Good morning, and welcome to today's investor conference call to discuss Kroger's agreement to merge with Albertsons. Please note this event is being recorded. I would now like to turn the conference over to Rob Quast, Director of Investor Relations. Please go ahead.
Good morning, and thank you for joining us. I am joined today by Kroger's Chairman and Chief Executive Officer, Rodney McMullen, and our Chief Financial Officer, Gary Millerchip. Before we begin, I want to remind you that today's discussions will include forward-looking statements. We want to caution you that such statements are predictions and actual events or results can differ materially. A detailed discussion of the many factors that we believe may have a material effect on our business on an ongoing basis is contained in our SEC filings. The Kroger Company has no obligation to update that information. After our prepared remarks, we look forward to taking your questions. We ask that you please limit yourself to one question and one follow-up question if necessary. During our prepared remarks this morning, we will reference a presentation that we have posted on the IR section of Kroger's website.
If you are viewing the webcast, you will be able to follow along live with our presentation. Turning to today's agenda, we're thrilled to be speaking with you about our exciting combination with Albertsons. This transaction will combine two complementary organizations to establish a national retail footprint, expanding customer reach and improving proximity to deliver fresh, affordable food to approximately 85 million households through a premier omni-channel experience. First, we will provide an overview of why we believe this is a compelling combination for our associates, customers, communities, and shareholders. We will walk you through the financial details, including how this combination accelerates our value creation model before opening the call up to your questions. I will now turn the call over to Rodney.
Thank you, Rob. Good morning, everyone, and thank you for joining us today. This is an exciting day for both Kroger and Albertsons. This transaction combines two strong, diverse, and resilient companies and allows us to make an important step in our journey to advance our strategy and achieve our purpose to feed the human spirit. By bringing our two companies together, we will accelerate the great work already underway at Kroger and Albertsons to better serve America. We will build upon the complementary strengths of each organization to create more opportunities for our associates, our customers, and our communities. By doing so, we are confident that this will create compelling value for our shareholders.
Before I go any further, I'd like to thank several people who played a key role in assembling the strong retail company that Albertsons is today, including Bob Miller, Steve Feinberg, Vivek Sankaran, and Sharon McCollam. Their team's efforts to combine these assets with great associates and a great customer connection makes today's announcement possible. We look forward to working closely with Vivek, Sharon, and the entire Albertsons leadership team. I also wanna extend a huge thank you to the Kroger team for their hard work that has led us to this significant company milestone. Our associates are at the heart of everything we do. Their passion for delivering a fresh and convenient customer experience inspires me every day. Now let's turn to our combination with Albertsons.
This is an important step in the journey to advance our strategy and achieve our purpose to feed the human spirit. We are confident our merger with Albertsons will build upon our go-to-market strategy momentum and unlock opportunities for all of our stakeholders. Albertsons and Kroger both have a strong track record of successful integrations with mergers. To achieve success in this integration, we will focus on combining each company's strength while maintaining and enhancing both sets of distinctive banners. This transaction brings together two purpose-driven, value-based organizations to serve more customers around the country. Over the last several years, we have been building a single seamless ecosystem to provide customers with a more personalized and convenient omni-channel experience, all with zero compromise. This transaction will advance these efforts by bringing Albertsons expanded infrastructure, technology, and digital and delivery service providers into our network.
With a broader selection of fresh products and an expanded Our Brands portfolio, we will be better positioned to deliver fresher products at a great value to more customers than ever before. This is particularly important in today's environment, with rising inflationary pressures and people increasingly shopping for groceries and eating at home. Our expanded portfolio, along with more personalized promotions and benefits, will help customers save on the products that matter most and help to relieve the inflationary pressures facing shoppers across the country. Together, we will continue to focus on supporting and investing our associates as they seek to reach their full potential. As we've seen with prior mergers, we expect this transaction will open new and exciting career opportunities for our associates.
As a combined company, we will build upon our similar values to create a culture that embraces diversity, equity, and inclusion. Kroger's culture is rooted in our purpose to feed the human spirit. By joining forces with Albertsons, we will advance this purpose while progressing our shared mission to create a more equitable and sustainable food system. For shareholders, this transaction allows us to accelerate our progress on our go-to-market strategy focused on fresh, our brands, personalization, and seamless. Together, we will expand our food business, generating more traffic and capturing more data, which will allow us to accelerate our growth in our alternative profit businesses and generate significant cash flows to reinvest in our business and return capital to shareholders. This combination will accelerate our value creation model.
In fact, during the first four years following close, we expect to deliver total shareholder returns well above Kroger's stand-alone model of 8%-11% per year. We have a long track record of meaningful investments in our associates, customers, and communities. These investments are an important part of our strategy. We know we win when we put our associates and customers first. We plan to continue these investments as we come together with Albertsons. The combined company will drive significant synergies that will allow us to invest approximately $0.5 billion in lowering prices for customers. We will also invest an incremental $1.3 billion in Albertsons stores to enhance the customer experience. Since 2018, Kroger has invested an incremental $1.2 billion in associate wages and benefits.
