Taking Stock

Harris Teeter Holders To Meet Oct. 3; Filings Show Only Two Bids Made

Although the Federal Trade Commission (FTC) has not yet ruled on which Harris Teeter or Kroger stores are candidates for divestment that it has scheduled an October 3 meeting at the company’s headquarters in Matthews, NC for shareholders to approve the all-cash deal.

In a filing with the Securities and Exchange Commission (SEC) on August 27, Harris Teeter chairman Tad Dickson urged shareholders to approve the acquisition in which they will receive $49.38 per share. Dickson also asks that stakeholders approve deal related compensation for certain senior officers of Harris Teeter including Dickson and HT president Fred Morganthall.

Despite four separate lawsuits contesting the deal (a frivolous, but usually common endeavor with these types of transactions), I’ll be shocked if the acquisition is not strongly approved by Teeter’s shareholders.

A fascinating sidebar to the story is the recounting of how the whole sales undertaking started (read the filing at the end of this column). In a separate August 2 SEC filing, Harris Teeter detailed the background of the process. The following is a lengthy, but important excerpt from that filing.

So, while 19 companies “kicked the tires,” only two – Kroger and Party P (believed to be Cerberus Capital Management) – actually made bids.

I also found it interesting (but not surprising) that HT’s board opted for the presumably more stable long-term partner in Kroger rather than Cerberus, which offered more in cash ($52 per share) but for only 40 million of the retailer’s outstanding common stock shares. Cerberus’ cash portion of that offer was about $2.1 billion. Kroger ultimately paid $2.44 billion in cash.

Some other interesting footnotes from the deal include the compensation that Harris Teeter’s four key executives will receive if the deal is approved by shareholders. Chairman Dickson will receive $262,500 as an incentive bonus at the close of the transaction. Others receiving compensation for successfully executing the sale will be president Morganthall ($188,125), CFO Woodlief ($175,000) and executive VP Rod Antolock ($156,725).

Additionally, J.P. Morgan examined the financial results of 11 high-profile publicly-traded retailers as a comparison to HT’s performance. Those retailers were divided into three groups: large national peers – Kroger, Safeway and Supervalu; multi-national peers – Ahold and Delhaize; regional peers – Ingles Markets, Roundy’s and Weis Markets; and natural high-growth peers – Fairway, The Fresh Market and Whole Foods.

J.P. Morgan also examined the enterprise value of 19 food retailers that were sold during the past 12 years to better determine a range of earnings multiples that Harris Teeter might fetch. Those retailers that were evaluated were:  Cerberus’ 30 percent stake in Supervalu; Cerberus’ acquisition of New Albertsons from Supervalu (2013); Winn-Dixie’s 2011 purchase of Bi-Lo; BJ’s/Leonard Green (2011); Yucaipa Cos.’ 37 percent stake in A&P and Pathmark (2009); Leonard Green’s 17 percent stake in Whole Foods; A&P’s purchase of Pathmark (2007); Wild Oats/Whole Foods (2007); Smart & Final/Apollo (2007); Marsh Supermarkets/Sun Capital (2006); Foodarama ShopRite/management-led buyout (2006); Albertsons/Supervalu (2006); Piggly Wiggly Midwest/Certified Grocers (2005); Yucaipa’s 40 percent stake  in Pathmark (2005); Bi-Lo-Bruno’s/Lone Star Funds (2004); Shaw’s-Star Markets/Albertsons (2004); Roundy’s/Willis Stein (2002); Copps/Roundy’s (2001); and Dick’s Supermarkets/Piggly Wiggly Midwest (2001).

In the filing, Harris Teeter, while noting the difficulty in making growth projections, offered this future analysis: store counts will respectively grow to 220, 228, 236, 245 and 255 for fiscal years 2013, 2014, 2015, 2016 and 2017 (it currently operates 212 units); the company will achieve comparable store sales growth of 2.6 percent for fiscal 2013 and 3 percent thereafter; gross margins will improve by 15 basis points from fiscal 2013 to fiscal 2014 and thereafter remain relatively flat; increased sales, general and administrative (SG&A) expenses leverage such that SG&A expenses, including fixed costs, will increase more slowly than the increase in revenue; and capital expenditure plus purchases of other investments (primarily land for future development)  would be offset by proceeds from the sale of property, plant and equipment and other investments and ranged from $171 million to $208 million per year between fiscal 2014 and 2017.

My guess is that senior management might stick around longer than the traditional one-year transition period. Keeping the local flavor of its acquisitions, allowing those managers to have regional flexibility while also still integrating many backroom functions which can maximize Kroger’s efficiencies and clout, are primary reasons why the Cincinnati-based retailer has been more successful with acquisitions than its “ large national peers.”

And while the FTC will almost certainly mandate some store closures/sales due to market overlap (Raleigh-Durham, Hampton Roads and Charlottesville, VA), this is a relatively clean deal and a tremendous opportunity for the nation’s largest pure play supermarket chain to make its imprint on the Baltimore-Washington market and perhaps as a steppingstone further north.

