The Kroger Co. (NYSE:KR) announced its agreement to acquire Harris Teeter Supermarkets Inc (NYSE:HTSI) for $2.5 billion in cash, which is considered as the second largest transaction in the grocery industry in the United States this year.

Kroger

Kroger Discloses Share Price of Harris Teeter

In a press statement, The Kroger Co. (NYSE:KR) said the acquisition price of $49.38 per share of Harris Teeter Supermarkets Inc (NYSE:HTSI) represents a 33.7% premium to the closing price of the stock in January 18, 2013.

The stock prices of Kroger Co. (NYSE: KR) and Harris Teeter Supermarkets Inc (NYSE:HTSI) surged after the announcement of the deal. Kroger’s stock increased by 2.5% to around $37.10 per share while Harris Teeter’s stock went up by nearly 2% to $49.33 per share on Tuesday afternoon trading.

Under the terms of the agreement, The Kroger Co. (NYSE:KR) will assume the outstanding debt of Harris Teeter Supermarkets Inc (NYSE:HTSI) of approximately $100 million. The company also said it would continue its quarterly dividend and share repurchase program, citing the shared long-term commitment of the two companies in returning cash to shareholders.

Allocation of Free Cash Flow to Reduce Debts

The Kroger Co. (NYSE:KR) said it would allocate some of its free cash flow (FCF) to reduce debts and to re-establish and maintain its 2.00 – 2.20 net debt to EBITDA ratio over the next 18-24 months. The company emphasized its commitment in keeping its current credit rating.

In addition, the company estimated a net accretion to earnings per diluted share would be around $0.06 to $0.09 in the first full year after the completion of the acquisition. The estimate includes the effect of its plan to allocate FCF to debt reduction. The Kroger Co. (NYSE:KR) expects to maintain its current 8% to 11% long-term growth rate in earnings per share. Over the next three to four years, the company expects to obtain annual cost savings of approximately $40 million to $50 million.

David B. Dillon, chairman and CEO of The Kroger Co. (NYSE:KR) said,  “Harris Teeter is an exceptional company with a great brand, friendly and talented associates, and attractive store formats in vibrant markets run by a first-class management team. This is a financially and strategically compelling transaction and a unique opportunity for our shareholders and associates.”

Harris Teeter Supermarkets Inc (NYSE:HTSI) will become a subsidiary of The Kroger Co. (NYSE:KR) and will continue to operate its stores under the leadership its senior management team.