As a combined company, we will remain focused on supporting and investing in our associates and expect to invest $1 billion to continue raising associate wages and comprehensive benefits post-close. Our commitment to these investments reflects our vision for what Kroger and Albertsons will be. A value-based organization built around our relentless commitment to our associates, our customers, our communities, and our shareholders. Next, Gary will cover the transaction details and provide an overview on the compelling benefits that this will bring for our shareholders. Gary?
Thanks, Rodney, and good morning, everyone. Before I begin, I want to echo Rodney's excitement about today's announcement. This is an important step on Kroger's journey towards achieving our long-term vision and a remarkable day in our company's history. Let me start by covering the key terms of the merger. Kroger will acquire all outstanding shares of Albertsons for $34.10 per share in cash, subject to certain per share reductions. This leads to an implied total enterprise value of approximately $24.6 billion, including the assumption of approximately $4.7 billion of Albertsons net debt. The purchase price at close will be reduced by approximately $6.85 per share as a result of the $4 billion special dividend that Albertsons intends to pay shareholders prior to closing.
A second adjustment to the purchase price will be made for the value of any store divestitures required to close the transaction that become part of a new Albertsons spin-off company. I'll provide additional color on this part of the transaction in a moment. On a combined basis, the two companies delivered approximately $210 billion in revenue, $11.6 billion of Adjusted EBITDA, and $3.3 billion in net earnings in fiscal year 2021. Looking ahead, we expect the transaction to be accretive to earnings in the first year following close and double-digit accretive to earnings by year four, excluding one-time costs. We expect to achieve approximately $1 billion of annual run rate synergies net of divestitures within the first four years following close of the transaction, with approximately 50% achieved within the first two years post-close.
As Rodney mentioned earlier, we expect to deliver TSR well above Kroger's stand-alone TSR model of 8%-11% during the first four years post-completion, and we will share more financial details, including specific TSR expectations post-closure, as we get closer to the transaction date. In terms of financing, Kroger has $17.4 billion of committed bridge financing in place from Citi and Wells Fargo. At closing, we plan to fund the transaction using a combination of cash on hand and proceeds from new debt financing. We have had productive conversations with the rating agencies and are strongly committed to our current investment-grade credit rating. To prioritize deleveraging post-closing, we have already paused our share repurchase program and expect to achieve our net leverage target of 2.5x EBITDA in the first 18-24 months post-close.
In connection with closing, we expect to make store divestitures in certain areas, and we will work cooperatively with the FTC to obtain clearance for the transaction. As one possible mechanism for accomplishing divestitures in certain areas, Albertsons will establish a subsidiary that would be spun off to Albertsons shareholders immediately prior to closing and operate as a stand-alone public company. This SpinCo would comprise a minimum of 100 stores and up to 375 stores. We will work with Albertsons to determine which stores will be part of this SpinCo and the pro forma capitalization of the new entity. As mentioned earlier, under the plans for the contemplated spin-off, the per share purchase price of $34.10 will also be reduced for these stores.
The value of the stores will be calculated using a multiple of three times Four-Wall Adjusted EBITDA, divided by the number of fully diluted Albertsons common shares outstanding prior to close. Closing is expected to occur early in 2024, subject to required regulatory clearance and other customary closing conditions. Now I'll turn the call back over to Rodney to provide some additional color on Albertsons' business today and how the merger will accelerate our go-to-market strategy.
Thanks, Gary. Albertsons is a U.S. food retailer with more than 2,000 food and drug stores, including roughly 1,700 pharmacies, more than 400 fuel centers, 22 distribution centers, and 19 manufacturing facilities across 34 states. Albertsons operates more than 20 iconic trusted banners across the country. The company is committed to being locally great and doing the little things that help it to truly become part of its communities. In 2021, Albertsons achieved approximately $15 billion in revenue from its Our Brands portfolio and $25 billion in fresh sales. In the last two plus years, Albertsons has expanded its delivery and pickup network and enhanced its loyal customer engagement to significantly expand their digital engagement with customers. In fact, in 2021, Albertsons drove an impressive digital sales growth of 263% on a two-year stack basis.
Most importantly, Albertsons is an organization built on its purpose and values. Just this year, Albertsons announced a new ESG framework to build on its strong history of driving sustainability and supporting its communities. I have had a chance to get to know members of the Albertsons team well leading to this transaction. What struck me most is their passion for their associates, their breadth of talent, and their commitment to delivering for their customers. We believe a combination with Albertsons makes sense for Kroger at every level. This transaction is compelling because we will bring together two highly complementary footprints. Albertsons operates in several areas where Kroger does not have stores or has a very limited presence. By combining with Albertsons, we'll greatly expand our national footprint to serve more customers across a combined 48 states and the District of Columbia.
We will also bring together two portfolios of iconic banners, and just as we would have done in prior transactions, we will take the learnings from each company to bring greater value and a better experience to more customers, more associates, and more communities. Turning now to strategy. This combination will enhance Kroger's go-to-market strategy, which includes our priorities of fresh, Our Brands, personalization, and seamless. These priorities are complementary with Albertsons priorities, and we will share how the combining the best of both organizations will accelerate our go-to-market strategy. By adding Albertsons complementary footprint, strong technology and innovation capabilities, and tremendous expertise, we will accelerate our progress in each of these focus areas. We will also bring the best of Albertsons own omni-channel capabilities to more customers to enhance the shopping experience.
