The Kroger Co. and Harris Teeter Supermarkets Inc. announced a definitive merger agreement under which Kroger will purchase all outstanding shares of Harris Teeter for $49.38 per share in cash. 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. The terms of the agreement were approved by the Boards of Directors of both companies.

Harris Teeter brings to Kroger an exceptional brand and complementary base of 212 stores in attractive southeastern and mid-Atlantic markets and in Washington, D.C. The stores are located primarily in high-growth markets, vacation destinations and university communities in North Carolina, Virginia, South Carolina, Maryland, Tennessee, Delaware, Florida, Georgia and the District of Columbia. Harris Teeter also operates distribution centers for grocery, frozen and perishable foods in Greensboro, NC and Indian Trail, NC and a dairy facility in High Point, NC. Harris Teeter had revenues of approximately $4.5 billion for fiscal year 2012.

"We are excited to welcome Harris Teeter to the Kroger family," said David B. Dillon, Kroger's Chairman and CEO. "Harris Teeter is an exceptional company with a great brand, friendly and talented associates, and attractive store formats in vibrant markets run by a first-class management team. They share our customer-centric approach to everything we do – from store format and merchandising to innovative loyalty programs. This is a financially and strategically compelling transaction and a unique opportunity for our shareholders and associates. We look forward to bringing together the best of Kroger and Harris Teeter while continuing to operate and grow the Harris Teeter brands. Together, we can continue to deepen our connections with customers across all of our markets."

Thomas W. Dickson, Chairman of the Board and CEO of Harris Teeter stated, "Harris Teeter has a long track record of creating shareholder value and this merger is the culmination of those efforts over many years. We are excited about becoming part of The Kroger Co., one of the best food retailers in the U.S. while maintaining the Harris Teeter banner, our management teams, our new store growth plan, our distribution and manufacturing facilities in North Carolina as well as our headquarters in Matthews, NC. As part of Kroger, Harris Teeter will be well equipped to continue to provide our customers outstanding quality and customer service as well as excellent value in an increasingly competitive market."

Kroger will finance the transaction with debt. Kroger also intends to assume Harris Teeter's outstanding debt of approximately $100 million. Consistent with Kroger's and Harris Teeter's shared long-term commitment to returning cash to shareholders, 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. Although the ratio will increase at the time the merger closes, Kroger expects to allocate some free cash flow to debt reduction to re-establish and maintain its 2.00 – 2.20 net debt to EBITDA ratio over the next 18-24 months. Kroger is committed to maintaining its current investment grade credit rating.

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, excluding transition and transaction expenses. Kroger expects to maintain its current 8-11% long-term net earnings per share growth rate off of this higher earnings base.

Kroger expects to achieve annual cost savings of approximately $40 to $50 million over the next three to four years. Much of the savings is expected to come from the benefits of Kroger's scale. Kroger has a strong history of achieving synergy goals. Being patient in achieving those goals reduces the risk of the transaction and sets the stage for sustainable growth.

Together the company will operate 2,631 supermarkets and employ over 368,300 associates across 34 states and the District of Columbia. Following closing, Harris Teeter will continue to operate its stores as a subsidiary of The Kroger Co. and will continue to be led by key members of Harris Teeter's senior management team. There are no plans to close stores, and associates will continue to have employment opportunities with both companies. Kroger headquarters will remain in Cincinnati, and Harris Teeter will keep its headquarters in Matthews, NC.

Kroger and Harris Teeter both strive to play a vital role in all of the communities they serve. In 2012, Kroger invested more than $250 million in local communities to provide hunger relief and support for the military and their families, breast cancer awareness programs and more than 30,000 schools and grassroots organizations. Harris Teeter similarly focuses community investments on feeding the hungry, supporting the military, and investing in local schools and community organizations. Harris Teeter's 2012 donations totaled $9.1 million.

The merger is expected to close following the satisfaction of customary closing conditions including approval by Harris Teeter shareholders and regulatory approval. The transaction includes customary breakup fees.

BofA Merrill Lynch is acting as exclusive financial advisor to Kroger and Arnold & Porter, LLP is acting as legal advisor to Kroger. J.P. Morgan Securities LLC is acting as exclusive financial advisor to Harris Teeter and provided a fairness opinion to its Board of Directors. McGuireWoods LLP is acting as legal advisor to Harris Teeter.

Source: Kroger