April 9, 2007
Kroger CEO Says No to LBO
Last Friday, The Wall Street Journal ran a report that a number of private equity firms were considering the possibility of pursuing a leveraged buyout at Kroger.
In quick order, David Dillon, chairman and chief executive officer at the company, responded with a letter to store associates and any others who were interested in the message.
“With the ready availability of significant capital in private equity funds and Kroger’s attractiveness as a franchise, rumors and speculation are not surprising. Unfortunately, the kind of speculation contained in the article can be disruptive to our associates and to the conduct of our business. I want you to know neither management nor our Board of Directors has any interest in pursuing a leveraged buyout transaction.”
Mr. Dillon continued: “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. 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.”
The WSJ piece speculated that large private equity firms such as Kohlberg Kravis Roberts (KKR), Blackstone Group, and TPG (formerly Texas Pacific) might individually or in a consortium be interested in going after the grocer. The chain, it was reported, would provide the opportunity for the firms to put available cash in a single entity with the knowledge that Kroger’s real estate assets provide the equity firms with a fallback should the company performance not meet expectations.
Discussion Questions: Do you expect we will see a further acceleration of private equity firms seeking to acquire retail chains? What is your reaction to The Wall Street Journal report that Kroger may be a target for a leveraged buyout?
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Private equity firms are always looking for a profitable investment. Supermarket chains are certainly something that every consumer will frequent eventually, so why not invest in this potentially profitable business? The timing is not right for Kroger but the timing may be right for others. Leveraged buyouts will continue and certainly Kroger will be a target again, along with others.
Like a pack of raiding jackals, when private equity firms get hungry they pray that they find new prey for their luncheon tray. It’s the rhyme of today’s financial time.
Meanwhile, looking up at this opportunistic scene from their earthly containers are such innovative men as John Hartford, Barney Kroger, M.B. Skaggs, Syney Rabb, Ted von Der Ahe and other retail food store pioneers who must wonder what have the financial gods wrought upon their “children” and how far will they go to “adopt” them. The answer is: As far as possible for there are non-grocery assets therein that are no longer hidden.
Further acceleration? I’m not sure things can move much faster in the buyout boom. Grocery, like many many semi-distressed, low-margin, capital-intensive industries, can really benefit from privatization, not only from a financial point of view, but from an operating one as well. Private investors have the luxury of being able to take a longer term view, and despite popular opinion to the contrary, most do. The communication from Kroger is standard operating procedure in these situations, and makes good sense. Employees can get distracted by talk of new ownership. While it has yet to be determined the impact these deals have on retailing in general, they are are much different than the raids of the 80s. The overall result may be very positive.
In the late 80s when I was 7-Eleven’s Worldwide Ad Mgr., Supreme Commander Jere Thompson got spooked by rumors of a potential greenmail attempt on the company and initiated an LBO. It was a notorious miscalculation, included today in case studies taught in business classes.
Kroger doesn’t spook. Worked with them closely at high levels over a period of years, and they are as savvy and current as any company. Cool as a fan (underside of the pillow, etc., etc.).
KKR is not to be overlooked, however. I also was impacted by their previous acquisition of a large supermarket operator some years ago, and am currently consulting with a potential acquiree. Of course, real estate is a big part of the play, and as warehouses became more efficient, inventory and transportation assets became less important in the calculations.
But as I’ve written before in these spaces, when a private equity firm buys a large retailer, they are buying cashflow. When clean cash is flowing across your books, your legal fiscal flexibilities are nearly endless in a global market. That’s the real play, and will continue to be as global monetary systems continue to fluctuate and change (Euro, Chinese valuation, Petrodollars, etc.).
When I read the report in the Wall Street Journal that private equity firms were considering the possibility of pursuing a leveraged buyout at Kroger, I was not surprised because it is easy to see where Kroger might be attractive at the present time. In his statement, CEO David Dillon makes it clear that Kroger management isn’t interested in being pursued, so I kind of doubt that anything might happen–at least not too soon. As a sidebar, there are advantages and disadvantages for a large national retailer being a publicly traded company. Publicly traded retailers are under a certain pressure to produce and report growth, profits, and good news, as often as every three months. For a number of reasons, in the retail environment this constant short term pressure can sometimes produce erroneous results in the longer run. Not to say this is the case for Kroger, but for some other retailers, it’s actually a blessing to go private.
I must be the only one here missing something. Why would a private equity firm invest in a supermarket chain? Have operating profits suddenly risen while I wasn’t looking?
The value of an equity play seems to me to be in finding a company that may or may not have growth potential (i.e. comp store sales or square footage growth) but does have excellent operating margins.
How do supermarkets fit into this category? Do they provide either an excellent return on invested capital, or an opportunity to make the retailers leaner and meaner and then take them public again?
