Kroger and Albertsons Cos. reached a roughly $1.9 billion deal to sell just over 400 stores and eight distribution centers across 17 states and Washington, D.C., to C&S Wholesale Grocers as part of the proposed $24.6 billion merger of the two giant U.S. supermarket chains.
Kroger, based in Cincinnati, and Albertsons, headquartered in Boise, Idaho, said on Friday they agreed to the all-cash transaction with C&S Wholesale that included two regional headquarters offices and five private-label brands. C&S Wholesale, based in Keene, New Hampshire, is a wholesale grocery supplier and one of the largest privately held companies in the U.S. It operates 160 stores now, some that are corporate-owned and some that are franchised grocery stores operating under the Grand Union and Piggly Wiggly banners in the Midwest, Northeast and Carolinas.
Kroger and Albertsons are shedding the properties to allay any antitrust concerns by the Federal Trade Commission, the agency that's been reviewing their merger since it was announced in October last year. The two grocers have said they were committed to divesting some stores as part of their combining and now say their merger is on track to close early next year.
The divestiture deal includes 413 stores, along with the QFC, Mariano's and Carrs brand names. In addition, Kroger will divest the Debi Lilly Design, Primo Taglio, Open Nature, ReadyMeals and Waterfront Bistro private-label brands.
The stores listed by state included in the divestiture are:
- Washington state, 104 Albertsons and Kroger stores.
- California, 66 Albertsons and Kroger stores.
- Colorado, 52 Albertsons stores.
- Oregon, 49 Albertsons and Kroger stores.
- Texas/Louisiana, 28 Albertsons stores.
- Arizona, 24 Albertsons stores.
- Nevada, 15 Albertsons stores.
- Illinois, 14 Kroger stores.
- Arkansas, 14 Albertsons stores.
- Idaho,13 Albertsons stores
- New Mexico, 12 Albertsons stores.
- Montana/Utah/Wyoming, 12 Albertsons stores.
- Washington, D.C./Maryland/Virginia, 10 Harris Teeter stores.
Prior to the sale closing, Kroger said it may — in connection with securing FTC and other governmental clearance — require C&S Wholesale to purchase up to an additional 237 stores in certain geographies. If additional stores are added to the deal, the buyer will pay Kroger additional cash consideration based upon an agreed upon formula.
Kroger plans to divest the stores after the merger with Albertsons is completed.
Kroger sought to "identify a well-capitalized buyer" that would be able to keep serving local communities, Chairman and CEO Rodney McMullen said in a statement, adding that "C&S achieves all these objectives."
He added that "C&S is led by an experienced management team with an extensive background in food retail and distribution." C&S also commits to honoring all collective bargaining agreements, he said.
Kroger discussed the pending sale on its scheduled second-quarter earnings call Friday morning, where McMullen told analysts, "The divestiture plan ensures that no stores will close as the result of the merger and that all front-line associates will remain employed."
The CEO also expressed optimism that the sale will satisfy the concerns of regulators.
"For us, we think we've addressed all the things and questions the FTC would have," McMullen said on the call.
But the FTC may raise other issues, according to Arun Sundaram, a vice president and senior equity analyst with CFRA Research.
"The agreement with C&S Wholesale could be enough to alleviate FTC concerns regarding market concentration, especially considering Kroger has the flexibility to divest an additional 237 stores, if needed," Sundaram said in an email to CoStar News.
"However, there is the possibility the government will bring a broader case and challenge the merger on the grounds of other issues, such as price discrimination and/or labor monopsony," Sundaram said, referring to a situation where an employer pays workers below market rate.
"Nonetheless, this development increases the likelihood of the deal closing," he said. He cited C&S' experience running grocery stores, its capital to invest, and its agreement to maintain labor agreements, as positive factors.
On Friday, Kroger also disclosed it had reached a settlement of $1.2 billion with U.S. states and local governing bodies and $36 million to Native American tribes, paid over 11 years, regarding claims and litigation related to the opioid epidemic. It will also fork over $177 million over six years to cover attorneys’ fees. The grocer said the settlement wasn't an admission of wrongdoing or liability and that it will continue to defend itself against any other claims and lawsuits relating to opioids.
Kroger took a $1.4 billion charge in the second quarter for the settlement. It posted sales of $33.85 billion in the quarter, a drop from $34.64 billion in the year-ago period.