‘Round The Trade

And speaking of Kroger (and Hampton Roads), the chain’s first step of its five year $250 million market upgrade plan for the region (it now operates 10 units in the Tidewater area of Virginia) was a grand-slam. A 124,000 square foot Marketplace recently opened in Virginia Beach (on the site of a former SuperKmart unit) and sales have reportedly topped the one million dollar a week barrier for the past month (that’s better than the first Virginia Marketplace, which opened in ChesterfieldCounty last December). Kroger also has other combo Marketplace units slated for Portsmouth and Suffolk, with more new store announcements expected soon…perhaps the presence of Kroger in its backyard was the catalyst to replace Bill Parker as president of Farm Fresh, which has struggled since Ron Dennis left the regional unit of Supervalu in 2010 (in the musical chairs department, Dennis was replaced by ex-Food Lion executive Gaelo de la Fuente who left Supervalu last year). Although Parker (who is a real good guy) did once toil for Albertsons, he’s really a holdover from the old Ron Dennis regime and not a hand-picked choice of Bob Miller who is now supervising the entire Supervalu and New Albertsons businesses under the aegis of private equity owner Cerberus Capital (many of those two firms’ senior executives worked directly for Miller when he was at Albertsons). Parker’s replacement on an interim basis is Chad Ferguson, an ex-Kroger exec who came on board at Supervalu shortly after the Cerberus/Bob Miller/Sam Duncan team gained control last March. So, while there has been some improvement with the new leadership team, the numbers at Supervalu’s regional chains, which also includes Shoppers, Cub, Shop ‘n Save and Hornbacher’s, are still in “struggle mode.” (I found it interesting that the only two division presidents to exit the “new” Supervalu were the ones least connected to Miller – Shoppers’ president Bob Bly in July and Parker last month). Clearly, there’s too much competition in most of the areas where SVU and New Albertsons operate, and so much toothpaste was squeezed from the tube under the wretched tenures of Jeff Noddle and Craig Herkert that it’s going to be very, very hard to gain significant sales increases over the next few deals. But, then again, this deal really isn’t about long-term market share success is it? With a strong real estate base now under its control and knowledgeable grocery leaders to streamline the “process,” Supervalu, with its increased share price and fixed supermarket assets and New Albertsons (Acme, Shaw’s, Jewel and two West Coast Albertsons divisions) with even a stronger real estate portfolio, have already achieved success for their financial partner…more Virginia news: Martin’s (Giant/Carlisle) will close its older and smallish Gayton Crossing unit in Richmond next month. Citing performance issues, the retailer said that a majority of the fewer than 100 associates would be offered jobs at other nearby stores. Next year, Martin’s will open its first new Richmond area store since it acquired Ukrop’s in 2010 in Midlothian (the 74,000 square-foot unit will serve as a replacement for its in the Sycamore Square Shopping Center store that opened in 1975)…Dollar Tree, the fastest-growing dollar store retailer in the country, announced that it will add freezers and refrigerated units to 550 of its stores over the next 12 months, which will give the Chesapeake based discounter more than 3,400 of its nearly 5,000 units, enabling them to be equipped for perishables. To give you an idea of Dollar Tree’s recent explosive growth, during its second quarter ended August 3, earnings increased $4.6 percent to $124.7 million while comp store sales grew 3.7 percent. During that 13 week period, the company opened 81 new stores. These numbers are not an anomaly; Dollar Tree has been on a spectacular growth run for the past five years…in Roanoke, members of United Food and Commercial Workers (UFCW) Local 400 working at the Mid-Atlantic division’s Kroger stores have ratified a new, three-year collective bargaining agreement. “This agreement is as good as any in the country,” said Local 400 president Mark P. Federici. “Despite the damaging impact of the Affordable Care Act (Obamacare) on the joint labor-management’s Taft-Hartley Funds providing health care to our members, we were able to maintain current benefits. And despite the still-struggling economy, we were able to negotiate actual raises and bonuses. Our members deserve all the credit for this strong contract, because their solidarity and activism is what made everything possible.” The union commented that bargaining was challenging and protracted, largely because Obama administration regulations covering implementation of the Affordable Care Act deny Taft-Hartley Funds any of the benefits of the new law while imposing major new burdens. As a result, the previous contract, which expired on March 31, 2013, has  been extended for five months, though many other negotiations in the grocery industry have required extensions lasting a year or longer. Highlights of the new agreement include: increases in total compensation of nearly $2/hour over the life of the contract including wages and employer contributions to the health and retirement funds, plus bonuses; maintenance of health and retirement benefits for current employees; expansion of job classifications that increase the number of lead positions, creating new paths for career advancement and increases in earnings and defeat of numerous management proposals for worker concessions. “I couldn’t be more pleased that our Kroger Roanoke members will be able to work for the next three years under an industry-leading collective bargaining agreement that empowers them to continue improving their lives,” Federici added. Local 400, the largest UFCW local, represents 35,000 workers in the retail food, retail, health care, manufacturing and other sectors in Virginia, Maryland, Washington, DC, West Virginia, Ohio, Kentucky and Tennessee. In other United Food and Commercial Workers news, the UFCW International is reaffiliating with the AFL-CIO after an eight-year break with the national labor federation. “We join the AFL-CIO because it is the right thing to do for UFCW members, giving them more power and influence,” said UFCW president Joe Hansen. “This is not about which building in Washington, DC we call home – it is about fostering more opportunities for workers to have a true voice on the job. Attacks on workers brought the UFCW into direct strategic partnership with the AFL-CIO and made it clear it was time for the UFCW to redouble our efforts to build a more robust and unified labor movement.…heading a bit further south, Publix has confirmed it will build new stores in Winston-Salem and Cornelius, NC. Both stores will open in the next 18 months to go along with five other Tar Heel state units currently under construction in Charlotte (three locations  – Ballantyne, Iverson Way and Matthews Mint Hill Road), Cary and Asheville. The two newest locations that were announced last month will each be 49,000 square feet in size. And as Publix continues to develop its new Charlotte division, and Kroger awaits the FTC go-ahead on its Harris Teeter acquisition, Lowes Foods (a unit of Alex Lee, Inc.) has closed two Triangle region stores in Cary and Raleigh… great move by Newark, DE-based Produce Marketing Association (PMA) last month when it hired ex-Food Lion president Cathy Green Burns as its new president. She will report to PMA CEO Bryan Silbermann as the growing trade organization seeks to continue the dynamic growth it has achieved over the past decade…at Wal-Mart, second quarter comps were down 0.3 percent at its U.S. stores. The company said the dip in same-store revenue resulted from low inflation and some price deflation in categories like dry groceries, snacks and frozens. Bill Simon, CEO of Wal-MartU.S., noted that trading down was also a factor, “…particularly in the categories where product loyalty is not the primary factor in a purcha
se decision.” Simon added that increases in produce comps were in the mid-single digits and that the positive effects of an internal program to improve employee training also aided sales through the 13 week period…the National Frozen and Refrigerated Association has named its March Frozen Food ‘Golden Penguin” winners. Among those in our region who were recognized were: Wakefern Food Corp. (co-op wholesaler); Bozzuto’s (corporate wholesaler); Ateeco Inc./Mrs. T’s Pierogies (branded manufacturer); Acosta (military sales agent); Douglas Sales Assoc. (retail sales agent); Weis Markets, assisted by Crane Communications Inc., (retail corporate chain or division over 50 stores)…also Shaw’s (now part of the Cerberus network) announced that another round of store closings. The West Bridgewater, MA chain is shuttering six of its 34 units in New Hampshire – Seabrook, Goffstown, Tilton, West Lebanon, Manchester and Keene. A week later Stop & Shop (Ahold USA) said it would close its fleet of six stores in the land of “live free or die” – Hudson, Exeter, Bedford, Milford and two Manchester stores…I’m sure many of you read the Bloomberg piece on C&S chairman Rick Cohen. Not only was the story interesting, but it revealed a lot about the “mystery” behind one of the most innovative and successful executives, not only in the grocery business but in the world. Among the nuggets in the story: Cohen’s net worth is $11.2 billion, making him one of the 100 wealthiest people in the world; as the owner of a privately-held firm, Cohen lets C&S’ corporate income pass through to be taxed as personal income to avoid double taxations; and in 2009 (based on Bloomberg research) the Keene, NH wholesaler had approximately $240 million in outstanding bonds and achieved a gross profit margin of 2.2 percent on net income of $19.3 billion. Bloomberg estimated C&S’ current annual volume to be $21.7 billion. I’ve probably gotten about 50 phone calls and emails about this story, but one person I’m certain I won’t be hearing from is Rick. That’s because he is one of the most private, low-key executives in the grocery business, and one who doesn’t grant interviews and doesn’t make many public appearances (unless it’s customer-related or for a philanthropic cause). Despite the flattering remarks in the story, I can’t believe Rick’s happy about all the new publicity…the National Grocers Association (NGA) in conjunction with Pasadena, MD-based FMS, has released its 2013 Independent Grocers Financial Survey. Some of the other nuggets from the report include: improvement on net profit in 2012 compared to 2011 – from 1.12 percent to 1.65 percent; inflation-adjusted increases in overall comp store revenue to an average of 1.46 percent; total store margins gained slightly to 26.48 percent; and healthcare costs continued to spiral upward, increasing 7.6 percent over 2012 levels. The survey found that the economy continued to improve and that lower unemployment proved to be a positive factor in gains made by the more than 250 independent retailers surveyed.  “Fiscal year 2012 was quite the comeback year for independent food retailers,” said Peter Larkin, president and CEO of NGA. “We found vast improvements in financial performance, much higher levels of store development, stabilized payroll and lower levels of theft-related shrink for the majority of respondents.”…Dietz & Watson, the iconic Philadelphia-based deli manufacturer, had to swallow some tough news over the long Labor Day weekend. Its 266,000 square foot primary distribution center in Delanco, NJ was burned beyond repair. This was no ordinary fire, but a blaze of mammoth size – 11 alarms were rung in which about 50 neighboring fire companies were called in and involved approximately 200 firefighters. Fortunately, nobody was hurt at the depot which was built in 2007 and employs 130 people, all of whom have all been moved to other D&W facilities, primarily to the main plant on Tacony Street in Philadelphia. The cause of the fire is as yet undetermined. Louis Eni, CEO of Dietz & Watson and one of the classiest people in any business, expressed concern about the safety of his people and expressed his gratitude to the firefighters who fought the big blaze, which originally broke out on Sunday, September 1 at 1:30 p.m. and wasn’t contained for more than 24 hours. Eni noted: “We will absolutely have to rebuild. The Delanco facility was the main warehouse for D&W and it also housed a third party logistics cold storage facility. That has also been destroyed. The office was not destroyed, so they are salvaging paperwork, computers, etc. and bringing them back to Philadelphia.  The entire company has stepped up to the plate and everyone is working together to keep the company going. What is most important now is to get a sense of normalcy back. We are working 24/7 until we get all inventory levels back to normal.” He added that “the outpouring of support has been incredible from all sectors of the industry.” From a trade perspective, Dietz & Watson shipped its first order on Tuesday morning, September 3. The Philly driver/salesmen/jobbers were also on the street on September 3 with product serving customers. In addition, all tractor/trailers are being loaded from the main plant in Philadelphia.  The West Coast shipments went out just before the Labor Day holiday and they were heavier than usual (due to holiday demand), and the intention was to ship to the West Coast again closer to the weekend of September 7-8. The company’s manufacturing plant in Baltimore and its Greenville, SC warehouse are being used as satellite distribution centers.

