The Kroger Co: A Surprise New Ingredient

Research evidence excerpt

The Kroger Co: A Surprise New Ingredient

slightly higher gross margins at Giant Eagle, but also a higher SG&A rate. Overall,

operating margins are likely lower due to less scale on corporate overhead.

With these assumptions, we'd estimate EBITDA of ~$250mm - $300mm for

Giant Eagle. This implies an EV / EBITDA multiple of ~5.5x - 6.5x (vs. Kroger's

current multiple of ~5.5x LTM EBITDA). Alongside the assumption of $400mm

of debt, this does not change Kroger's leverage profile.

The acquisition will not impact any capital return plans. The company is still below

its long-term leverage target of 2.3x - 2.5x and does not anticipate any impact to

its dividend. Due to the deal, the company had paused buybacks in 1Q, but with

the deal closed the company plans to complete the full $2bn of buybacks in the

remainder of the year.

UBS Evidence Lab Data shows Giant Eagle's store footprint is highly

complementary to Kroger's

There is minimal geographic overlap between the two grocers, validating the strategic

merits of the transaction.

We evaluated UBS Evidence Lab data that breaks down store locations by MSA for

both Giant Eagle & Kroger.

Across Giant Eagle's top 15 MSAs (which comprise 95% of store footprint), Kroger

is only active in 2 of the 15 (comprising 4% of the Kroger's total footprint). The

largest areas of overlap are in Columbus, OH and Indianapolis, IN.

This analysis validates the company's thesis that the geographic footprint is highly

complementary, extending Kroger's reach into new markets (primarily Pittsburgh,

Cleveland, Akron, and Youngstown) where it had no presence previously.

Figure 1: Overlap in Giant Eagle's Top 15 MSAs

Overlap in Giant Eag

le s Top 15 MSAs

Source: UBS Evidence Lab

Valuation: We think KR’s risk-reward is balanced at current levels