As a result, the merger will accelerate our position as a more compelling alternative to larger and non-union competitors. Together, we will drive value for our associates, customers, and communities. Let's start first with our commitment to providing fresh products. We know customers care about fresh, and that means we care about fresh. By combining Kroger's Fresh for Everyone commitment with Albertsons Customer for Life strategy, we will be able to deliver a wider variety of fresh options we know our customers will love. With an expanded supplier base and a network of stores and distribution centers, we will build on this incredible progress made on our end-to-end fresh initiative. Our optimized supply chain will ensure products remain fresher longer, both in store and, more importantly, in our customers' homes. Alongside fresh, customers are looking for unique, high-quality products. That's where Our Brands comes in.
Kroger's Our Brands portfolio has been a key growth driver as customers discover Private Selection, Simple Truth, Kroger, Home Chef, and Murray's Cheese. Alongside our expansive banner brands that offer innovative products at a great value. Additionally, Albertsons has a portfolio of 14,000 own brands, items including O Organics, Open Nature, Lucerne, and Signature SELECT. We will be able to significantly expand Our Brands assortment to offer customers even more innovation and variety. Together, we will have a portfolio of approximately 34,000 private label products across premium, natural and organic and opening price point brands. On a combined basis in 2021, Kroger and Albertsons portfolio had sales of $43 billion. This would make us the equivalent to one of the largest CPG companies in America. Right now, Kroger manufactures nearly 30% of our brand products.
This competitive advantage gives us oversight over the quality and supply and empowers us to create unique and innovative products. With Albertsons, we will increase our manufacturing footprint to a total of 52 plants. Together, these capabilities will allow our combined companies to drive improved quality, efficiency and value to provide unique products to our customers. Through our combined loyalty programs and data science capabilities, we will offer customers a more personalized experience, providing savings on more products that matter most to them. We will enhance our seamless shopping experience, maximizing reach, creating more meaningful promotions, and deepening our relationships with customers. By adding Albertsons for U program, we will create a combined customer base of approximately 85 million households and one of the most comprehensive first-party data repositories in food and retail space.
This unmatched personalized experience will provide more relevant recommendations and promotions that save customers time and money. Now moving to seamless. We will continue to invest in our digital capabilities, and we know that building a world-class digital ecosystem is an important part of our growth strategy. With Albertsons, we will build a premier omni-channel experience that expands our opportunity to offer our customers anything, anytime, anywhere with zero compromise. Importantly, we will have an expanded network of stores, distribution centers and automated fulfillment centers to provide a superior digital experience for our customers. Growing our Kroger Delivery network remains a key priority as it allows us to deliver fresher products to more customers with excellent service, both in new and existing geographies.
Albertsons and Kroger's combined technology, infrastructure, digital capabilities and delivery service providers will offer customers a more personalized and convenient omni-channel experience, both in store and online, and both. Our ability to deliver these customer benefits starts with our associates. Between Kroger and Albertsons, we currently employ more than 710,000 associates. We invest in our associates because we know the associate experience drives the customer experience. When our associates thrive, they bring a best in class customer experience to life. Albertsons shares this commitment. What's more is we expect this transaction will allow us to continue creating a culture where associates come for a job and discover a career, unlocking new and exciting opportunities for many of our associates. We will need the incredible talent of both organizations to position our combined companies for success and execute on our winning strategy once the transaction closes.
As part of this, we will secure union jobs and will continue to work with local unions across America to serve our communities. We are confident that with Albertsons, we will continue building a best in class associate experience and remain an employer of choice. As many of you know, our commitment to ESG is deeply embedded across Kroger, and we just celebrated our five-year anniversary of our Zero Hunger Zero Waste social and environmental impact plan. Albertsons and Kroger share a passion for sustainability, serving our communities and creating a better future for our stakeholders. The learnings and expertise Albertsons gained through the Recipe for Change will complement the important work we are doing with Zero Hunger, Zero Waste. Together, we will be well positioned to achieve our mission of creating a more equitable and sustainable food system.
Now I'll hand it over to Gary to discuss the financial details, including how this combination accelerates our value creation model. Gary?
Thanks, Rodney. We believe this merger of two successful companies provides the opportunity to reshape the food retail industry and deliver significant value for our customers, associates, and shareholders. As you can see on the slide, we'll be creating a unique and compelling set of assets, which today includes almost 5,000 stores, over 710,000 associates, approximately 85 million households and enhanced capabilities in both fresh and our brands. By combining Kroger's and Albertsons assets, we will advance all elements of Kroger's go-to-market strategy, accelerating growth in our core supermarket business and our alternative profit businesses to deliver even more attractive returns for our shareholders. Those of you who have followed Kroger will be familiar with our value creation model.
As I mentioned a moment ago, in addition to accelerating growth in our core supermarket business. The combined company will generate significantly greater data and traffic, powering incremental growth in our high margin alternative profit businesses. The value we create from these fast-growing alternative profit businesses allows us to reinvest even more in the customer experience to drive additional traffic, creating a flywheel effect in our model. As shared at our Investor Day in March, Kroger's alternative profit businesses contributed over $1 billion in operating profit last year. As a combined company, we see a roadmap to grow alternative profits to over $1.5 billion. With approximately 85 million households, we expect our increased national reach will accelerate growth in Kroger Personal Finance, Retail Media, and 84.51°'s customer insights.
