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Kroger plans to buy online vitamin retailer for $280 million

Kroger stock

The uncertainty surrounding Vitacost.com the past 4½ months has been cleared with today’s announcement that The Kroger Co. plans to buy the online vitamin retailer for $280 million, according to the Winston-Salem Journal.

The deal represents a 51 percent premium on Vitacost.com’s share price as of Feb. 19 – the day before a major Vitacost.com shareholder publicly asked the company to evaluate strategic alternatives that included a sale.

Kroger said it will use debt to finance the deal, which is expected to close in the third quarter.

Vitacost.com is based in Boca Raton, Fla. It offers more than 45,000 products including vitamins, minerals, herbs, supplements, sports nutrition, beauty care products and natural and organic foods to 2.3 million customers.

It has 408 full-time employees at its Lexington facility, which includes 78 employees who work for Nutra-Pharma Manufacturing Corp. of N.C. based on a manufacturing outsourcing agreement.

The companies said Vitacost.com will operate as a Kroger subsidiary and continue to operate its facilities in Lexington, Boca Raton and Las Vegas. Vitacost.com has more than 800 employees overall.

Kroger said its main incentive is acquiring Vitacost.com’s e-commerce platform which includes ship-to-home orders in all 50 states, including 16 states not served by Kroger supermarkets. The deal is expected to assist Kroger in gaining new U.S. and international sales.

“Vitacost.com’s talented team has built an exceptional online retail destination in the growing nutrition and wellness market, with an enviable technology and fulfillment infrastructure,” Rodney McMullen, Kroger’s chief executive, said in a statement.

“This merger is in line with our growth strategy to enter new markets and new channels, and – along with Harris Teeter’s online order and pick up service – accelerates our efforts to provide customers with even more ways to shop.

“Vitacost.com’s core focus on healthy living products is complementary to our fast-growing natural foods business, and we intend to grow Vitacost.com’s strong position in the online nutrition market,” McMullen said.

Jeffrey Horowitz, Vitacost.com’s chief executive, said the deal “represents a significant premium for our shareholders.”

“The company will benefit by leveraging Kroger’s scale and resources to further drive the online healthy living industry to new heights.”

Peter Tourtellot, managing partner of Anderson Bauman Tourtellot Vos, called the deal “a brilliant move on the part of Kroger as it addresses a segment of the business that is growing.”

News of the deal comes after the two largest shareholders in Vitacost.com agreed on March 25 to expand the company’s board of directors by one member to help quell a potential takeover initiative.

Kroger will make an offer for all of the outstanding shares of Vitacost.com’s common stock. Any shares not acquired will be acquired by Kroger in a subsequent merger.

The companies said holders of 26.2 percent of Vitacost.com stock have agreed to support the transaction and tender their shares. Great Hill Partners LLC owns 18.99 percent of Vitacost.com, while Osmium Partners LLC owns 8.2 percent.

On Feb. 20, Consac LLC challenged Vitacost.com officials to put the company up for sale “to unlock shareholder value.”

Ryan Drexler, Consac’s president, said at that time that Vitacost.com’s market share and distribution network “will be of interest to several significant industry players and other retailers, who will be able to better leverage the company’s strengths within a larger, better-capitalized entity.”

Vitacost.com Inc. reported in May a larger loss in the first quarter of $3.9 million compared with a loss of just under $3 million a year ago.

Vitacost.com prefers to focus on increasing EBITDA, or earnings before interest, taxes, depreciation and amortization. In that financial scenario, which some analysts and investors favor as a better measuring stick of performance for small corporations, it had a loss of $700,000 in adjusted EBITDA compared with a loss of $300,000 a year ago.

“Kroger has demonstrated over the years they are comfortable in allowing those companies who they buy to operate without everything being driven from a central operation,” Tourtellot said.

“It is because of this culture I think Vitacost.com will continue to grow and be vibrant. They will also help strengthen Kroger’s online offerings in their various divisions, as will Harris Teeter.

“I compare Kroger’s strategy to that of VF Corp. VF wants to be in every retail apparel segment and related items, and this is exactly what Kroger is doing with this acquisition.”