Local Notes

Wegmans will open its 82nd unit on September 15 in Germantown, MD. The 123,000 square foot mega-store will be the family-owned uber-retailer’s first Montgomery County unit and seventh store in Maryland. We’ve also talked recently about Wegmans’ potential interest in opening a new unit in the District of Columbia. According to a memo from Wegmans’ senior VP-real estate development Ralph Uttaro to Advisory Neighborhood Committee (ANC) commissioners, that interest for a site in the soon to be redeveloped former Walter Reed Army Medical Center on 16th Street NW is real. However, Uttaro told the ANC that any possible deal at the location would have to involve DC-based real estate firm Roadside Development LLC, which Wegmans works with exclusively. Uttaro noted that Wegmans has been studying the Walter Reed site for more than 18 months and has worked with Roadside to develop a plan “that meets Wegmans’ needs to create a successful store.” Uttaro expressed his concerns to the ANC that other developers that made presentations about the site have included Wegmans’ logo in their proposals or claimed that the Rochester, NY-based retailer has been having discussions with them regarding Wegmans’ plans. By the way, Wegmans’ next opening after Germantown will be in Montgomeryville, PA on November 3…while it was certainly major news in itself that The Fresh Grocer will be joining Wakefern as its 50th ShopRite member, there are a few important sidebars related to this move to recognize. Not only is Wakefern adding a solid and established merchant into its fold (about $165 million in annual retail sales), it now will also control The Fresh Grocer trademark, a potentially useful name and differentiated format (smaller size, perishables-driven) to attract prospective new members and offer existing ones an alternative growth option (along with the much speculated upon report that Wakefern will soon also offer the use of its PriceRite discount banner – currently all 53 PriceRites are corporately-owned – to existing members as another competitive weapon. Conversely, the loss of The Fresh Grocer is a big hit for Supervalu’s Eastern Region, which will lose its second largest independent banner. In speaking with owner Pat Burns about the shift, he emphasized the move was primarily driven by Wakefern’s opportunity to afford him long-term security as well as new programs and opportunities. And when asked, he went out of his way to praise the management team at Supervalu-Eastern Region (particularly president Kevin Kemp and senior VP Joe Della Noce). He also admitted that Supervalu’s corporate problems and challenges (mainly created by the previous Jeff Noddle and Craig Herkert regimes) were factors in his decision to leave Supervalu. However, all the Supervalu-Eastern Region news was not so glum as B. Green & Co., owner of three supermarkets, two cash & carries and a sizeable redistribution business, has signed a new supply contract with the wholesaler. Actually, B. Green has been a Supervalu customer ever since it sold its own wholesale grocery business to Richfood in 1993 (Supervalu acquired Richfood in 2000), but has been operating without a new long-term agreement for about six months. The new deal will now make the Baltimore independent Supervalu-Eastern region’s second largest customer and CEO Benjy Green has been named to SVU’s new retail advisory board. “We considered several very competitive offers, but in the end were impressed with what the new Supervalu team brought to the table,” Green stated.  “I want to thank (CEO) Sam Duncan and (Eastern Region president) Kevin Kemp for their creativity and tenacity in getting this deal done. Their personal involvement was invaluable.” Benjy later acknowledged that Duncan made two visits to B. Green’s Baltimore headquarters (apparently that’s two more than former CEOs Jeff Noddle or Craig Herkert made) and Kemp personally handled many of the final, intricate details… Don Ciotti, a veteran of Genuardi’s and Wal-Mart, before joining DA’s Bottom Dollar Foods (BDF) unit in 2010 has left the fledgling discounter as director of operations and has joined Giant Eagle’s Good Cents Grocery + More discount division in a similar capacity. In switching to Giant Eagle, Ciotti will now toil for one of BDF’s chief rivals and the largest grocer in the Pittsburgh/Youngstown market. Ironically, after a recent lull in new store activity, DBF recently opened new stores in Souderton, PA; Homestead, PA; and Woodbury, NJ. Delhaize America recently acknowledged that BDF has trimmed its losses, but is still unprofitable…the ageless Bernie Kenny and his team at Delaware Supermarkets opened their sixth ShopRite August 25 in Glasgow, DE. The former Super Fresh and Pathmark  (A&P) location has been expanded to 73,000 square feet and will be the second ShopRite operated by the company along the U.S. Route 40 corridor…another former  Tea Company unit (Pathmark) that recently reopened under a new banner was Weis’ 55,200 square foot Hillsborough, NJ unit which has been totally refurbished and looks great. Weis will soon open at the site of another former A&P unit in nearby Flanders, NJ, the western New Jersey berg where the Sunbury, PA regional chain once operated (that store is now a high-volume ShopRite). Weis also announced that the new Hillsborough unit, as well as stores in Newton, Franklin and Hackettstown, NJ along with stores in Conshohocken, Doylestown, Norristown (all former Genuardi’s locations) and Lansdale, PA have been added to the retailer’s online shopping service. With the addition of those eight units, Weis’ online service is now available at 14 locations…more obits than usual to report this month and that’s never a good thing. It’s with a heavy heart that we report the passing of the great Shirley Howard, founder and president of the Children’s Cancer Foundation (CCF). I’ve been fortunate to meet many great people in my life, but I can’t think of anyone who has made a more lasting impression on me than Shirley. Her sole mission was to improve the lives of hundreds of children who were afflicted with cancer. In fact, in nearly 39 years, she personally raised more than $30 million for CCF. And if you ever had a personal medical concern involving family or friends, Shirley would have the top doctor at Johns Hopkins, University of Maryland Hospital or Georgetown University Medical Center contact you within 24 hours. Her credibility and access were that powerful. During most of those years she didn’t accept a salary and worked tirelessly out of her Baltimore home (Shirley didn’t drive either, making her accomplishments even more astounding). During the funeral service, five distinguished speakers spoke about her unyielding persistence, all adding that it was Shirley’s passion and deep commitment to her cause that made her truly unique and special. Despite a difficult past 18 months, Shirley carried the torch until the end, determined to help as many young people as she could. I’ll miss her compassion and friendship very much. Also passing was another Baltimore original, Art Donovan, former defensive lineman for the original Baltimore Colts and one of the great characters to play during the NFL’s golden era. Actually, Donovan called the period from the early 1950s to the early 1960s the “blue collar” era, noting that the game was played primarily by “oversized coal miners and West Texas psychopaths.” I met Art numerous times after his retirement from pro football (he was elected to the NFL Hall of Fame in 1968), but there was one meeting that was unforgettable. Artie was the honoree at a charitable function and I was asked to serve as his unofficial aide (go-fer) prior to the event. Part of those duties included handling his food and beverage needs. A few hot dogs satiated Artie’s food whims, but satisfying his thirst desire was another story. That’s because Artie’s only request was for some Schlitz beer. Unfortunately by the mid-1980s, the once popular brew was almost impossible to find. I must have called
more than a dozen liquor stores before disappointedly telling the big man that I could not locate his favorite beverage. Artie smiled and said, “Listen kid, there’s only one place in Baltimore that still carries Schlitz. Here’s the phone number, go pick up a case.” A case? Sure enough, the owner of a small liquor store in Dundalk, MD knew exactly what I was talking about. And while Artie didn’t drink the entire case, he came close. Also passing away last month was Joe McCarthy, one of the great old line warriors in the food business. McCarthy, who began his career with First National Supermarkets in the late 1940s (that’s where I first met him), spent 30 years at that now-defunct chain, rising to the position of senior VP. He later joined Grand Union for a four year stint (1977-1981) and spent the last nine years of his career with A&P where he started as senior VP of the company’s Metro New York group and later became EVP and COO for the entire Tea Company. Joe McCarthy was a no nonsense, tough, old school executive who knew virtually every aspect of the grocery business, and despite his gruffness, was always kind and helpful to me when I first began my career in 1974. He died in Naples, FL at age 91. One of the great modern crime novelists of our time, Elmore Leonard, has also died. Elmore was still writing almost every day (he wrote all of his books in longhand on unlined yellow pads) until nearly the end. His volume of work, which began in 1953 with “The Bounty Hunters,” was one of the most prolific and interesting of the past 50 years. Among his many novels which were ultimately made into motion pictures were “Out of Sight” (1998), “Jackie Brown” (1997), “52 Pick-Up” (1986) and one of my all-time favorite movies “Get Shorty” (1995). Born in New Orleans and raised in Detroit, where he lived most of his life, Leonard’s spare writing style and gritty realism made most of his novels a fun and absorbing read. Leonard was 87…a few final thoughts about the recent surprising departures of Giant/Landover president Anthony Hucker and Delhaize America CEO Roland Smith. I was disappointed to hear the news about Mr. Hucker. Anthony is an extremely intelligent and engaging personality who, unlike his predecessor, Robin Michel, was genuinely liked by Giant’s associates. There’s no question that the transition from his expertise in strategic management to a more operational-driven job was a challenge, but Anthony worked hard to make Giant a better place to work and a more visible presence in the community. In the end, it’s always about “the numbers” and clearly Giant has been struggling due to many factors that include economic and competitive issues and some that involve Ahold USA transitioning into a changing organization following the integration of many functions to Carlisle, PA. There’s also a new management structure in place led by James McCann, another talented Brit with an extremely high level of smarts and perhaps a different vision and makeup than the person who originally helped choose Hucker – the now retired Carl Schlicker. Sometimes the chemistry doesn’t work out, particularly if business at Giant (and for many retailers in the Baltimore-Washington market) isn’t clicking on all cylinders. With the search for a future fourth president in five years now under way, Giant not only must deliver better results, but it needs more management stability. We wish Anthony the best of luck in his future endeavors. As for Roland Smith, clearly the changing of the guard at parent company Delhaize Group (and subsequent loss of control of day-to-day U.S. operations) was the probable cause of his exit. It’s hard to evaluate Smith’s tenure, which lasted less than a year. While we heard the moniker “Chainsaw Jr.” tossed around by associates and vendors, it’s only fair to note that Smith was brought in to tighten the ship (he sold DA’s losing unit in Florida to Winn-Dixie) and change the culture, so “whackin’ and hackin’” would have been the first offensive deployment for any new leader. And while the trimming of the executive team and the brand “repositioning” of Food Lion has helped same store revenue and earnings, there’s so much more that’s needed to restore most of the Delhaize America store fleet back to sea level. It’s difficult to fathom any supermarket executive being able to successfully complete that task, given the damage that the Belgian retailer has inflicted upon it is flagship Food Lion unit over the past decade and the ferocity of the current competitive environment. Ask yourself this questions objectively: given the convenience of its locations and the recent pricing and merchandising upgrades, is there a significantly more compelling reason to make Food Lion your primary shopping destination today than there was 18 months ago? Even Beth Newlands Campbell, who late last year was named Food Lion president replacing the ousted aforementioned Cathy Green Burns (one of Smith’s first moves), acknowledged in a recent Charlotte Observer interview: .“…we have to get better.” Clearly, Newlands Campbell, a 26 year alumnus of sister firm Hannaford, gets the big picture, admitting that “…there’s an imperative to set us apart, You can’t be middle of the road.” But talkin’ it and walkin’ it in Food Lion’s case are still miles apart. Somehow, me thinks that a new non-American CEO (Frans Muller) based in Brussels, isn’t going to offer Delhaize the best opportunity to improve its U.S. business.

