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Kroger Albertsons merger: Is there value in ACI stock as KR circles?

By Jenal Mehta


Updated

grovery store shopping
Kroger to buy Albertsons for $25 billion: Photo - Getty Images

The share value of Kroger (KR) and Albertsons (ACI) have rallied since news broke of their merger this week. Today news emerged that the offer has been accepted by both sides. Kroger has agreed to pay $24.6 bn for the take over of Albertsons, which amounts to $34.10 per share. 

Kroger is the United States’ highest earning grocery retail store chain. It operates brands such as Ralphs, Dillons, Smith’s, Harris Teeter and King Snoopers.

There are now reports that Kroger is planning to take over rival Albertsons, which is the second largest earner. This may be the largest ever merger deal in the industry.

While both companies are the top earning grocery stores in the US, this merger will likely push their scope even higher, and aid them in competing with the likes of Walmart (WMT), Costco (COST) and Target (TGT).

Kroger (KR) Price Chart

The news also boosted the valuation of Ocado (OCDO) British online supermarket, as Kroger is its biggest client. Despite the benefits of the merger, expansion in online retail will remain Kroger and Albertsons biggest challenge.

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Why is Kroger acquiring Albertsons?

In terms of retail sales, for the last two years Kroger has been top of the list when it comes to grocery stores in the United States. In 2021, the company brought in $136bn in revenue.

The income was more than double that of the second highest earner, Albertsons, which brought in $72bn.

Kroger operates 25 different brands, in 35 states ,while Albertsons owns 20 brands in 34 states. If the merger goes ahead, together their store market share will be around 16%, second only to Walmart (WMT) having 20%.

 

 

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The merger comes at a time when costs are high, but take over costs are low. Merging could reduce costs in terms of logistics, shortening supply chains and gaining access to new customers.

The current period of suppressed market valuations also means that Kroger will be able to take over Albertsons much more cheaply than it would have in a more stable economic period. The current offer by Kroger of  $24.6 bn is at a 25% premium, much lower than other mergers in the sector. For example, Albertsons acquired Safeway in 2014 for a premium of 56%. 

 

Walmart (WMT) Price Chart

Challenges

Following the announcement, the merger will be scrutinised by the Federal Trade Commission (FTC). A merger this size will likely create some monopoly concerns.

While markets reacted positively to the news, and some of this even spilled into Ocado’s (OCDO) valuations, online retail is where the highest potential growth lies for the retail sector.

The industry currently functions under narrow margins, and if this merger can create extra cash for the two companies to invest in online retail, it would have a huge leg up over its competitors.

Research by Mckinsey finds that although there is likely to be a temporary slowdown in online retail growth in 2022, by 2030 however they expect online retail to make up 20% of grocery shopping.

However this is a huge bet, as there is no certainty whether this is how consumer behaviour is likely to lead.

AJ Bell investment director Russ Mould comments that “ the core retail model of delivering goods to customers via that online platform is yet to prove it can be profitable.”

Markets in this article

COST
Costco
842.71 USD
-4.35 -0.510%
OCDO
Ocado Group plc
3.325 USD
-0.505 -13.310%
TGT
Target
152.89 USD
1.44 +0.950%
KR
The Kroger Co.
52.56 USD
-0.27 -0.510%
WMT
Wal-Mart Stores Inc (Extended Hours)
69.33 USD
0.17 +0.250%

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