Having finished digesting its acquisition of Harris-Teeter, grocery store giant Kroger (NYSE:KR) is rumored to have an appetite for yet another acquisition. While there's no real basis for the speculation, other than a bond analyst saying "all signs point to management's willingness to make a major acquisition," Wall Street is trying to piece together where it might move next.
Will the snowbird fly south?
Many point to Florida as an obvious market because the Cincinnati-based supermarket chain has virtually no presence at all in the state. The census identified Florida as the third most populous state behind California and Texas making its dense population a prime consideration.
Yet Publix and Wal-Mart (NYSE:WMT) are the two largest grocers in Florida, meaning Kroger's entrance through a possible purchase of Winn-Dixie and its sister chain Bi-Lo (what many analysts consider the most likely candidate) would put it at the No. 3 spot. That isn't always the best place to be, and Winn-Dixie's parent owner Southeastern Grocers remains over-leveraged after buying the supermarket out of bankruptcy in 2012.
Last September Southeastern Grocers pulled a planned IPO as a result of lackluster revenue growth and widening losses, and with Kroger maintaining that its goal is to keep its bond ratings creditworthy after any acquisition, taking on the dead weight of Southeastern would seemingly rule out a Winn-Dixie acquisition. It would be a weak player to challenge Publix or Wal-Mart.
It's a wide open country
Florida, however, isn't the only region where Kroger lacks much of a presence: Chicago, the Northeast, Oklahoma, and the upper Midwest are also areas where the grocer could make a move to bulk up its footprint.
With that in mind, here are some possible candidates that could make the list of potential targets for an acquisitive Kroger based on their geography.
- Giant Eagle has 417 stores throughout western Pennsylvania, Ohio, northern West Virginia, and Maryland with revenue of $9.3 billion. Forbes ranked it as the 35th largest private company in the U.S. in 2014
- The Great Atlantic & Pacific Tea Co., better known as A&P, emerged from bankruptcy in 2012 and has 301 stores in Connecticut, Delaware, Maryland, New Jersey, New York, and Pennsylvania with an estimated $6.3 billion in revenue
- Weis Markets (NYSE:WMK) operates 163 stores in Pennsylvania, Maryland, New Jersey, New York, and West Virginia and had sales of $2.7 million in 2013
- With 6.8 billion in revenue, Wegmans Food Markets has 85 stores in the mid-Atlantic and New England states of New York, Pennsylvania, New Jersey, Maryland, Massachusetts, and Virginia
- Hy-Vee is Forbes 45th largest private company in the U.S. with revenues of $8 billion and 235 stores stretching across the Midwestern states of Iowa, Illinois, Kansas, Minnesota, Missouri, Nebraska, South Dakota, and Wisconsin
- Meijer, another Forbes list-maker ranking at No.19 with $15 billion in revenue, has 213 stores mostly in Michigan, but also in Illinois, Indiana, Ohio, and Kentucky
Obviously with Kroger not actually saying it's pursuing anyone -- only that it's always open to the right deal -- this is all just reading tea leaves. There are a lot of other smaller chains that could be scooped up should it make a move, or the supermarket giant could go in a completely different direction just as it did last August when it bought online vitamin retailer Vitacost for $280 million.
A supermarket powerhouse
Kroger is second only to Wal-Mart in terms of size, operating over 2,600 stores that generated over $100 billion in revenues last year, giving it a lot of muscle to flex. With net total debt of $11.5 billion, including the debt related to acquiring Harris Teeter and its stock buyback program, a comparison to adjusted EBITDA would give it a ratio of 2.29 as of the end of the last quarter.
That's higher than a year ago, but down from the second quarter and continues Kroger's goal of moving net debt toward a range of 2.0 to 2.2 times adjusted EBITDA by late next year. Even if it were at the upper end of that range, Kroger says it wouldn't preclude it from doing a deal.
While that suggests it still possesses a strong financial position, Kroger also says it's not yet reached a stage where it's ready to do more M&A. Analysts can probably keep guessing when Kroger will do its next deal, but investors may want to put the supermarket chain on their own shopping list before then.