Harris Teeter SEC Filing

“At an industry meeting that occurred in April 2011, the President of Party A (a supermarket chain) approached Mr. Morganthall, the president of Harris Teeter, to make an informal inquiry as to whether Harris Teeter would be interested in discussing a combination with Party A. On June 1, 2011, Harris Teeter and Party A entered into a confidentiality agreement. A meeting was arranged, and the chief executive officer of Harris Teeter, Mr. Dickson, met with the chairman of Party A in July 2011. In connection with the meeting, Mr. Dickson toured some of Party A’s stores. A subsequent visit was arranged in August 2011, at which three senior executives of Party A met with Mr. Dickson and Mr. Morganthall to visit some Harris Teeter stores. The discussions were very general and remained at a high level. At the regularly scheduled August 18, 2011 meeting of the Harris Teeter Board, Mr. Dickson reported on the visits.

During the remainder of 2011 and early 2012, Harris Teeter exchanged additional high-level information with Party A, but no serious discussions regarding a strategic combination took place. At the May 17, 2012 regular quarterly meeting of the Harris Teeter Board, Mr. Dickson informed the Harris Teeter Board that discussions with Party A had moved very slowly, but that the Party A CEO remained interested in continuing discussions about a transaction. The Harris Teeter Board discussed the possibility of engaging a financial advisor to facilitate discussions, but, in light of the slow movement of Party A, the Harris Teeter Board made no decision on the engagement of financial advisors at that time. Ultimately, Party A chose not to pursue a combination with Harris Teeter.

In May 2012, representatives of Party B, a private equity firm, visited Harris Teeter’s offices to meet with Mr. Dickson and Harris Teeter’s Chief Financial Officer, Mr. (John) Woodlief. In June 2012, representatives of Party C, another private equity firm, also visited Harris Teeter’s offices and spoke with Mr. Dickson, Mr. Morganthall and Mr. Woodlief. Both Party B and Party C discussed their interest and relevant transaction expertise in the food retail sector and expressed a desire to learn more about Harris Teeter. Mr. Dickson thanked each of Party B and Party C for their interest and indicated he would update the Harris Teeter Board on their inquiry. He further indicated that management was in the annual process of preparing Harris Teeter’s five-year strategic plan, and that it would not make sense to have further discussions until the plan was completed, since the Harris Teeter Board would want to assess Harris Teeter’s prospects for continuing to operate as an independent company before evaluating strategic alternatives.