Doesn’t seem like it to me….
Recent history has shown us that retail chains may be more attractive to investors due to their underlying assets, especially real estate. Private investors seldom speculate on retailers based on operating profits–they are after asset appreciation. Kroger fits this bill fairly nicely and it has the potential to be piece-mealed off in separate chunks that could net investors a tidy return.
WSJ may have got the story wrong due to a bad tip. Or the source may have simply been floating a trial balloon to put the company in play or nudge its stock. Or the interest may be quite real. Regardless, in this as in any negotiation, Mr. Dillon is required to say no to any initial offer. My guess is that we haven’t heard the end of this.
I agree with Mark. This kind of stuff sounds like Michael Jordan at his first retirement press conference: “I’m really done for good.” Dave Dillon: “We’re not going private.” What’s that textbook line about maximizing shareholder value?
Most companies are for sale. CEOs just say they aren’t to keep employees from panicking. I think we will see continued buyouts of both public and privately held grocers. As Wal-Mart, Costco, Whole Foods, Trader Joe’s, and others continue to shrink the grocery store pie, more and more companies will be putting themselves on the market before the financial impacts of a shrinking market show up on the books. Also good companies that will survive and thrive in the shrinking market are attractive targets as well.
History has told us Kroger is not for sale. Some years ago, they bought out a buyer attempting green mail. Kroger has the strength to withstand a challenge. Many other retailers do not. The strategy is called “unlock the value in real estate.” The model to watch is Carrefour. Retailers that own their stores are candidates. Those retailers with a large real estate bank are candidates.
David Dillon of Kroger responded to the buyout rumor the way most CEOs respond to buyout rumors: he said, “We’re not for sale.” Of course, that’s irrelevant. The board wouldn’t be doing its job if it didn’t consider purchase offers, since stockholders might be better off selling. And many CEOs seem to feel that their buyout price will be higher if the initial response is hostile. After all, had David Dillon responded with, “Yes, we’d like to sell out because we don’t see much profit growth ahead,” what kind of price could he get for the shareholders? And who believes that any CEO wouldn’t sell out for the right personal financial parachute?
As Sydney Greenstreet said: “Everything in Casablanca is for sale.”
Market conditions for private equity firms remain strong and we can certainly expect more activity in the retail segment. During the recent P&G Alumni Network presentation, former P&G CEO turned KKR private equity leader, Ed Artzt summarized the energy in the space in a simple statement: “Imagine a $900 billion business that’s growing at 54% a year. That’s private equity.”
According to a recent LBO retail outlook release by JP Morgan, Private Equity firms have a growing share of merger & acquisition activity and have a “war chest” of capital to invest. That, in combination with interest rates remaining relatively low spells opportunity for Private Equity to accelerate activity. Retail is highly attractive as the real estate holdings provide means for financing and retailers such as Kroger with multiple banners and geographies can have high break-up value. Consider the recent Albertsons transaction that comprised of multiple parts including the break up of food and drug and the creation of the Albertsons LLC. Stay tuned, more is “in-store.”
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Private equity firms are always looking for a profitable investment. Supermarket chains are certainly something that every consumer will frequent eventually, so why not invest in this potentially profitable business? The timing is not right for Kroger but the timing may be right for others. Leveraged buyouts will continue and certainly Kroger will be a target again, along with others.
Like a pack of raiding jackals, when private equity firms get hungry they pray that they find new prey for their luncheon tray. It’s the rhyme of today’s financial time.
Meanwhile, looking up at this opportunistic scene from their earthly containers are such innovative men as John Hartford, Barney Kroger, M.B. Skaggs, Syney Rabb, Ted von Der Ahe and other retail food store pioneers who must wonder what have the financial gods wrought upon their “children” and how far will they go to “adopt” them. The answer is: As far as possible for there are non-grocery assets therein that are no longer hidden.
Further acceleration? I’m not sure things can move much faster in the buyout boom. Grocery, like many many semi-distressed, low-margin, capital-intensive industries, can really benefit from privatization, not only from a financial point of view, but from an operating one as well. Private investors have the luxury of being able to take a longer term view, and despite popular opinion to the contrary, most do. The communication from Kroger is standard operating procedure in these situations, and makes good sense. Employees can get distracted by talk of new ownership. While it has yet to be determined the impact these deals have on retailing in general, they are are much different than the raids of the 80s. The overall result may be very positive.
In the late 80s when I was 7-Eleven’s Worldwide Ad Mgr., Supreme Commander Jere Thompson got spooked by rumors of a potential greenmail attempt on the company and initiated an LBO. It was a notorious miscalculation, included today in case studies taught in business classes.
Kroger doesn’t spook. Worked with them closely at high levels over a period of years, and they are as savvy and current as any company. Cool as a fan (underside of the pillow, etc., etc.).