In addition, our combined data assets will fuel improved personalization and media relevance, allowing advertisers to maximize return on ad spend and increase the level of brand investment in personalized offers such as digital coupons and rebates. Our alternative profit businesses are a key element of our value creation model today. As a result of the merger, will be even more impactful in driving sustainable earnings growth and improving Kroger's operating margin in the future. Turning now to cost synergies we expect to achieve as a result of the merger. As I mentioned earlier, we anticipate approximately $1 billion of annual run rate synergies, net of divestitures, within the first four years of combined operations, with approximately 50% being achieved within the first two years following close.
By combining our complementary strategies, assets and expertise, we expect to achieve these synergies largely through improved sourcing, leveraging technology, optimization of our supply chain, manufacturing and distribution networks, and general and administrative cost efficiencies. We have completed a thorough diligence review over the last several months and are confident these goals are very achievable. These synergy opportunities will also set the stage for Kroger to reinvest back in the Albertsons business through price investments and store enhancements, accelerating growth and providing additional value to our shareholders over time. Kroger has a strong value creation model that has delivered sustained, attractive total shareholder returns in recent years and has proven to be resilient throughout the economic cycle. We are excited about the opportunities presented by the merger with Albertsons to strengthen this model.
By combining the best of both companies, maximizing synergies, and accelerating our value creation flywheel, we expect the transaction will be accretive to earnings in the first full year following close and be double-digit accretive to earnings by year four, excluding one-time costs. The strength of our free cash flow is an important part of Kroger's model, and we expect the transaction will be 30% accretive to total annual free cash flow by year four. Overall, we expect the combined company to deliver total shareholder returns well above our standalone TSR model of 8%-11% during the first four years post-close. Turning now to a recap of how we plan to finance the transaction. Kroger has $17.4 billion of committed bridge financing in place from Citi and Wells Fargo.
At closing, we plan to fund the transaction using a combination of cash on hand and proceeds from new debt financing. In addition, to minimize future earnings volatility, we plan to hedge the majority of the benchmark interest rate risk associated with the new debt issuance. We have held productive conversations with the rating agencies and are committed to maintaining our current investment grade rating. In terms of capital allocation, we remain committed to investing in the business to drive profitable growth, and we'll continue to prioritize high return projects that support our strategy. We will also continue to pay our dividend quarterly and expect this to increase over time subject to board approval. Immediately following closing, we would expect to be above our target net debt to EBITDA leverage ratio of 2.3-2.5.
We are committed to getting back within our target range within 18-24 months post-close, and have already paused our share repurchase program to prioritize deleveraging following the merger. In summary, Kroger's go-to-market strategy is resonating with our customers, and we have significant momentum in our business. We expect this momentum to continue as our business model has proven to be resilient through a variety of operating environments. Kroger's unique combination of assets, proven value creation model, and strong free cash flow provide a compelling investment thesis today, an investment thesis that we believe is significantly strengthened by our merger with Albertsons. Bringing together the impressive capabilities of both companies will allow us to accelerate our strategy and our value creation flywheel to deliver even more attractive returns for our investors. Now I'll turn it back to Rodney.
Thanks, Gary. I want to reiterate how excited we are to approach this major milestone in Kroger's history. The transaction builds upon both Albertsons and Kroger's strengths. It will allow us to continue delivering for our associates, our customers, and our communities while creating value for our shareholders. We will be able to offer an enhanced omni-channel experience that provides customers with anything, anytime, anywhere, all with zero compromise. We will broaden our selection of fresh and Our Brands products, bringing high-quality products to more customers. We will do so while offering even more personalized promotions on products customers love. We will maintain our track record of investing in our associates as they seek to achieve their full potential. Our expanded network, broader customer base, and enhanced capabilities will accelerate our value creation model, driving enhanced profitability and shareholder returns.
As I noted earlier, and as Gary noted, we have a resilient business model and are making significant progress on our strategy. This transaction will build upon the work already underway at Kroger and Albertsons, achieving our go-to-market strategy and positioning us to generate compelling value for all stakeholders. This is truly an exciting day for Kroger, for our associates, our customers, and our shareholders, and we cannot wait to welcome Albertsons to the Kroger family of companies. Now with that, we'll turn to your questions.
Thank you. If you'd like to ask a question today, please press star followed by one on your telephone keypad now. When preparing to ask your question, please ensure your headset's unmuted locally. Our first question today comes from John Heinbockel from Guggenheim Securities. John, please go ahead. Your line is open.
Hey, guys. Two questions. The first one is maybe more involved, but what do you think are the biggest buckets? You touched on some of them. The biggest buckets of revenue synergy, right, in terms of rolling Ocado out to more locations, you know, maybe getting Albertsons Media off the ground. What are the biggest buckets? You know, is there any way to quantify that, right? You talked about $1 billion of cost synergy, you know, is there $3 billion, $5 billion of revenue synergy and/or what does it do to your comp, TSR? Does the comp go up 100 basis points? That's one big topic. Then secondly, for Gary, breakup fee and/or reverse breakup fees. I didn't hear you mention any of that.
