Kroger Pauses Buybacks to Prioritize Debt Reduction After Albertsons Deal Closes

Cincinnati-based Kroger said Friday that it will pay for the $24.6 billion deal with cash and proceeds from a new debt financing. The company secured a 364-day, $17.4 billion bridge loan from

Citigroup Inc.

and Wells Fargo & Co., it said in a securities filing. The loan is the second largest global bridge loan this year to date, trailing

Broadcom Inc.’s

$32 billion loan as part of its deal announced in May to buy

VMware Inc.,

according to Dealogic, a financial data provider.

Kroger will temporarily pause buybacks with the goal of giving priority to debt reduction after the transaction closes, the company said Friday. The company repurchased $309 million in shares during the quarter ended Aug. 13, and said in September its board authorized a new $1 billion repurchase program. Kroger had $1.1 billion in cash and temporary investments on its balance sheet as of Aug. 13, down from $1.8 billion at the beginning of the year.

“We would expect, as we’ve paused buybacks, to have a significant amount of cash for when we close the transaction,” Chief Financial Officer

Gary Millerchip

said Friday during an analyst call. The company didn’t immediately respond to a request to make Mr. Millerchip available for an interview.

Kroger aims to achieve a ratio of net debt to adjusted earnings before interest, taxes and depreciation of 2.3 times to 2.5 times within 18 to 24 months after the deal closes, which is expected in early 2024. That figure stood at 1.63 times as of Aug. 13. The company on Friday didn’t say what its leverage ratio will be after the transaction closes.

Kroger had $19.28 billion in net debt as of Aug. 13, compared with $18.98 billion a year earlier, according to S&P Global Market Intelligence, a data provider.

“In this current market, given rising rates and a weaker economic cycle, investors are a bit more cautious around companies with high debt levels,” said Rupesh Parikh, an analyst at investment firm Oppenheimer & Co Inc., referring to the additional debt the company is taking on to fund the transaction. Kroger’s shares fell 7% on Friday, closing at $43.16.

Halting buybacks will free up cash on the balance sheet that the company can use to deleverage, in addition to cash from the combined earnings of the two companies and cost savings, analysts said. The companies both have stores in locations including Southern California, Washington, Texas and Washington, D.C., and said Friday they expect to sell overlapping stores to help win regulatory approval for the transaction.

Credit rating firm

Moody’s Corp.

on Friday affirmed Kroger’s investment-grade credit rating. But, the firm changed the company’s outlook to negative from stable, largely due to the risks involved with closing and integrating such a large transaction, analyst Chedly Milord Louis said. Moody’s expects Kroger’s ratio of gross debt to Ebitda, which currently stands at 2.5 times, to reach about 3.8 times after the transaction closes and 3.2 times within 18 to 24 months after the transaction, according to Ms. Milord Louis.

Still, the deal makes strategic sense given the size of the company that it will create and the breadth of its product offering, Ms. Milord Louis said. “This is a strong competitor. And they’ve always been a strong competitor. I don’t necessarily see that changing with the acquisition of Albertsons,” she said.

Write to Kristin Broughton at [email protected]