Kroger suspends buyouts to prioritize debt reduction after Albertsons deal closes

Grocery giant Kroger Co.

is suspending share buybacks ahead of its planned acquisition of rival Albertsons Cos. Inc., in an effort to use the extra cash to pay down its debt as it closes one of the biggest deals in the history of the U.S. food industry.

The blockbuster transaction comes amid slowing trading, economic uncertainty and investor concerns about highly leveraged companies. Funding costs for businesses at all levels of credit have risen in recent months since the Federal Reserve began raising interest rates to fight inflation.

Cincinnati-based Kroger said Friday it would pay for the $24.6 billion deal in cash and proceeds from new debt financing. The company secured a $17.4 billion 364-day bridge loan from Citigroup Inc.

and Wells Fargo & Co., he said in a securities filing. The loan is the second largest global bridge loan this year so far, behind Broadcom Inc.

$32 billion loan as part of its deal announced in May to buy VMware Inc.,

according to Dealogic, a financial data provider.

Kroger will temporarily suspend buybacks in an effort to prioritize debt reduction after the deal closes, the company said Friday. The company repurchased $309 million in shares in the quarter ended Aug. 13 and said in September its board had authorized a new $1 billion buyback program. Kroger had $1.1 billion in cash and temporary investments on its balance sheet as of August 13, up from $1.8 billion at the start of the year.

“We expect, as we have suspended redemptions, to have a significant amount of cash available to close the transaction,” chief financial officer Gary Millerchip said on a call with analysts on Friday. The company did not immediately respond to a request to make Mr. Millerchip available for an interview.

Kroger aims to achieve a net debt to adjusted earnings before interest, tax, depreciation and amortization ratio of 2.3x to 2.5x within 18 to 24 months of closing the deal, which is expected in early 2024. That figure was 1.63x as of August 13. On Friday, the company did not say what its leverage ratio would be after the deal closes.

Kroger had net debt of $19.28 billion as of August 13, up from $18.98 billion a year earlier, according to S&P Global Market Intelligence, a data provider.

“In this current market, given rising rates and a weaker economic cycle, investors are a bit more cautious about companies with high leverage,” said firm analyst Rupesh Parikh. investment Oppenheimer & Co Inc., referring to the additional debt that the company undertakes to finance the transaction. Kroger shares fell 7% on Friday, closing at $43.16.

Stopping buybacks will free up cash on the balance sheet that the company can use to deleverage, in addition to cash from the two companies’ combined earnings and cost savings, analysts said. The companies both have stores in locations including Southern California, Washington, Texas and Washington, D.C., and said Friday they plan to sell overlapping stores to help gain regulatory approval for the transaction.

Rating company Moody’s Corp.

Friday affirmed Kroger’s investment grade credit rating. But, the company changed the outlook for the business from stable to negative, largely due to the risks involved in closing and integrating such a large transaction, analyst Chedly Milord Louis said. Moody’s expects Kroger’s gross debt to EBITDA ratio, which currently stands at 2.5x, to reach approximately 3.8x after the transaction closes and 3.2x within 18 to 24 months. following the transaction, according to Ms. Milord Louis.

Still, the deal makes strategic sense given the size of the business it will create and the breadth of its product offering, Ms Milord Louis said. “It’s a strong competitor. And they’ve always been a strong competitor. I don’t see that necessarily changing with the acquisition of Albertsons,” she said.

Write to Kristin Broughton at [email protected]

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