At the regular quarterly meeting of the Harris Teeter Board held on August 16, 2012, Harris Teeter’s management made its annual presentation to the Harris Teeter Board of the five-year strategic plan and Mr. Dickson informed the Harris Teeter Board of the visits from Party B and Party C. Party B and Party C continued to make inquiries of Harris Teeter and ask for follow-up visits, but no further substantive discussions were held with Party B or Party C until after J.P. Morgan had been formally engaged as Harris Teeter’s financial advisor (on November 16, 2012). At the Harris Teeter Board meeting on August 16, 2012, following management’s presentation of the five-year strategic plan and Mr. Dickson’s presentation regarding his discussions with Parties B and C, the Harris Teeter Board encouraged management to take a more active approach in the exploration of strategic alternatives.

Between the August 16, 2012 Board meeting and the regular quarterly Harris Teeter Board meeting held on November 15, 2012, Harris Teeter’s management discussed with J.P. Morgan its potential engagement as financial advisor to Harris Teeter in connection with (a) evaluating the merits of a potential sale, merger, joint venture and/or other business combination and (b) comparing the merits of such a transaction to the prospects of Harris Teeter as a standalone public company. On November 15, 2012, the Harris Teeter Board discussed J.P. Morgan’s extensive advisory and transaction experience in the retail sector, and in the food retail industry in particular. Management reviewed with the Harris Teeter Board the principal terms of the proposed engagement with J.P. Morgan, including the proposed fees, and compared the proposed fees to fees charged by other investment bankers in connection with similar engagements. The Harris Teeter Board expressed its support for the exploration of strategic alternatives and the engagement of J.P. Morgan and determined that the process would be overseen by the Harris Teeter Board as a whole.

On November 16, 2012, Harris Teeter engaged J.P. Morgan as its financial advisor. J.P. Morgan advised that Harris Teeter should consider continuing its discussions with Party B and Party C and initiating discussions with other potential purchasers.

Over the course of the next two weeks, management and J.P. Morgan worked together to develop a list of additional potential purchasers. During the period beginning November 21, 2012 and ending December 3, 2012, J.P. Morgan contacted eleven additional potential purchasers, each of which had demonstrated expertise in food retail and the financial capacity to consummate an acquisition of, or combination with, Harris Teeter. Between December 5, 2012 and December 20, 2012, Harris Teeter executed eight confidentiality agreements, including with each of Party B and Party C, as well as Party D, Party E, Party F, Party G, Party H and Party I, respectively.

Between December 7, 2012 and December 20, 2012, J.P. Morgan sent summary information regarding Harris Teeter to each of the eight parties, discussed with each of them the materials that had been distributed to them and answered their questions regarding Harris Teeter. Also between December 7, 2012 and December 20, 2012, J.P. Morgan submitted an instruction letter to each of the parties. The instruction letter, among other things, requested that preliminary nonbinding indications of interest be submitted by December 21, 2012.

J.P. Morgan received preliminary nonbinding indications of interest on December 21, 2012 from Party B, Party C, Party D, Party E, Party F and Party I. A preliminary indication of interest was received from Party H on January 4, 2013. Party G did not submit an indication of interest and did not continue to participate in the process.

The preliminary nonbinding indications of interest received ranged from $44 to $50 per share. Party B’s indication of interest was at $50 per share, but included a requirement for an immediate 45-day exclusivity period in order for Party B to conduct due diligence and negotiate a purchase agreement. Harris Teeter, following discussions with its financial and legal advisors and members of the Harris Teeter Board, determined that it was not in the best interest of its shareholders to suspend the process for the purpose of allowing Party B, which had not yet conducted any due diligence, to determine whether it was interested in pursuing a transaction. Party B was informed that it would not be granted a 45-day exclusivity period, and Party B elected not to further participate in the process. Party F’s preliminary indication of interest was at the low end of the range, and Party F was excluded from the process.

All preliminary nonbinding indications of interest were expressly conditioned on the completion of due diligence and the negotiation of satisfactory definitive agreements.

From January 25, 2013 through February 7, 2013, Harris Teeter’s management met with, made presentations to and provided store tours to each of Party C, Party D, Party E, Party H and Party I.

The potential buyers who attended the management presentations were given access to a virtual data room prepared by Harris Teeter with the assistance of J.P. Morgan and McGuireWoods LLP, Harris Teeter’s corporate and securities counsel. During the week of February 11, 2013, all of the potential buyers submitted requests for additional information in order to complete their analysis. In response to these diligence requests, Harris Teeter provided access to extensive data through the virtual data room.

During the 52-week period ended January 18, 2013, Harris Teeter stock traded in a range from $35.72 to $44.40 per share. On January 18, 2013, the closing price of Harris Teeter stock was $36.94 per share. After the market closed on that day, Mergermarket reported that Harris Teeter was conducting a strategic review. On the following day, the closing price for Harris Teeter stock was $39.31, a 6.4 percent increase over the previous closing price. On January 31, 2013, Harris Teeter’s stock closed at $41.49. Following the close of the market that day, Harris Teeter announced its earnings for the first quarter of its 2013 fiscal year, and the following day the stock closed at $37.67, a 9.2 percent decrease.

On February 12, 2013 at 3:50 p.m., The Wall Street Journal reported that Harris Teeter was considering a sale and that it had retained J.P. Morgan as its financial advisor. Harris Teeter stock had opened that day at $37.04; it closed at $39.50, a 6.6 percent increase. The articles in Mergermarket and The Wall Street Journal , along with other online and print publications, created significant uncertainty among Harris Teeter’s employees, vendors and customers. As a result, Harris Teeter issued a press release on February 13, 2013 following the closing of the market, confirming that it had retained J.P. Morgan as its financial advisor to explore strategic alternatives. Harris Teeter stock closed at $41.39 the following day. The announcement by Harris Teeter received substantial press coverage. Following Harris Teeter’s public confirmation that it had engaged J.P. Morgan as its financial advisor, J.P. Morgan received calls from several additional interested parties, including Party J, Party K, Party L, Party M, Party N and Party O.

Party J called J.P. Morgan on February 25, 2013 to express its interest in acquiring Harris Teeter. After reviewing public information, Party J decided not to pursue a transaction.

Party K reached out to J.P. Morgan on February 26, 2013 and requested a confidentiality agreement, which J.P. Morgan provided that same day. However, Party K decided neither to sign the confidentiality agreement nor to continue to pursue a transaction with Harris Teeter.

A financial advisor to Party L contacted J.P. Morgan on February 26, 2013 to register its interest in a transaction with Harris Teeter. Representatives from Party L as well as representatives from Party L’s financial advisor met with Harris Teeter management in New York on March 14, 2013. After this meeting, both parties mutually decided not to engage in further discussions regarding a transaction.

J.P. Morgan contacted Party M on March 1, 2013 to determine Party M’s interest in a potential transaction with Harris Teeter. Party M decided not to pursue a transaction with Harris Teeter.

Party N contacted J.P. Morgan on March 17, 2013, but decided not to pursue a transaction with Harris Teeter.

On February 21, 2013, the Harris Teeter Board held its regular quarterly meeting. At that meeting, McGuireWoods advised the directors of their fiduciary duties in connection with a possible transaction. Mr. Dickson reported to the Harris Teeter Board that Harris Teeter had entered into an engagement letter with J.P. Morgan in accordance with the terms outlined at the November 15, 2012 meeting of the Harris Teeter Board. Mr. Dickson advised the Harris Teeter Board regarding the status of the discussions with each of the prospective buyers and of the anticipated next steps in the process. The Harris Teeter Board also discussed the potential for continuing to operate independently, and discussed ways in which Harris Teeter could continue to operate effectively if no strategic transaction occurred.