KKR is not to be overlooked, however. I also was impacted by their previous acquisition of a large supermarket operator some years ago, and am currently consulting with a potential acquiree. Of course, real estate is a big part of the play, and as warehouses became more efficient, inventory and transportation assets became less important in the calculations.
But as I’ve written before in these spaces, when a private equity firm buys a large retailer, they are buying cashflow. When clean cash is flowing across your books, your legal fiscal flexibilities are nearly endless in a global market. That’s the real play, and will continue to be as global monetary systems continue to fluctuate and change (Euro, Chinese valuation, Petrodollars, etc.).
When I read the report in the Wall Street Journal that private equity firms were considering the possibility of pursuing a leveraged buyout at Kroger, I was not surprised because it is easy to see where Kroger might be attractive at the present time. In his statement, CEO David Dillon makes it clear that Kroger management isn’t interested in being pursued, so I kind of doubt that anything might happen–at least not too soon. As a sidebar, there are advantages and disadvantages for a large national retailer being a publicly traded company. Publicly traded retailers are under a certain pressure to produce and report growth, profits, and good news, as often as every three months. For a number of reasons, in the retail environment this constant short term pressure can sometimes produce erroneous results in the longer run. Not to say this is the case for Kroger, but for some other retailers, it’s actually a blessing to go private.
I must be the only one here missing something. Why would a private equity firm invest in a supermarket chain? Have operating profits suddenly risen while I wasn’t looking?
The value of an equity play seems to me to be in finding a company that may or may not have growth potential (i.e. comp store sales or square footage growth) but does have excellent operating margins.
How do supermarkets fit into this category? Do they provide either an excellent return on invested capital, or an opportunity to make the retailers leaner and meaner and then take them public again?
Doesn’t seem like it to me….
Recent history has shown us that retail chains may be more attractive to investors due to their underlying assets, especially real estate. Private investors seldom speculate on retailers based on operating profits–they are after asset appreciation. Kroger fits this bill fairly nicely and it has the potential to be piece-mealed off in separate chunks that could net investors a tidy return.
WSJ may have got the story wrong due to a bad tip. Or the source may have simply been floating a trial balloon to put the company in play or nudge its stock. Or the interest may be quite real. Regardless, in this as in any negotiation, Mr. Dillon is required to say no to any initial offer. My guess is that we haven’t heard the end of this.
I agree with Mark. This kind of stuff sounds like Michael Jordan at his first retirement press conference: “I’m really done for good.” Dave Dillon: “We’re not going private.” What’s that textbook line about maximizing shareholder value?
Most companies are for sale. CEOs just say they aren’t to keep employees from panicking. I think we will see continued buyouts of both public and privately held grocers. As Wal-Mart, Costco, Whole Foods, Trader Joe’s, and others continue to shrink the grocery store pie, more and more companies will be putting themselves on the market before the financial impacts of a shrinking market show up on the books. Also good companies that will survive and thrive in the shrinking market are attractive targets as well.
History has told us Kroger is not for sale. Some years ago, they bought out a buyer attempting green mail. Kroger has the strength to withstand a challenge. Many other retailers do not. The strategy is called “unlock the value in real estate.” The model to watch is Carrefour. Retailers that own their stores are candidates. Those retailers with a large real estate bank are candidates.
David Dillon of Kroger responded to the buyout rumor the way most CEOs respond to buyout rumors: he said, “We’re not for sale.” Of course, that’s irrelevant. The board wouldn’t be doing its job if it didn’t consider purchase offers, since stockholders might be better off selling. And many CEOs seem to feel that their buyout price will be higher if the initial response is hostile. After all, had David Dillon responded with, “Yes, we’d like to sell out because we don’t see much profit growth ahead,” what kind of price could he get for the shareholders? And who believes that any CEO wouldn’t sell out for the right personal financial parachute?
As Sydney Greenstreet said: “Everything in Casablanca is for sale.”
Market conditions for private equity firms remain strong and we can certainly expect more activity in the retail segment. During the recent P&G Alumni Network presentation, former P&G CEO turned KKR private equity leader, Ed Artzt summarized the energy in the space in a simple statement: “Imagine a $900 billion business that’s growing at 54% a year. That’s private equity.”
According to a recent LBO retail outlook release by JP Morgan, Private Equity firms have a growing share of merger & acquisition activity and have a “war chest” of capital to invest. That, in combination with interest rates remaining relatively low spells opportunity for Private Equity to accelerate activity. Retail is highly attractive as the real estate holdings provide means for financing and retailers such as Kroger with multiple banners and geographies can have high break-up value. Consider the recent Albertsons transaction that comprised of multiple parts including the break up of food and drug and the creation of the Albertsons LLC. Stay tuned, more is “in-store.”