Are there any of those?
Yeah. John, on your first question, I love the question, and obviously it's incredibly exciting. You know, the specific numbers, I don't know that we would be in a position to say what the specific number is at this point. But when you look across, it's fascinating when you look at Our Brands as an example. Both of our companies, the total numbers are pretty similar. But when you start looking within categories, each of us have categories that we do meaningfully better than the other, just for example. If you look at, you know, some of Our Brands products, there's several Our Brands products that we don't carry.
If you look at our Murray's Cheese, obviously that's something that Albertsons has a ton of great stores and incredible trade areas that we think will leverage that. If you look at the personalized offers and some of the work that each of us have done with Albertsons for U and, you know, the Kroger and the Fuel Points, it's fascinating how many things that each of us are doing something a little bit better than the other one.
It's just a huge opportunity, and that's one of the things that we really look forward to being able to dig into and get some momentum behind it because we think there's real value there, and it's obviously a meaningful opportunity for upside, but it's gonna take a lot of work from both of our teams. You know, at this point, we wouldn't have a specific number other than we think it's. We would totally agree with you that it's a huge opportunity. Gary, I'll let you talk about the breakup fee.
Yeah. Thanks, Rodney. Just one thing to add maybe, John, on the growth model, and we mentioned it in your prepared comments, but as Rodney said it, for us, the most exciting part of the transaction is this drives our go-to-market strategy and helps accelerate that model. So that's first and foremost why we decided this was an exciting opportunity. Specifically on the second part of that question on alternative profit streams, we really do believe that creating a national footprint and 85 million households allows us to take the capability we've been building over a number of years to a different level.
You've heard me share on a slide that we believe the $1 billion has a very attainable opportunity to grow to $1.5 billion very quickly because of the ability to bring our capabilities to that larger national footprint, which is more appealing, I think, across the media partners that we work with, because you can now create more of those opportunities. Specifically on the reverse break fee, yes, there is. We have filed our documentation, and there is a reverse break fee of $600 million if the deal doesn't close.
Was there a breakup fee? Yeah, I know it's the reverse, right? Is there a straight breakup fee or no?
There is. That's also included in the documentation, John. Yeah.
I guess you're right. I get it. Okay. Thank you.
Thanks, John.
Thanks.
The next question comes from Kenneth Goldman from J.P. Morgan. Kenneth, please go ahead.
Hi. Thanks so much. I'm wondering if you could maybe walk us through some of the key ways you envision the transaction, maybe helping you better compete against some large food retailers out there. I know there's some obvious ones we can think of, but it might be helpful to hear some details about, you know, how you would emphasize the more important ways in which, I guess, better size and scale and geographic footprint could work to your advantage as you see it.
Yeah. Great. Another great question, Ken. I would really put it in two buckets. One would be the things that customers can see, and it's things like fresh. By integrating the two supply chains, we'll be able to take days out of how long it takes for products to get from the farm to our stores, as an example. Obviously, reducing those days that it takes to get it to a store then allows the customer to have more days at home. If you look at data, it's both data and things that you can do to support the customer. Both of us have amazing algorithms on how we target and making sure that the customer experience is even more personalized for them individually.
The other thing is, one of the things on using data that's not so customer facing is how the companies use data internally to help support our associates to do their jobs easier, as an example. On technology, it's an area where, as you know, each company has significantly accelerated our investments in technology. Kroger about five years ago, significantly increased the amount of investments we made on technology from a capital standpoint and from an operating expense standpoint. This allows both of us would be investing in a new point of sale system as an example.
By merging, obviously it'll allow us to only have one point of sale, and we'll be able to take the monies that we would have spent on developing each of us developing a system and investing that for further enhancement of supporting our associates and customers. You know, those are just some of the examples. Really, if you get back to you know John's question, there's also revenue synergies as well. It's you know a long list. I know once the integration teams get started, I feel very comfortable that we'll find even more opportunities, and we'll have to prioritize. There'll be so many opportunities we'll have to prioritize, which is very exciting. Thanks, Ken.
Could I ask a quick follow-up, Rodney, if I have time? Just from a customer-facing standpoint, what will customers see? Will there be a unified loyalty card? Do you expect any banner changes to come? I know in some areas like Southern California, there's gonna be, you know, you'll have the four or five banners in kind of the same market. Just wanna get a quick sense there from you. Thank you.
Yeah, it's something that's important, and I would say we're early in that process and probably different markets, the approach would be different. You know, what I would expect is the technology behind it will end up becoming the same. In terms of what the customer sees, we'll wanna evaluate each market individually, who has the stronger market share and what's the best go-to-market strategy.
Thanks, Ken.
The next question comes from Robert Dimond from Bank of America. Rob, the line is open. Please go ahead.
Hey, good morning. Thanks for taking my question. Actually two follow-ups. You know, the first one, Rodney, you know, Albertsons has a very different pricing model than Kroger. You know, you mentioned price investment. You know, Albertsons is, I think, a little more decentralized, more localized than you guys. Is there gonna be sort of a conversion to the Kroger approach to business? Do you think there could be a disruptive period, you know, taking more of a, you know, I'll call it high-low, for lack of a better word, pricing model and putting it on the EDLP model that you guys have?
