Published - October 17, 2022 @ 11:15 AM (EET)

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After eyeing the retail chain for a while, grocery giant Kroger Co. (NYSE:KR) agreed last week to buy Albertsons (NYSE:ACI) for $34.10 per share in a deal valued at $24.6 billion.

In the US, Kroger is the second-largest grocer by market share, behind Walmart, thus further broadening its footprint if the company closes the deal with Albertsons, the fourth largest.

The blockbuster transaction, which will also need regulatory approval, comes at a challenging time in the grocery industry.

Regulators have recently scrutinized how large companies influence prices with inflation driving up the cost of food and may be concerned that a merged company could price out smaller competitors even more.

If approved, the combining companies would capture nearly 16% of the US grocery market, compared with Walmart (NYSE:WMT), which has roughly 21% of the market as of June 30.

In addition, the merger will enhance Kroger's buying power with suppliers and generate potential revenue synergies from expanding its online offering, with the financial benefits of the transaction looking considerable.

WHY IT MATTERS

On Friday, Kroger said it would pay for the almost $25 billion deal with cash and proceeds from a new debt financing.

Kroger also said it would temporarily pause buybacks to prioritize debt reduction after the transaction closes.  During the quarter that ended August 13, the company repurchased $309 million in shares.

Elsewhere, Albertsons expects to pay a special cash dividend of up to $4 billion to its shareholders.

Within four years of closing, Kroger aims to achieve $1 billion of annual cost savings, averaging 40% of Albertson's expected operating profit in the 2022 financial year.

NOW WHAT

Creating an astronomical supermarket operator with 700,000 employees working for banners, including Safeway, Ralphs, and Fred Meyer, the potential deal would be among the largest US retail transactions in years.

Jennifer Bartashus, an analyst at Bloomberg Intelligence, said,

"This is the type of transaction that really looks good on paper, but the actual practicality of achieving regulatory approval by the FTC could be difficult."  She added, "If you think about the store bases of the two respective entities, there is a lot of overlap in very competitive markets."

Albertsons' stock closed 11% higher Thursday on the potential merger news.

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