Potential Kroger-Albertsons combination would add scale, but attract regulatory scrutiny


Neither our $49.50 per share valuation of Kroger narrow moat (KR) nor our $28.50 per share valuation of Albertsons no moat (ACI) will change in light of media reports that they are considering a merger, as we are awaiting more concrete information before incorporating a deal into our analyzes (shares of the former are roughly stable and the latter are up around 10% following the report). While we believe a combination between the two largest pure grocers in the U.S. would create scale advantages (and associated cost and purchasing leverage) that would help fend off the burgeoning omnichannel titans Walmart WMT and Amazon AMZN, we suspect an overlap between the two channels’ footprints in many marketplaces may cause regulators to scrutinize a transaction.

We have long argued that local market scale, cost leverage (especially in omnichannel fulfillment, analytics, sourcing, distribution and advertising), own-brand portfolios and the data generated by loyalty programs can help grocers beat their rivals in a fiercely competitive industry. We believe Kroger sits well above other pure US grocers, with leading analytics, private label and omnichannel presences, while Albertsons is a step behind on all fronts. Whether Kroger could extend its benefits to Albertsons depends largely on the extent to which regulators impose divestitures in certain markets, as the two companies are rivals in many regions.

Prior to the speculation, Kroger was trading at around 11x consensus FY2022 earnings (or an enterprise value of 6x consensus adjusted EBITDA; consensus as calculated by FactSet), while Albertsons was trading at around 9 times earnings (Enterprise Value/Consensus Adjusted EBITDA of 5). If Albertsons were valued at a similar multiple to Kroger in an acquisition, its shareholders would receive a premium of around 30%. However, we believe the price would depend on an assessment of the potential divestments required, which could lower the premium significantly.


About Author

Comments are closed.