My other one for Gary would just be, you know, on the double digit accretion assumption, you know, over four years, maybe some thoughts on the assumptions on, you know, inflation or what type of environment you guys are betting on over the next four years to get there? Thanks.
Yeah. If you look at the pricing model, first of all, we wouldn't look at it in terms of moving everything to the Kroger operating model. We would really look at what connects best with the customer. You know, Albertsons has always been investing in pricing. So it's something that's not new to them. Obviously, our experience is the synergies will allow us to take some of those synergies and invest it in pricing to help, you know, make the world a little bit easier for customers. As you know, Kroger has invested in pricing for well over 10 years, and it's been very helpful in terms of us improving our customer loyalty model, which then improves the household spend per household, which creates a flywheel.
All those things together is what creates the alternative profit model. We will make sure that we leverage both of our learnings on alternative profits and take that to the next level, as Gary mentioned. On centralization and decentralization, we're comfortable operating both models. You know, we'll sit down with the teams and really learn what makes sense in each market. Even within our company today, different divisions would have a little different structure on that. The thing that is incredibly important to us is making sure that we go and when we sit down with a CPG, talk as one company, and making sure that we're leveraging our data and our ability to try to partner with CPGs to grow both of our businesses, as an example.
Those are things that we think are incredibly important, and we'll make sure that we do. That, for us, isn't so much decentralized or centralized. It's making sure that you go to market as one company so that, you know, the thing I always like to say, if you look at Murray's Cheese, we have a few people that are some of the best cheese experts in the world, and they actually compete and win in competitions across the world. We couldn't afford to have that kind of talent in every division, and being able to leverage that across a large company is always hugely beneficial from connecting with the customer and supporting the customer. You know, we're comfortable with the model, and we're gonna sit down with each team and just talk through what makes the most sense.
with that, Gary, I'll turn it over to you.
Yeah, just briefly, Robbie, on your second question. You know, we mentioned on the call, we won't get into a lot of detail at this point, just because there's a lot of planning and time that will still pass as we head towards completing the transaction. I think what I would say is that as we've talked before, as you know, our model, we believe is resilient throughout the economic cycle, and we've shared our TSR expectation and goal of 8%-11% over time because we believe we can navigate those different operating environments to deliver on that return. We believe our overall financial value creation model is able to deliver on that over the medium to longer term based on the commitment that we've shared.
When you think about accretion, I would think of it if you look at the first four years post-close, I think of it over the next 5-6 years, and we look at the value creation model for Kroger, we believe compared to maybe a reasonable assumption around the midpoint of our TSR model, we're talking about accretion being over and above that midpoint of the TSR model over that period of time when we talk about the sort of general direction of the guidance that we shared for post-merger, if that helps.
Thanks, Robbie.
The next question comes from Simeon Gutman of Morgan Stanley. Simeon, please go ahead. Your line is open.
Good morning, everyone. I have a strategic question and then a SpinCo question. The strategic one is Rodney, you've been around this business and industry for a long time. Kroger's been a product of many acquisitions, so has Albertsons. I think there could be a fair debate that up until COVID, they haven't been that value creative looking at the margin of the business and the return on capital. I understand both companies think the margins are retained post-COVID, but now that we look at structural M&A, I wanna ask what's different. Is industry closer to oligopoly and now that we can hold on to these synergies and continue to build? Curious what you think is different and why we hold margin and build from here.
Yeah. If you look, obviously both of us, as you mentioned, have a tremendous amount of experience with mergers. I think both of us, what we've been able to do is maintain the local relevance in communities and with customers locally while leveraging the infrastructure behind to save money. You know, some of those savings go to obviously supporting the customer, supporting investing. But you know, if you look at both of our ROICs, we both earned well in excess of our cost of capital and would expect to continue to earn well in excess of our cost of capital. We think about, you know, the overall business model is what creates value.
As you know, we think the our TSR of 8%-11% does a great job of good returns for our shareholders while improving the sustainability of our business model long term while supporting our associates' job security and growth and customer connection. This will even accelerate that. You know, I feel good about the opportunities for the merged companies to create some incremental benefits for our shareholders that will improve our combined ROIC. You know, I think that's incredibly important and obviously continuing to earn in excess of our cost of capital is important as well.
On SpinCo, could it turn into a sale? Is that something that could change? The 100- to 375-store potential divestiture, how confident are you in that number?
Yeah, I think, Simeon, just to clarify on SpinCo. So obviously we're in the very early stages right now of the regulatory process, so we don't wanna get ahead of that in terms of talking through too much detail because we will go through that process. We're confident from an extensive work that we've done, that we believe we have a clear path to achieve regulatory approval with divestitures. We really see SpinCo as one option to be able to address those divestitures. We think it's a really clean option in the sense that it could potentially be a faster way to package up a strategy around divestitures. From a Kroger perspective, it gives us a confidence in the level of price that we would achieve for those stores.
We would intend to fully market any stores that we need to divest, and we would look at SpinCo as one option within that plan. Depending on what the level of divestiture is, we'll obviously frame and shape what the size and shape of SpinCo would look like.
Okay, thanks. Very helpful. Good luck.
Thanks.
