Kroger Co., the nation's biggest grocery store chain, has agreed to acquire the owner of Ralphs Grocery and Hughes Family Markets for about $13 billion in stock and assumed debt in a deal that would create a supermarket powerhouse spanning from coast to coast, sources said Sunday.
A merger of Cincinnati-based Kroger and Fred Meyer Inc., the Portland-based parent of Ralphs, Food 4 Less, Hughes and other stores, would create a chain of 2,200 stores in 31 states, from California to the Carolinas. The new company would have annual sales of about $43 billion.
Sources said the proposed merger, which is expected to be announced today in New York, would enable the combined company to be more competitive on prices, and the new entity is expected to save about $225 million in costs within three years--much of it in discounts suppliers would give the combined company because of its greater purchasing power. But the deal is likely to draw some criticism from consumer advocates concerned that fewer supermarket chains means fewer choices for shoppers and thus the potential for higher prices.
The deal was engineered by investor Ronald Burkle, chairman of Fred Meyer and head of Los Angeles-based Yucaipa Cos., which controlled the Ralphs and Food 4 Less chains before they were sold to Fred Meyer. Sources said Burkle initiated talks that led to the Kroger-Meyer deal. The two sides have been negotiating for about six weeks.
Burkle, who has achieved billionaire status by buying and selling supermarket chains, has retained control of the chains he has merged in the past. However, Burkle has always maintained that control is not as important as arranging deals that benefit shareholders, which means they benefit him as well. In this case, Burkle's Yucaipa Cos. would become the largest shareholder in a new Kroger with about 4% of the stock.
Under the deal, Fred Meyer shareholders would receive one Kroger share for each of their shares and Kroger would assume about $5 billion in Fred Meyer debt. Boards of both companies have approved the transaction, the sources said.
A Kroger-Fred Meyer deal would be the latest in a spate of mergers involving the major supermarket chains, which have seen bulking up as the easiest way to boost market share and cut costs to better compete against low-priced retailers such as Wal-Mart and Kmart that have been adding groceries to their stores.
Two months ago in what was then the biggest supermarket deal to date, Albertson's agreed to acquire American Stores Co., which owns Lucky supermarkets and the Sav-on drugstore chain, for $11.7 billion. Last year, Pleasanton, Calif.-based Safeway, the No. 2 chain, bought Southern California's Vons chain.
And Fred Meyer acquired Ralphs in a two-step, four-chain deal last year that catapulted Meyer from the 11th-largest supermarket operator to No. 4. Under that deal, Ralphs agreed to be acquired by Meyer and Meyer also acquired the Seattle-based QFC chain, which owned Hughes. The deal gave Ralphs control of Hughes, which retained its name but now carries Ralphs' products.
Sources on Sunday said Ralphs, Food 4 Less, Hughes and other chains owned by Fred Meyer would retain their store names and formats after the merger with Kroger. The sources added that some layoffs would occur in the administrative offices of Fred Meyer. The headquarters of the new company would be in Cincinnati.
The planned deal would allow Kroger to retain its leadership over No. 2 Safeway. Safeway was widely rumored to be considering a buyout of Kroger, and many industry analysts believe Kroger struck a deal with Meyer to forestall such a bid and remain independent.
A purchase adds Fred Meyer's estimated $15 billion in annual sales to Kroger, which had 1997 sales of $26.6 billion. Together they would have about 300,000 employees.
The deal is expected to close in early 1999, pending shareholder and regulatory approval. The two companies are not likely to meet antitrust obstacles since they compete only in Arizona, sources said.
After the merger, Burkle would be a director on the new Kroger board. The company would be headed by Kroger Chairman Joseph A. Pichler.