Kroger Bid for Albertsons Problematic

Analysts skeptical on value

Published in CSP Daily News

CINCINNATI -- Reports of a Kroger-Albertsons deal may be premature, said a MarketWatch report. Reacting to reports, analysts mostly said that Kroger, the nation's biggest grocery chain, would create more problems for itself than value by trying to absorb Albertsons, the nation's second-largest chain.

Analysts cited by MarketWatch said they think that Albertsons $10 billion plus price tag would distract Cincinnati-based Kroger's effort to clean up its own balance sheet while trying to battle the likes of Wal-Mart Stores Inc. We hope Kroger is only poking [image-nocss] around Albertson's for informational purposes, Prudential Securities analyst Robert Campagnino wrote in a note to clients.

Not a match made in heaven, was the headline on Goldman Sachs & Co analyst John Heinbockel's report. Kroger is a surprising bidder, he wrote.

Bear Stearns analyst Robert Summers called an Albertsons bid confusing after having just met with Kroger's management. We hope that news overstates Kroger's involvement, he wrote. It remains our impression that management was content pursuing opportunistic market fill-in strategy with respect to acquiring assets, an approach that has been successful for Kroger the past four years.

Investors were intrigued by the notion, said the report, pushing shares of Boise, Idaho-based Albertsons higher.

A Kroger acquisition of Albertsons would be problematic and distracting, analysts said. Although Albertsons could give Kroger immediate presence in the tight Chicago-area grocery market, there are a number of other cities where the two overlap. That would open the door to federal antitrust scrutiny on an acquisition as well as the closing of a number of stores, the report said.

The two companies have what Heinbockel called a sizeable overlap in California, Arizona and Colorado, and the cities of Dallas, Portland, Salt Lake City and Seattle. That could lead to forced divestitures in the neighborhood of 500 to 600 stores, the Goldman Sachs analyst said, that could reduce merger synergies enough to affect the bid price.

But more troubling to the analysts cited by MarketWatch are the greater operational difficulties facing Albertsons. Kroger has made significant progress against the challenges it faces in the grocery industry, Prudential's Campagnino said. Buying what we see as poorer-quality assets simply to gain access to a couple of markets makes little sense in what we continue to see as an over-stored food retailing environment.

Lehman Bros. analyst Meredith Adler agreed: Management will be highly distracted by the need to integrate such a large and far-flung empire, especially one that has seen deterioration in underlying fundamentals in nearly every region. She added that Kroger would likely lose its investment-grade rating, especially if it uses debt to pay for half of the purchase. The backlash from that is higher interest rates on borrowing and could make its long-term leases pricier, MarketWatch said.

But at least one analyst likes the idea, the report said. BB&T Capital Markets' Andrew Wolf upgraded his recommendation on Albertsons to buy, believing that the naysayers are underestimating the company's worth. While it is true that Albertson's is a nonintegrated collection of both good and bad assets, on a profit-weighted basis the good far outweighs the bad, he said. By his estimate, 70% of Albertson's company stores ring up 90% of operating profit, with much of that coming from the prized assetsJewel, Shaw's, Acme, Osco and Sav-on.