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Kroger bags Fred Meyer
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October 19, 1998: 3:32 p.m. ET
$12.8B purchase lets Kroger remain nation's largest grocery operator
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NEW YORK (CNNfn) - Grocery store giant Kroger Co. agreed Monday to purchase rival Fred Meyer Co. in a $12.8 billion deal that will enable Kroger to reclaim its status as the nation's largest supermarket company.
Kroger will buy Fred Meyer, a Portland, Ore.-based food and drugstore giant, for $8 billion in stock, plus the assumption of $4.8 billion in debt.
Under terms of the deal, Fred Meyer shareholders will receive one new share of Kroger's common stock for each Fred Meyer common share they own.
While Kroger is hyping the cost savings associated with the merger, investors don't appear to share the company's enthusiasm.
Shares of Kroger (KR) were down 2-3/16 at 46-9/16 on the New York Stock Exchange following the announcement, while Fred Meyer (FMY) shares slid 4 to 45 on the Big Board.
Some analysts speculate that the companies' stock prices suffered because of investor concern over debt levels. Kroger currently has debt of about $3.2 billion and Fred Meyer's debt, which Kroger will take on as part of the acquisition, stands at $5 billion.
Others, however, seemed baffled by the cool reception to the deal on Wall Street.
"I can't imagine what it is (that's sending the companies' stock price lower)," said Prudential Securities analyst George E. Thompson. "The only thing I can think of is that somebody out there must believe that putting this thing together is going to be much more complicated than we believe. I don't see that being the case."
Thompson said he believes the merger is a good deal for both companies, one that should create the economies of scale necessary to remain competitive in the tough supermarket industry.
"This certainly gives Kroger size, and that's very important," he said.
The merger also will enable Kroger to retain its title as the nation's largest supermarket operator, staying ahead of rival Albertson's (ABS), which otherwise would have eclipsed Kroger through its $11.7 billion buyout of American Stores Co. (ASC) in August.
Albertson's "upped the ante" in the supermarket business, Thompson said.
The combined company will retain Kroger's name and Cincinnati headquarters. Kroger Chairman and Chief Executive Joseph Pichler, will keep his position while Meyer Chief Executive Robert Miller will be named vice-chairman and chief operating officer of the new company.
Analysts say they see few significant changes in store for Kroger once the merger is complete, but customers could benefit from efficiency-driven lower prices.
"If you do see some changes, there could be some operating efficiencies and economies of scale that flow through to the consumer via lower prices," said grocery analyst Patrick Schumann, of Edward Jones. "But I do believe that they're going to operate the way that these companies have operated. They have very strong stores to begin with…so the consumer shouldn't see too much change at the beginning."
Combined with Meyer, currently the fifth-largest grocery chain, Kroger will operate 2,200 supermarkets in 31 states, boasting $43 billion in annual sales.
Fred Meyer has more than 85,000 employees and estimated annual sales of $15 billion. The company's four main subsidiaries -- Fred Meyer Stores, Smith's Food & Drug Centers, Quality Food Centers and Ralphs Grocery Co. -- operate more than 800 stores food and drug stores in 12 western states stretching from Alaska to Texas. 
-- from staff and wire reports
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