OREANDA-NEWS. Fitch Ratings views The Kroger Co.'s (Kroger) definitive agreement to acquire Roundy's, Inc. (Roundy's) as neutral to the ratings. Kroger's long-term Issuer Default Rating (IDR) is 'BBB' and short-term IDR is 'F2'. The Rating Outlook is Stable. Fitch currently maintains a 'b-*'/Stable Outlook credit opinion on Roundy's which is expected to be withdrawn upon transaction closing.

A full list of ratings follows at the end of this release.

The transaction price is $3.60/share in cash or about $800 million including debt (7x EBITDA), represents a 65% premium to Roundy's stock price prior to announcement, and will be financed with debt. At Aug. 15, 2015, Kroger had $11.2 billion of total debt. Roundy's has roughly $650 million of debt, inclusive of $445 million in term loans due 2021 and $200 million of 10.25% second-lien notes due 2020 that Kroger expects to refinance. The notes contain a change of control put that requires them to be redeemed.

Fitch does not expect Kroger's financial leverage to increase materially as a result of the acquisition. Net debt/EBITDA is projected to remain within management's targeted 2.0x- 2.2x range, or approximately 3.0x on a gross leverage basis. The merger was unanimously approved by both boards and is expected to close by the end of the 2015 calendar year with regulatory issues not anticipated, given minimal geographic overlap.

Roundy's, which generates approximately $4 billion of revenue and $115 million of EBITDA, operates 150 supermarkets in Wisconsin (118 stores) and Illinois (32 stores) under the Pick 'n Save, Mariano's, Copps, and Metro Market banners. The company holds the No. 1 or No. 2 position in its core markets but has been consistently losing share, reporting negative same-store sales (SSS) for more than six years. SSS declined 3.4% during the latest quarter and are projected to decline 2.25% to 3.25% for the year. Customer transactions are declining at a mid-single-digit rate due to heightened competition and the cannibalization of sales by new stores.

Fitch views the transaction as in line with Kroger's strategy of expanding both organically and via acquisitions but as inconsistent with historical purchases as Kroger typically does not acquire struggling chains that require significant price investments to become more competitive. Roundy's EBITDA margin is roughly 3% compared to more than 5% for Kroger.

Kroger will gain scale in Wisconsin, a new contiguous market, while expanding its presence in Chicago with the more upscale Mariano's banner. Roundy's will benefit from Kroger's financial flexibility, operating efficiency, and ability to drive top-line performance and grow share by investing in price and improving the customer shopping experience. However, given Roundy's protracted comp declines, the level of price as well as capital investments in both existing and new stores, and time required to stabilize and grow organic sales all add an element of uncertainty.

Kroger's ratings reflect its industry-leading non-fuel identical store (ID) sales, ability to offset long-term gross margin pressure with cost containment and the leveraging of fixed costs, relatively steady leverage, and position as the largest supermarket retailer in the nation. Fitch continues to expect non-fuel ID sales to approximate 4% in 2015 and about 3.5% thereafter. Moreover, investments in price are expected to be offset with cost reductions, particularly at Roundy's, and total debt/EBITDA is expected to approximate 3.0x over the near- to intermediate-term.

RATING SENSITIVITIES

A positive rating action would be considered if total adjusted debt/EBITDAR declines to and is sustained in the mid- 2.0x range, ID sales are steady in the mid-single-digit range, and operating margins gradually improve. This is not currently anticipated given that management's 2.0x-2.2x net debt/EBITDA target equates to total adjusted debt/EBITDAR of around 3.0x.

A negative action would be considered if total adjusted debt/EBITDAR increased to and was sustained in the low 3.0x range due to pressure on margins and/or a more aggressive approach to share repurchases or acquisitions. Persistent declines in supermarket ID sales and/or the consistent loss of market share could also contribute to a negative rating action.

Fitch currently rates Kroger as follows:

--Long-term IDR 'BBB';
--Senior unsecured notes 'BBB';
--Bank credit facility 'BBB';
--Short-term IDR 'F2';
--Commercial paper 'F2'.

The Rating Outlook is Stable.