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KROGER CONSIDERING SUPERx/HOOK LEVERAGED BUYOUT

Executive Summary

KROGER CONSIDERING SUPERx/HOOK LEVERAGED BUYOUT as one option for divesting its drugstore business. In a Sept. 30 press release, the Cincinnati-based supermarket chain said it is "developing plans to sell its retail drug business through a series of private transaction," and that one of the alternatives involved is "the formation of a private company that would include the majority of the current assets of SupeRx Drug Stores and Hook Drug." Kroger's announcement indicates a narrowing of options since the company decided to "reposition" its drugstore operations two months ago ("The Pink Sheet" July 28, p. 13). At that time Kroger said it was also considering a shareholder spinoff of its retail drug business via a new public offering. Kroger currently operates 891 SupeRx and Hook stores located in the Midwest, Northeast, Southeast and Southwest. In its most recent 10K filing with the Securities & Exchange Commission, Kroger reported that 213 SupeRx stores are located adjacent to Kroger Supermarkets. One possibility is that the 330-store Hook chain might be sold separately. When the Indianapolis-based drug chain was acquired in 1985 for $160 mil., Kroger already had a retail drug business in the Midwest. Hook could be sold as a separate entity, and SupeRx would still retain its presence in that region of the country. While SupeRx and Hook, combined, make Kroger one of the nation's largest drug chains, their combined operations accounted for only 7% of the company's total 1985 revenues. Kroger reported sales of $17.1 bil., of which $1.2 bil. came from the drugstore division. The remainder came from the company's 1,360 Kroger/Dillon supermarkets and convenience stores. In addition, Kroger has recently made a move into the food/drug combo area, which it intends to pursue. These operations, located in 380 supermarkets, would be unaffected by the sale of the drugstore business. "We believe that a repositioning of the drugstores will enable the stand-alone portion of the company to better pursue its market niche as a healthcare/convenience retailer, while Kroger concentrates on the development and refinement of drug merchandising within the combination store setting," the company stated last July. Kroger indicated that should the company decide in favor of a leveraged buyout, current management would be invited to participate. The drugstore division is headed by Gerald Wolken, a corporate VP who serves as president of SupeRx. Kroger said it is "hopeful" the transactions will be completed "shortly." Proceeds will be used to reduce debt, purchase outstanding shares of common stock and for other corporate purposes, the release noted.

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