Kroger to Acquire Harris Teeter for $2.5B (Update 1)

This story has been updated from 9:15 am ET with additional information.

NEW YORK ( TheStreet) -- Midwestern supermarket giant Kroger ( KR) agreed to acquire North Carolina-based chain, Harris Teeter Supermarkets ( HTSI) on Tuesday for a transaction valued at $2.5 billion in all cash.

Kroger of Cincinnati agreed to pay $49.38 per share in cash for all of Harris Teeter's outstanding shares, a 1.7% premium to the seller's closing stock price on Monday.

The transaction price also represents a premium of 33.7% to Harris Teeter's closing share price on Jan. 18, 2013, the day of the first media report that Harris Teeter was evaluating strategic alternatives, according to the press release.

Harris Teeter shares rose 1.6% to $49.26 on Tuesday.

But what's interesting is that shares of Kroger rose as much as 3.1% and reached a 52-week-high of $37.32 after the announcement. The share price rise is atypical for a buyer's stock price on the day a deal is announced.

"What you're seeing is the market really likes this deal," says Michael Robinson, executive vice president of Levick Communications and manager of the firm's Corporate and Public Affairs Practice Group.

"The market really appreciates the economies of scale this will give it and appreciates the expansion with Harris Teeter into high growth markets," Robinson says, referring to better pricing power for Kroger when it negotiates with big food companies like Procter & Gamble ( PG), for instance. "Some of the big wholesalers and manufacturers actually like this deal because it helps them keep prices where they want them to be."

With the acquisition, Kroger expects to achieve annual cost savings of approximately $40 million to $50 million over the next three to four years.

Kroger expects net accretion to earnings per diluted share in the range of 6 cents to 9 cents a share 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.

More importantly, "it is clear that Kroger is setting itself up to go head to head with Wal-Mart in as many places as it can," Robinson says.

With more than 2,000 supermarkets throughout the Midwest, the acquisition will substantially expand Kroger's footprint to the Southeast and mid-Atlantic. The Cincinnati-based company will gain more than 212 stores 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, N.C. and Indian Trail, N.C. and a dairy facility in High Point, N.C.

After the deal closes, 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, the companies said.

Kroger is swiftly becoming one of the nation's largest retailers, moving more into direct competition with the likes of Wal-Mart Stores ( WMT), particularly as the retailing giant launches an increasing number of standalone grocery stores.

Kroger employs 343,000 people serving customers in 2,419 supermarkets and department stores in 31 states. The company operates up to two dozen brands, including Kroger, City Market, Dillons, Jay C, Food 4 Less, Fred Meyer, Fry's, King Soopers, QFC, Ralphs and Smith's. The company also operates 784 convenience stores, 322 fine jewelry stores, 1,182 supermarket fuel centers and 37 food processing plants in the U.S.

Harris Teeter's annual revenue totaled $4.5 billion last year.

"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," Kroger Chairman and CEO David B. Dillon said in a press release. "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."

"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, N.C.," Harris Teeter's Chairman and CEO Thomas W. Dickson said. "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."

Bank of America Merrill Lynch is acting as exclusive financial advisor to Kroger; JPMorgan Securities is acting as exclusive financial advisor to Harris Teeter.

Kroger plans to finance the transaction with debt and will assume Harris Teeter's outstanding debt of approximately $100 million.

-- Written by Laurie Kulikowski in New York.

To contact Laurie Kulikowski, send an email to: Laurie.Kulikowski@thestreet.com.

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