Harris Teeter entered into confidentiality agreements with three parties who had contacted J.P. Morgan following the February 13, 2013 announcement — Party O, Party P and Kroger. Information regarding Harris Teeter was distributed to each of these three prospective buyers. Party O executed a confidentiality agreement on March 11, 2013 and received summary information regarding Harris Teeter. Party P executed a confidentiality agreement on March 7, 2013. Kroger executed a confidentiality agreement on March 12, 2013. On March 27, 2013, Party O informed J.P. Morgan that it would no longer be continuing with the process.

Following the management presentations in January and February and continuing through mid-March, discussions continued with Party C, Party D, Party E, Party H and Party I. By March 18, 2013, each of these parties had exited the process and had informed J.P. Morgan that it was unwilling to enter into a transaction at Harris Teeter’s then-current trading level, which was in the low $40s.

On April 2, 2013, Kroger informed J.P. Morgan that it had engaged Merrill Lynch, Pierce, Fenner & Smith Incorporated (‘BofA Merrill Lynch’) as its financial advisor. On April 8, 2013, Kroger submitted a preliminary nonbinding initial indication of interest. Kroger indicated that it would be prepared to purchase all of the shares of Harris Teeter common stock for between $42 and $45 per share in cash. The indication of interest was subject to several conditions, including satisfactory completion of due diligence, negotiation of a mutually satisfactory definitive agreement and regulatory approval (including antitrust regulatory approval). Following discussions with Harris Teeter, J.P. Morgan responded to Kroger on April 18, 2013, indicating that it was unlikely that Harris Teeter would entertain a transaction at the indicated range or be prepared to bear any regulatory or antitrust approval risk. J.P. Morgan suggested to Kroger that, with additional access to management and due diligence, Kroger would be able to offer a higher value. In order to facilitate Kroger’s review of Harris Teeter, Harris Teeter gave Kroger access to the virtual data room on April 12, 2013 (but precluded access to competitively sensitive information).

On April 11, 2013, J.P. Morgan received a call from a senior representative of Party P indicating that Party P was very interested in a transaction. Party P indicated that the consideration would be a mixture of cash and stock in a public entity that would be created through a combination of Party P’s supermarket portfolio company (the “Party P Portfolio Company”) and Harris Teeter. The cash portion of the consideration would be $2 billion or $40 per share. Party P offered its assistance to value the stock component given that the Party P Portfolio Company was not a public company and did not have historical audited financial statements.

On April 15, 2013, Party P submitted a preliminary nonbinding indication of interest to combine the Party P Portfolio Company with Harris Teeter in a transaction in which the Harris Teeter shareholders would receive a total cash consideration of $2 billion, or $40 per share in cash, together with what Party P described as “a significant publicly traded minority stake in the combined entity.” The indication of interest submitted by Party P was subject to negotiation of a definitive merger agreement, obtaining debt financing, the confirmation of certain material assumptions, due diligence review and regulatory approvals.

April 14, 2013, J.P. Morgan received a call from a representative of Party Q. Harris Teeter instructed J.P. Morgan to initiate discussions with Party Q. Harris Teeter signed a confidentiality agreement with Party Q as of April 16, 2013. By the end of April 2013, Party Q had decided not to proceed further with the process.

On April 22, 2013, a special meeting of the Harris Teeter Board was held. At the meeting, J.P. Morgan representatives provided an update on the process, including a report on the preliminary nonbinding indications of interest received from Kroger and Party P, which were the only two parties actively engaged in the process at that time. J.P. Morgan indicated the key next steps for each party in the event that the Harris Teeter Board decided to continue with that party in the process. For Party P, J.P. Morgan indicated that the next steps in the process included completion of business due diligence, commencement of Harris Teeter reverse due diligence on the Party P Portfolio Company, conducting a detailed review of the synergy opportunity, obtaining a revised indication of value with clarification and quantification of the percentage ownership and implied immediate trading value of the “significant publicly traded minority stake in the combined entity”, and developing a refined view of the pro forma capital structure. For Kroger, J.P. Morgan indicated that the next steps included completion of business due diligence, confirmation that Kroger was willing to bear antitrust and regulatory risk and obtaining a revised indication of value. The Harris Teeter Board authorized J.P. Morgan to contact each party.

On April 23, 2013, J.P. Morgan spoke with Party P’s financial advisor and BofA Merrill Lynch to discuss the next steps in the process.

On April 25, 2013, Party R called J.P. Morgan and said a combination with Harris Teeter made strategic sense and expressed its interest in joining the process. Party R subsequently did not execute a confidentiality agreement.

During the months of April and May 2013, Kroger and Party P conducted extensive due diligence on Harris Teeter, and Harris Teeter conducted extensive reverse due diligence on the Party P Portfolio Company. Party P was given access to Harris Teeter’s virtual data room on May 1, 2013.

On May 2, 2013, following the closing of the market, Harris Teeter announced its earnings for the second quarter of the 2013 fiscal year, and the closing price on the day following the announcement was $44.10, an increase of 8.0 percent.

On May 3, 2013, Harris Teeter entered into a mutual confidentiality agreement with Party P and the Party P Portfolio Company, in order to provide for reverse due diligence by Harris Teeter on the Party P Portfolio Company. This mutual confidentiality agreement replaced the confidentiality agreement entered into between Harris Teeter and Party P on March 7, 2013.

On May 6 and 7, 2013, members of Harris Teeter management met with, made presentations to and participated in meetings with representatives of Kroger and BofA Merrill Lynch regarding Harris Teeter’s business operations.

On May 9, 2013, Kroger conducted additional site visits of Harris Teeter locations.

On four separate days in May 2013, senior members of Harris Teeter visited stores of the Party P Portfolio Company.

On May 14, 2013, J.P. Morgan spoke with Party P’s financial advisor to confirm its continued interest in Harris Teeter and its preliminary nonbinding indication of interest.

On May 16, 2013, a regular quarterly meeting of the Harris Teeter Board was held, during which representatives from J.P. Morgan and McGuireWoods were present. J.P. Morgan updated the Harris Teeter Board on the diligence progress of Kroger and Party P. J.P. Morgan informed the Harris Teeter Board that Party P believed that the consideration that it offered ($2 billion or $40 per share plus “a significant publicly traded minority stake in the combined entity”) had the potential to offer a value in excess of $50 per share. Party P stated that this valuation was based on a number of important assumptions, including anticipated levels of combined EBITDA, significant potential synergies, prevailing public market multiples and substantial debt reduction over a five-year time period. The Harris Teeter Board authorized J.P. Morgan to deliver feedback to each of Kroger and Party P.

On May 18, 2013, J.P. Morgan spoke to Party P to discuss next steps in the process including (a) completion of diligence of Harris Teeter, (b) ongoing reverse diligence of Harris Teeter on the Party P Portfolio Company, (c) Harris Teeter’s timeline to deliver a pro forma financial model for the combined Party P Portfolio Company/Harris Teeter public entity and (d) joint work on synergies.

On May 19, 2013, J.P. Morgan spoke to BofA Merrill Lynch, who requested additional diligence information that Kroger required before being in a position to submit a revised indication of interest. On May 20, 2013, J.P. Morgan provided the requested information to BofA Merrill Lynch.

On May 20, 2013, J.P. Morgan spoke to BofA Merrill Lynch to indicate that the three next steps in the process included completing all due diligence, facilitating a call between Harris Teeter’s and Kroger’s antitrust counsel and revising its preliminary nonbinding indication of interest.

On May 21 and 22, 2013, J.P. Morgan spoke to Party P’s financial advisor and noted the Harris Teeter Board’s concerns regarding key areas of uncertainty with Party P’s preliminary nonbinding indication of interest including the immediate trading value of the equity consideration, the nature and amount of the Party P Portfolio Company’s off-balance-sheet liabilities, the lack of audited financials and the timing for delivering them, as well as recent Party P Portfolio Company financial performance.