Thanks, Simeon.
The next question comes from Scott Mushkin from R5 Capital. Scott, your line is open. Please go ahead.
Thanks very much, guys. You know, kind of same angle as the last question. You know, what gives you confidence in a market like Seattle or, you know, maybe in Denver, where your market share is gonna go, looks like well over 40%, that you won't actually have to spin off just flat out divisions?
Yeah. It's a great question, Scott. Obviously, we're early in the process and, you know, we're gonna collaborate and cooperate with the FTC as part of the process. As Gary and I both have mentioned, we do expect there'll be store divestitures. I think it's too early to start saying what that would be in each specific market. You know, both companies, you know, Albertsons and Kroger both have been advised by, you know, attorneys around the FTC issues, and feel very confident that, we'll be able to find something that works for all, but we'll sit down with the FTC as soon as we can.
as a follow-up.
Sorry, Scott, just to mention.
Oh, go ahead, sorry.
Sorry. Scott, to mention that, as you know, the regulators traditionally follow a process to evaluate this type of transaction. As I mentioned earlier, we believe we have a path to work to a closure here and feel confident on the financial modeling that we've done that we can deliver return for our shareholders in that regard. From you know from that perspective, you know, we wouldn't get into more detail as Rodney mentioned, but we believe there's a clear path here. We actually believe this is a really great outcome for all stakeholders, as Rodney mentioned, with the commitments to invest in price and to invest in value in stores and for our associates.
As a follow-up, and I apologize if the document's been filed and it's in there, but, you know, what happens if it needs to be more like 600 or 650 stores? What takes place then?
Yeah. I think it's way too early to get into specifics. You know, there's various scenarios, but you know, it's way too early. As I said, you know, we'll sit down with the FTC as soon as we can.
Thanks, Scott.
The next question is from Edward Kelly from Wells Fargo. Ed, please go ahead. Your line is open.
Hi, guys. Good morning. You know.
Good morning.
Rodney, I was hoping, could you assess the position of the acquired, you know, the assets that you're acquiring, the Albertsons assets from a pricing and a store experience, you know, perspective? Then, as you think about, you know, investment, you know, what you've talked about, how do we think about the amount of synergies that are being invested? You had a number of buckets in there, but, you know, I do believe that there's capital involved, you know, with that as well. Then just, you know, bigger picture, right?
20 years ago, Kroger started down a path that was very different, I think, than, you know, a lot of other conventional grocery stores, and you got a good return on that, you know, and generated a good flywheel. Is that the ultimate goal, you know, with the assets that you're acquiring here?
Yeah. If you look, you know, to me, it's a great question. The number one thing by merging is, you know, it truly creates a national footprint across, you know, the whole country, 48 states, 85 million households, which you know, is darn close to everybody in the United States. When you look at all of that together, it'll allow us to create a customer experience and support for our associates unlike anything else. When you look, one of the things that we when we were going through the due diligence that we thought it was very important is make sure that we felt good about Albertsons in every market they operate in terms of their strength of connection with customers, where they are on pricing, where the physical stores were.
When you look, we felt really good about their, you know, the operations of every one of their divisions across the country and all of us that were involved in the due diligence has been in stores in multiple markets. We feel good about that. Obviously, from a pricing standpoint, there's places where we thought it was important to invest in pricing and that's part of what we thought was important on the synergies is to take some of those synergies. When you look at the investment in capital and some of that work, that investment will improve the customer experience, but that capital will also create a return both in terms of sales growth and profit growth. There's a return associated with that as well.
You know, when I look at the journey that Albertsons is on, it looks very similar to the journey that we're on in terms of focusing on associates, focusing on customers, focusing on fresh, focusing on using the traffic and talent to create alternative profit streams. The hope and expectation is both of those things will be able to take each of our learnings and accelerate what we would have been able to do, we'll be able to do faster than what we could have done without each other. It's incredibly exciting. You know, when I look at the last 20 years and the journey that we've been on, I think it's been awesome.
I think the work that Vivek, Sharon, and Bob and Steve have done is incredibly impressive at Albertsons, and I think this will just help accelerate that as well. Thanks, Ed.
The next question comes from Kelly Bania from BMO. Kelly, your line is open. Please go ahead.
Hi, good morning. It's Kelly Bania from BMO. Rodney and Gary, just wanted to dig in a little bit more on the discussion of synergies versus investments here. It sounds like you're targeting $1 billion in synergies, but reinvesting about $1.5 billion into price and wages. I guess on the price investments, I think that amounts to about less than 1% of Albertsons sales. Is that enough? And where would that put Albertsons price gaps relative to Kroger's? Do you think that Albertsons' and Kroger's price gaps need to be the same?
How have you come up with that half a billion? Is that just key value items? Is that certain regions? Just really some help in understanding that price investment, because it does seem like the companies have had maybe historically different philosophies on price. Then also on the wage structure, have you evaluated Albertsons wage structure and is that where the majority of the investments need to come in that within that billion dollars?
Yeah. If you look at price, it really is market specific. It's, you know, all of us survey our competitors on where they are on price. It is market by market in terms of what we feel like we need to invest to be able to get pricing where we feel comfortable. You know, the other thing I always think is important is Albertsons also is very aggressive on a promotional strategy. You know, we'll continue to learn from that. We feel good about what we've included for price investments. If you look at the wage structure, in most places where there is overlap, we would have similar labor contracts, so it would be pretty similar.
