Kroger’s (NYSE:KR) stock fell about 3% in premarket trade on Oct. 14 after it agreed to buy Albertson’s Companies (NYSE:ACI) for $24.6 billion.
Albertson’s was also down in the pre-market, but it had risen 11% on Oct. 13.
Kroger is valuing Albertson’s at $34.10/share. Albertson’s was due to open below $28.
Why Buy Now?
Grocery shares languished for years before breaking out during the pandemic. In 2022, Kroger is up 3% while the average stock in the S&P 500 is down over 23%. Albertson’s has traded as high as $36/share during 2022 but is now down over 10%.
Both chains own more than their namesake markets. Kroger owns Harris Teeter, Dillon’s, Roundy’s, and Fred Meyer, among other chains. Albertson’s owns Safeway and Jewel/Osco. Among their biggest territory overlaps is California, where Safeway and Albertson’s go up against Kroger’s Ralph’s chain.
While some reporters call the result a “mega grocery chain,” it would only have about 13% of the U.S. market. Walmart (NYSE:WMT) is now the country’s largest grocery, with a 21.6% share of spend, when its Sams Club warehouse stores are added. Kroger had 8.8% and Costco Wholesale (NASDAQ:COST) was not far behind at 6.4%.
For the May quarter Kroger earned $657 million, 91 cents/share on revenue of $44.6 billion. For the June quarter, Albertson’s earned $484 million, 86 cents/share, on revenue of $23.3 billion.
In addition to Walmart, Costco and Amazon (NASDAQ:AMZN), which owns Whole Foods, grocers like Kroger’s and Albertson’s face growing competition from European giants Aldi and Lidl, as well as Trader Joe’s, which is also owned by a German company. Both hope to complete their deal in early 2024 but it will face scrutiny from an increasingly aggressive Securities and Exchange Commission.
KR Stock: What Happens Now
As trading opened Albertson’s was still selling at a 25% discount to the Kroger price. This indicates skepticism over whether the merger will be approved and how long that might take.
Shoppers are unlikely to see much change as both companies continue to use the names of past acquisitions in the marketplace.
On the date of publication, Dana Blankenhorn held long positions in COST and AMZN. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