On June 3, 2013, J.P. Morgan had conversations with BofA Merrill Lynch, during which BofA Merrill Lynch, at Kroger’s direction, verbally gave J.P. Morgan a revised preliminary nonbinding indication of interest of $45.50 to $47.50 per share and indicated to J.P. Morgan that there was additional diligence to be completed in order to narrow the offer to a single point of value.

On June 6, 2013, Harris Teeter delivered a revised financial model to Party P and the Party P Portfolio Company. An in-person diligence session was held with Party P and the Party P Portfolio Company in New York City on June 11, 2013 to review the model again for the purpose of continuing to refine the model for a contemplated combined company. On this date, J.P. Morgan communicated to Party P the overall status of the process and anticipated timing of next steps in the process and indicated Harris Teeter’s desire for an announcement in early July 2013. J.P. Morgan informed Party P of the next Harris Teeter Board meeting on June 24, 2013. J.P. Morgan requested that Party P deliver a revised preliminary nonbinding indication of interest by June 20, 2013.

On June 13, 2013, J.P. Morgan spoke to BofA Merrill Lynch and informed them of the next Harris Teeter Board meeting on June 24, 2013. J.P. Morgan discussed the overall status of the process and anticipated timing of next steps in the process and indicated Harris Teeter’s desire for an announcement in early July 2013. J.P. Morgan requested that Kroger deliver a revised preliminary nonbinding indication of interest by June 20, 2013.

On June 18, 2013, Harris Teeter provided Kroger with a proposed merger agreement drafted for a strategic buyer and provided Party P with a proposed merger agreement drafted for a financial buyer.

On June 19, 2013, BofA Merrill Lynch informed J.P. Morgan that Kroger had revised its proposal from a range of $45.50 to $47.50 per share to a single point proposal of $47.50 per share. J.P. Morgan asked BofA Merrill Lynch to have Kroger reflect its revised proposal in writing and also indicate Kroger’s timing for completing due diligence and signing a definitive agreement. On June 21, 2013, Harris Teeter received Kroger’s revised preliminary nonbinding indication of interest. Kroger delivered a written proposal, confirming the earlier verbal proposal, of $47.50 per share in cash. The proposal anticipated the completion of due diligence and negotiation of definitive agreements within two to three weeks.

On June 20, 2013, Party P delivered a revised written preliminary nonbinding indication of interest to Harris Teeter. Under the proposal, Party P would contribute the Party P Portfolio Company into Harris Teeter and lever the combined entity to result in Harris Teeter shareholders receiving $2.08 billion in cash consideration ($52 per share in cash for 40 million (of the 49.5 million) shares of Harris Teeter common stock) with the remaining shares to be acquired in exchange for common stock in the combined entity (such that Harris Teeter shareholders would own 30 percent of the combined company). It was contemplated that the combined entity would be a publicly traded company on the New York Stock Exchange. The proposal contemplated that the Harris Teeter shareholders would have the ability to make a cash/stock election as to the consideration they received, with proration in the event cash or stock were oversubscribed (i.e., if all Harris Teeter shareholders elected cash, each would receive $42 per share in cash and the balance in stock consideration). Party P’s proposal was subject to negotiation of the definitive merger agreement, confirmation of the accuracy of significant financing assumptions, attaining financing commitments from lenders (drafts of which were provided with the preliminary nonbinding indication of interest), and the completion of confirmatory due diligence and other matters. The proposal noted that the Party P Portfolio Company did not have audited financial statements, and estimated that audited financial statements could be obtained in November 2013. On June 21, 2013, following receipt of a preliminary nonbinding indication of interest, J.P. Morgan spoke with Party P’s financial advisor to clarify Party P’s proposal.

On June 21, 2013, Harris Teeter provided Kroger and Party P with a draft of the disclosure schedules to the merger agreement.

On June 24, 2013, a special meeting of the Harris Teeter Board was held. Representatives of both McGuireWoods and J.P. Morgan attended the meeting. J.P. Morgan representatives informed the Harris Teeter Board of the extensive due diligence that had occurred since the last meeting of the Harris Teeter Board, indicating that both Kroger and Party P remained very interested in a transaction. McGuireWoods provided the Harris Teeter Board with a summary of the key terms contained in the draft merger agreements provided to Kroger and Party P.

The Harris Teeter Board instructed J.P. Morgan to focus on three issues with respect to Kroger’s proposal: a higher purchase price, assumption of the regulatory approval risk by Kroger and certainty to closure.

In addition, J.P. Morgan reviewed the proposal from Party P in detail with the Harris Teeter Board. J.P. Morgan highlighted that cash consideration had increased from $2 billion to $2.08 billion (i.e., upon 100 percent proration, from $40 to $42 per share in cash) and Harris Teeter’s equity participation in the combined entity had now been specified to be 30 percent. J.P. Morgan noted there had been significant detailed work completed by both the Party P Portfolio Company and Harris Teeter regarding the composition, quantification and timing of synergies. J.P. Morgan pointed out that the combined entity would carry leverage levels of 6.4x total debt / LTM EBITDA(Last Twelve Months Earnings before Interest, Taxes, Depreciation, Amortization) and 6.8x adjusted debt /LTM EBITDAR (Last Twelve Months before Earnings Before Interest, Taxes, Depreciation, Amortization, Rent) without synergies and 5.3x total debt / LTM EBITDA and 5.8x adjusted debt / LTM EBITDAR with full run-rate synergies (as estimated by Harris Teeter management and Party P Portfolio Company management) included. The terms used in this paragraph are defined as follows: (a) “LTM” means last twelve months; (b) “EBITDA” means earnings before interest, taxes, depreciation and amortization; (c) “adjusted debt” means total debt plus rent expense capitalized at 8.0x (per Moody’s methodology); (d) “EBITDAR” means earnings before interest, taxes, depreciation, amortization and rent expense and (e) “run-rate synergies” means total annual synergies expected upon completing the integration of the two entities.

J.P. Morgan summarized its views of Party P’s proposal by enumerating to the Harris Teeter Board six benefits as well as several areas of concern with the proposal. The benefits were: (a) the increase in cash consideration offered from $2 billion to $2.08 billion, (b) the election mechanism afforded to Harris Teeter shareholders by which they could choose the form of consideration they receive, (c) the significant ownership percentage of the combined entity that would be afforded to Harris Teeter shareholders (30 percent of the combined company), (d) the improved financing structure as well as the draft commitment papers from two global financial institutions, (e) the significant detailed synergy work that had been completed by both parties and (f) the meaningful upside opportunity coming from the underperforming Party P Portfolio Company stores.

The primary risks discussed with the Harris Teeter Board related to the speed and lack of certainty of closing and the uncertain valuation of the equity in the combined company. J.P. Morgan discussed with the Harris Teeter Board the following factors as, collectively, creating the risk of delay and also significant risk to shareholders of a transaction with Party P ultimately failing to close: (a) the lack of historical audited financial statements of the Party P Portfolio Company and the substantial length of time that it would take to prepare appropriate financial statements and have them audited, (b) the financing contingency associated with the proposal and (c) the general lack of readiness of the Party P Portfolio Company to be a public company or part of a public company. J.P. Morgan also discussed with the Harris Teeter Board the following factors as risks relating to the value of the stock of the combined entity: (a) certain significant contingent liabilities affecting the Party P Portfolio Company, (b) the negative comparative same store sales experienced by the Party P Portfolio Company in recent periods, (c) the need for significant capital expenditures to modernize the stores operated by the Party P Portfolio Company, (d) the execution risk of the combined company’s performance against plan, (e) operating a business with such high leverage, (f) pension plan matters, (g) ongoing negotiations with the unions representing employees at the Party P Portfolio Company and (h) the expectation that it would take a period of years for the synergies to be realized and uncertainty as to the ultimate stock value to be achieved.