The wage investment is really the combined companies and what we'll continue to accelerate and invest incrementally in wages for our associates. I don't know, Gary, anything you wanna add?
Yeah, maybe just, Kelly, to your original part of the question, from a synergy perspective, just to clarify the synergy is a net synergy, so we will be investing in those areas that we mentioned to support our customers and to support our associates. We'd still expect there to be incremental value for shareholders through that synergy process. It's after the investments that we would be making in the business to make sure that the growth is sustainable as we bring together two large successful organizations, which is why, of course, that we highlighted that we would expect there to be accretion in year one, and we would expect by year four to have double-digit accretion.
I would think of it more as a balanced plan to make sure that we're driving the long-term go-to-market strategy while delivering short-term value for shareholders as well.
Thanks, Kelly.
The next question is from Michael Montani from Evercore. Michael, please go ahead. Your line is open.
Hi, can you hear me?
Yes. Good morning.
Oh, okay, great. Good morning. I just wanted to follow up a little bit on the synergy front. I was wondering if you could clarify, you know, roughly is it a one-third, two-thirds kind of COGS synergies versus overhead synergies on a net basis? Just super high level, do you see more of the price investment being geared towards the Albertsons brands relative to the Kroger ones, given the starting point?
Yeah. On the pricing, the half a billion dollars is totally focused on the Albertsons brands, totally. On the mix of synergies, Gary, I'll let you go answer that part of the question.
Thanks, Rodney. Yeah, Michael, obviously we will get into a lot more detail as we get further through the process because we are still early, but we have done a tremendous amount of diligence, and the Albertsons teams have been very helpful in working together to understand the opportunities across the two businesses. I would say the two biggest areas would be in the sourcing side and also in supply chain and sort of end-to-end operations. There are some administrative cost efficiencies as well for sure, but the biggest areas would be in sourcing and supply chain end to end. And that's all obviously in the cost areas. We see tremendous opportunity for alternative profit growth that I mentioned earlier and accelerating both of our growth models through our go-to-market strategy.
Thanks, Michael.
Our final question today will be from Rupesh Parikh from Oppenheimer. Rupesh, your line is open. Please go ahead.
Good morning. Thanks for taking my question. Gary, I just had a question on leverage.
Good morning.
At the initial part of the transaction consummation, what's the ballpark leverage you guys expect? Do you see any opportunities to delever faster, whether through sale-leasebacks or other opportunities, with the combined chains?
Thanks, Rodney. Thanks for the question, Rupesh. You know, as I mentioned earlier, we have when you look at the transaction, if you think about it at a high level, you've got sort of just under $20 billion of purchase price consideration that will come down for the special dividend. There may well be some additional debt in Albertsons to fund part of the special dividend. Think of it, you know, towards the, if you've got $20 billion of consideration minus $4 billion for a special dividend, but then some debt being raised to fund part of it, that's where the sort of $17.4 billion of bridge facility comes into play. That's how the math sort of plays out there.
All that being said, as I mentioned in my prepared comments, we would expect, as we've paused buybacks, to have a significant amount of cash for when we close the transaction, so that would also net off against the amount of incremental debt that we would take. I would think of it being below the actual, you know, the bridge facility that we communicated. We do believe that we'll be able to get back to within our debt-to-EBITDA ratio relatively quickly. As I mentioned on the call, we've talked extensively with the rating agencies to make sure that they're comfortable. We actually feel very good about the plan we have because we do wanna keep investing capital to grow the business. We do believe this is an accelerator of our growth strategy.
Actually we think the balance is right in terms of taking that financial flexibility we've built over the last few years to be able to complete this transaction while maintaining our current investment-grade rating. At the same time, having a clear path to really generate free cash flow that will bring that debt down.
Yeah. On sale-leasebacks, we look at that as just a financing transaction and, you know, are you better off having the debt via just straight debt or having a sale-leaseback and on the lease. When you do a sale-leaseback, you end up with a required equity return for both the investor for the real estate plus your own equity return. It's just a financing mechanism, so we're comfortable either way. We feel very comfortable and confident. As you know, the combined businesses generate amazing cash flow as well, and that will also pay down. I'm guessing on working capital, we'll probably learn from each other and there'll be some money there that will help support de-leveraging as well. With that, Rupesh, thank you for the question.
Thanks to everyone for joining us today. As you know, I always like to have two closers, and the second one is always sharing a few comments directly with associates. In this case, I wanna share it directly with the Albertsons and Kroger associates listening in. This transaction means the companies can do something that's never been done before. Associates across both organizations will have exciting opportunities to grow their careers as we bring together the best of both Albertsons and Kroger, just as both companies have done in previous mergers. The success each of us experienced in the last four years allows us to make the announcement today and sets up a future where we can achieve even more, and we cannot wait to embark upon this journey together. And again, thanks for joining us today.
Really appreciate all the questions and the comments, and I'm sure we'll be talking soon. Thank you very much.
This concludes today's call. Thank you very much for your attendance. You may now disconnect your lines.