C.E.O. Dillon Says No Kroger LBO In the Works

CINCINNATI -- So is The Kroger Co. here the likely target of a leveraged buy-out by a private equity firm, or isn't it?

Dave Dillon, the leading supermarket chain's top executive, said no it isn't, in a statement released late last Friday to, no doubt, concerned Kroger employees.

Earlier that day, however, a report in the Wall Street Journal said the buzz around Wall Street was that, indeed, deep-pocketed private equity investors were seriously eyeing Kroger as a candidate, and that it was likely an LBO was in the offing.

"I want you to know neither management nor our Board of Directors has any interest in pursuing a leveraged buyout transaction," chairman and c.e.o. Dillon said in a letter to employees that the chain also released on its Web site.

While Dillon insisted that the chain's policy is "not to comment on acquisition rumors," he did acknowledge the swirl of speculation launched with his company as the focus, and it was clear the chain's management had decided it could not remain silent.

"With the ready availability of significant capital in private equity funds and Kroger's attractiveness as a franchise, rumors and speculation are not surprising," Dillon said. "Unfortunately, the kind of speculation contained in the article can be disruptive to our associates and to the conduct of our business.

"Our focus is on the execution of our business strategy, which is to serve our customers, and in that way to continue to grow Kroger as an independent public company and create value for our shareholders," Dillon continued. "Putting our customers first has generated substantial returns for our shareholders, and we expect to continue to grow as we face the challenges of this intensely competitive industry."

Citing unnamed sources it said were familiar with the matter, the Wall Street Journal said a number of parties were interested in Kroger and expected it to explore a leveraged buyout opportunity with its investment bank, Goldman Sachs.

Some industry observers said they could see the logic behind such a move.

Kroger, with 2006 revenue of $66 billion, has a market capitalization of more than $20 billion, making it both a logical and well-timed target for a buyout, Burt Flickinger III, managing director of New York-based Strategic Resource group, told Progressive Grocer on Friday.

An LBO "makes a ton of sense for Kroger," Flickinger said. "It's a perfect time to monetize it. Kroger has paid down its debt load and found formats that win consistently against Wal-Mart. At the same time, it's found a way to win against all the other major [publicly traded] chains like Safeway and Albertsons/Supervalu, as well as holding its own against the best of the family-owned and operated privately held chains like Bashas, H.E. Butt, and Publix."

Flickinger said that, should it go private, "there's a lot more Kroger could do outside [the constraints of] the Sarbanes-Oxley Act," particularly if Dillon remains at the helm.

"Dillon is arguably the best executive leader of any of the publicly held retailers in America today," said Flickinger, noting that under Dillon's "dynamic leadership, there's been a tremendous amount of sales share and profit growth potential, [which] a private equity firm can participate in by taking Kroger private."

When asked if Dillon would be likely to stay on if a deal was tendered, Flickinger said "any private equity firm would likely be insistent that he stay on" in light of Kroger's solid performance under his watch since 2003.

"Also, Kroger has had very good senior management for the last four decades," Flickinger noted. "As a result, Kroger is the only unionized chain that can consistently win across all forms of competition."

Flickinger further said a bid to take Kroger private via an LBO would be amicable, as opposed to hostile and unsolicited.

Kroger's shares closed Thursday at $29.11, near a 52-week high. Financial markets were closed for Good Friday, when the Wall Street Journal story surfaced.

The market for leveraged takeovers has been whipped into a frenzy in the past few years as many public companies have been subject to buyout rumors. But the Wall Street Journal report claimed "the specificity of discussions around Wall Street suggests there is a lot of behind-the-scenes movement around the grocer."

In 1988, Kohlberg Kravis Roberts & Co. had attempted a leveraged buyout of Kroger, but the grocery chain decided to take on debt as a way to stave off a takeover.

At the end of fiscal 2006, Kroger operated (either directly or through its subsidiaries) 2,468 supermarkets and multi-department stores in 31 states, under two dozen local banners including Kroger and Kroger Marketplace, Ralphs, Fred Meyer, Food 4 Less, King Soopers, Smith's and Smith's Marketplace, Fry's and Fry's Marketplace, Dillons, QFC and City Market. Kroger also operated (either directly or through subsidiaries, franchise agreements, or operating agreements) 779 convenience stores, 412 fine jewelry stores, 631 supermarket fuel centers and 42 food processing plants.
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