaction price represents a premium of 33.7% to the Harris Teeter closing share price on January 18, 2013, the day of the first media report that Harris Teeter was evaluating strategic alternatives  Kroger intends to continue its quarterly dividend and share repurchase program while managing free cash flow to reduce the leverage taken on from this merger  Kroger expects to allocate some free cash flow to debt reduction to re- establish and maintain its 2.0x – 2.2x net debt to EBITDA ratio over the next 18-24 months  Including the effect of allocating some free cash flow to debt reduction, Kroger expects net accretion to earnings per diluted share in the range of $0.06 – $0.09 in the first full year after the merger  This is Kroger's largest deal since its 1998 acquisition of Portland, Ore.- based Fred Meyer for $12 billion