The Harris Teeter Board instructed J.P. Morgan to highlight these areas of concern to Party P and to encourage Party P to propose to Harris Teeter ways to minimize these risks.

On June 25, 2013, J.P. Morgan called Party P and delivered a message consistent with the benefits and considerations noted above. J.P. Morgan communicated that Harris Teeter now had a better understanding of the upside and downside of the proposal and that the timing of the availability of a quality of earnings report and audited financials was a concern.

On June 25, 2013, J.P. Morgan also called BofA Merrill Lynch, during which J.P. Morgan communicated that Kroger was behind a competing bidder on value and J.P. Morgan believed it was unlikely that the Harris Teeter Board would approve the transaction at the value indicated by Kroger’s most recent proposal. J.P. Morgan encouraged Kroger to address any antitrust or regulatory approval risk, to complete all of its due diligence and to provide a markup of the merger agreement as soon as possible.

On June 26, 2013, J.P. Morgan and the financial advisors to Party P discussed outstanding diligence items over the phone. The financial advisors to Party P provided a timeline to the announcement of a potential transaction in the beginning of September 2013. Also, in order to facilitate the rapid completion of diligence in the interim, J.P. Morgan and Party P agreed to schedule an in-person meeting with Harris Teeter management as well as Party P Portfolio Company management in Charlotte for late in the week of July 15, 2013.

On June 27, 2013, J.P. Morgan and the advisors to Party P spoke over the phone regarding diligence matters.

On July 1, 2013, J.P. Morgan spoke over the phone with Party P and Party P indicated that it did not intend to submit an offer of higher value.

On July 2, 2013, J.P. Morgan, Kroger and BofA Merrill Lynch had a call in which Kroger stated that it was not prepared to change its offer price and would be submitting a revised draft of the merger agreement, which BofA Merrill Lynch did submit to J.P. Morgan later that day. In Harris Teeter’s view, the most significant changes proposed by Kroger were the following: (a) revising the covenants that required Kroger to use its “best efforts” to avoid or eliminate every impediment under any antitrust law in order to enable the closing to occur as soon as possible to a “reasonable best efforts” standard, (b) the removal of the regulatory termination fee that required Kroger to pay Harris Teeter if clearance under the HSR Act had not occurred or any other injunction or order relating to antitrust laws prevented the closing, (c) the increase in the termination fee payable by Harris Teeter upon the occurrence of certain events from 2percent of the deal value to $100,000,000 (approximately 4.3 percent of the deal value at the then-current offer price of $47.50 per share) and (d) the elimination of a “go-shop” provision permitting Harris Teeter to continue to seek other prospective buyers during a 60 day period after the signing of the merger agreement.

On July 2, 2013, J.P. Morgan and a member of Harris Teeter’s management team spoke over the phone with members of Party P and the financial advisors to Party P regarding outstanding diligence items.

On July 3, 2013, McGuireWoods revised the merger agreement and J.P. Morgan sent it to BofA Merrill Lynch. The revised draft reinstated the ‘best efforts’ language regarding regulatory matters, reinstated the regulatory termination fee provision and rejected Kroger’s proposed increase in the termination fee. For reasons discussed below, the “go-shop” provision was not reinserted. Subsequent to that, Harris Teeter and Kroger negotiated and exchanged several drafts of the draft merger agreement and disclosure schedules.

On July 5, 2013, Kroger submitted a revised offer of $48.75 per share. J.P. Morgan again indicated that, at that price, J.P. Morgan believed that it was unlikely that Harris Teeter would enter into a transaction.

Over the course of July 5 to July 7, 2013, Harris Teeter, J.P. Morgan, McGuireWoods, Kroger, BofA Merrill Lynch and Arnold & Porter LLP, Kroger’s external legal counsel, engaged in extensive negotiations over the terms of the merger agreement. During the course of the negotiations, Harris Teeter and Kroger reached agreement regarding the best efforts language related to regulatory matters, the regulatory break-up fee was agreed to be $200,000,000 and the termination fee was set at $75,000,000. Harris Teeter posted additional information to the virtual data room in conjunction with changes to the draft merger agreement and disclosure schedules.

On July 7, 2013, Kroger submitted a revised offer of $49.38 per share. At Kroger’s direction, BofA Merrill Lynch expressed that this offer was contingent on it being accepted and the merger agreement being adopted by the Harris Teeter Board at its meeting scheduled for July 8, 2013. On the evening of July 7, 2013, Kroger’s Chairman and CEO, Mr. Dillon, and Mr. Dickson spoke by telephone, and they agreed that all major issues had been resolved.

On July 8, 2013, the Harris Teeter Board held a special meeting at the Charlotte offices of McGuireWoods. Members of Harris Teeter’s senior management, as well as representatives of J.P. Morgan and McGuireWoods, attended the meeting. Representatives of J.P. Morgan informed the Harris Teeter Board that the Kroger Board of Directors was meeting simultaneously, and was expected to approve a merger agreement that would result in the holders of Harris Teeter common stock receiving $49.38 per share in cash. During the course of the meeting, J.P. Morgan reported that a call had been received from BofA Merrill Lynch, who reported that the Kroger Board of Directors had approved the merger agreement pursuant to which the holders of Harris Teeter common stock would receive $49.38 per share in cash. Representatives of J.P. Morgan reviewed the history of the transaction, discussed with the Harris Teeter Board its financial analysis of the offer made by Kroger and answered all of the Harris Teeter Board’s questions. J.P. Morgan representatives also reviewed the Party P proposal, the details of which remained the same as those presented at the June 24, 2013 Harris Teeter Board meeting. The Harris Teeter Board expressed the same concerns regarding the Party P proposal that had been discussed at the June 24, 2013 meeting, summarized as the uncertain value of the equity component of the proposal, significant execution risks and a lengthy period to execute. McGuireWoods made a presentation to the Harris Teeter Board concerning the material terms and conditions of the final merger agreement and discussed the final terms of the merger agreement that had been negotiated with Kroger and its counsel. In connection with a discussion by McGuireWoods of fiduciary duties of the Harris Teeter Board as it evaluated the transaction, the Harris Teeter Board discussed the removal of the “go-shop” provision, and concluded that the inclusion of a “go-shop” provision was not necessary since the transaction had received broad publicity and neither Harris Teeter nor J.P. Morgan could identify any likely buyers that had not either participated in the process, been contacted about the process or indicated a lack of interest in the process. In light of Kroger’s insistence that the “go-shop” provision be removed as a condition of moving forward, and in consideration of Kroger’s cash offer price, Kroger’s acceptance of regulatory risk, Harris Teeter’s ability to pursue a potential superior proposal if one were to emerge and the high probability of closing the transaction, the Harris Teeter Board determined that it was in the best interest of the shareholders to proceed without a “go-shop” provision.

J.P. Morgan then delivered its oral opinion to the Harris Teeter Board, which opinion was confirmed in writing, to the effect that, as of July 8, 2013, and based upon and subject to the factors, procedures, assumptions, qualifications and limitations set forth therein, the consideration to be paid by Kroger to holders of Harris Teeter common stock pursuant to the merger agreement was fair, from a financial point of view, to such shareholders. The Harris Teeter Board then adopted the merger agreement, and authorized the officers of Harris Teeter to sign the merger agreement.”