Potential Kroger-Albertsons Combination Would Add Scale, but Draw Regulatory Scrutiny

Neither our $49.50 per share valuation of narrow-moat Kroger nor our $28.50 per share valuation of no-moat Albertsons will change in light of rumors that they are considering a merger, as we await more concrete information before incorporating a deal into our analyses (shares of the former are roughly flat and the latter up around 10% in the wake of the report). While we believe a combination between the two largest pure-play grocers in the United States would create scale benefits (and associated cost and purchasing leverage) that would help fend off burgeoning omnichannel titans Walmart and Amazon, we suspect overlap between the two chains’ footprints in many markets may lead regulators to scrutinize a transaction closely.