ELSENIER
Journal of Financial Economics 36 (1994) 193224
Organizational form and the consequences of high1
leveraged transactions
Kroger’s recapitalization a
David J. Denis
Virginia Polytechnic Institute and State Wniuersity. Blacksburg, VA 24061-0221, USA
(Received August 1993; final version receivedJanuary 1994)
-Abstract
This paper compares the leveraged recapitalization of Kroger Co. with the leveraged
buyout of Safeway Stores. While both transactions dramatically increased leverage,
Safeway’s also altered managerial ownership, board composition, and executive compensation, while Kroger’s did not. My analysis suggests that these difTeresces in organizational form lead to large dii%erences in post-HLT restructuring actions and value
creation. I conclude that the improved incentive structure and increased monitoring
provided by the LB0 specialist at Safeway lead managers to generate cash in a more
productive manner than the organizational structure employed by Kroger.
Key wortr’s: Leveraged buyouts; Wecapitalizations; Restructurings
JEL classijkation:
G32; G34; G35
1. Introduction
During the 198Os, many firms undertook highly leveraged transactions
(HLTs) involving debt-financed payouts to shareholders. Although substantial
I would like to thank Diane Denis for many valuable discussions and comments and John
Easterwood, Rob Hansen, Michael Jensen (the editor), Scott Lee, Jeff Netter, Tim Q&T, Atulya
Sarin, Vijay Singal, and Marc Zenner for helpful suggesticns. 1 am also indebted to Karen Wruck
(the referee) for many valuable suggestions and for providing some of the data on Safeway Stores.
Michelle Rachmaninoff provided excellent assistance in the data collection process. This research
has been partially supported by a summer research grant from the R.B. Pamphn College of Business
at WI.
0304-405Xj94/$07.00 0
ssljl0304405x9400784
1994 Elsevier Science S.A. All rights reserved
x
194
D.J. Den&/ Journal of Financial Economics 36 (1994)
193-224
effort has been devoted to studying these transactions,’ there remain aspects of
HLTs
that are contrr?versial. For example, Jensen (1989) argues that the
leveraged
buyout (LBO) organization, characterized by high financial leverage,
high managerial equity ownership, and monitoring by active investors such as
LB0 sponsors, creates an incentive structure that is superior to that of the
typical public corporation in lower growth industries. Under this view, the
presence of the LB0 sponsor, with its large equity position and presence on the
board of directors, is important in ensuring that, following a buyout, cash flow is
generated in the most productive manner.
Critics of leveraged buyouts, however, argue that LBOs are flawed in two
respects. First, they argue that since LB0 sponsors typically cash out of the firm
five to ten years after the buyout, the LB0 organization is inherently shortsighted, focusing on generating short-term cash flows rather than long-run value
(Rappaport, 1990). Kaplan (1991) finds that approximately 45% of the large
LBOs completed between 1979 and 1986 returned to public ownership at some
time prior to August 1990. In his sample, the unconditional median time spent
as a private firm is 6.8 years. However, Kaplan also finds that those firms
returning to public ownership maintain debt and ownership concentration
levels that are substantially higher than pre-buyout levels, suggesting that the
firms maintain many characteristics of the LB0 organization even after returning to public ownership status.
Second, since buyout sponsors take the firm private, pre-buyout shareholders
cannot share in any post-buyout value increases. This has led some observers to
argue that leveraged recapitalizations (recaps) are ‘fairer’ to pre-HLT shareholders than LBOs because the firm remains publicly traded following a recap.2
The purpose of this paper is to shed some light on these issues by comparing
the public leveraged recapitalization of the Kroger Co. with the leveraged
buyout of Safeway Stores Inc. Both firms operate in the grocery store industry;
both received buyout offers from Kohlberg, Kravis and Roberts (KKR) in the
mid-1980s. KKR ultimately succeeded in taking Safeway private; Kroger rejected KKR’s offer and instead proceeded with a leveraged recapitalization. While
both transactions resulted in a debt-to-value ratio exceeding 90%, Safeway’s
LB0 resulted in increased managerial shareholdings and majority ownership by
its LB0 sponsor, KKR. Following the buyout, KKR also held a majority of
seats on the board of directors. In contrast, there was little change in managerial
‘For the effects of leveraged buyouts on operating performance and shareholder returns, see Kaplan
(1989), Muscarella and Vetsuypens (1990), and Smith (1990). For the effects of leveraged recapital-
izations, see Denis and Denis (1993, 1994) and Palepu and Wruck (1992).
2See, for example, Susan Faludi’s Pulitzer Prize-winning article comparing the Kroger and Safeway
transactions (‘The Reckoning: Safeway LB0 Yields Vast Profits But Extracts a Heavy Human Toll’,
Wall Street Journd, May 16, 1990).
D.J. DenislJournal of Financial Economics 36 (1994)
193-224
195
ownership or board composition following Kroger’s recapitalization. The two
transactions thus offer an interesting experimental setting for studying the link
between differences in ownership/governance structure, subsequent restructuring, and value creation in highly leveraged firms.
Despite similarities in leverage, Kroger and Safeway took substantially different restructuring actions following their HLTs. Specifically, Safeway linked
managerial compensation more closely to firm performance; there was no such
change at Kroger. Safeway serviced its debt load by selling assets while only
modestly reducing its capital expenditure program. In contrast, Kroger cut back
on capital expenditures while selling fewer assets. Finally, pre-buyout and
post-buyout stock returns and total dollar gains earned by Safeway shareholders were significantly higher than those earned by Kroger shareholders.
These differences in restructuring activity and value creation appear to be
caused primarily by differences in organizational form. There is evidence that
the extent of restructuring at Safeway would not have been as great without the
presence of KKR. Conversely, the evidence sug*geststhat the scope of restructuring would have been greater at Kroger had KKR been successful in acquiring
control of the firm.
These findings support the hypothesis that the improved incentive structure
and increased monitoring provided by the LB0 specialist at Safeway led
managers to generate cash in a more productive manner than did the organizational structure employed at Kroger. The evidence thus contradicts the claims
that LBOs are more short-sighted and create less value in the long run than
leveraged recaps. Nevertheless, the positive abnormal returns earned by prerecap Kroger shareholders suggest that the constraints of leverage alone provide
managers with a strong incentive to improve organizational efficiency.
The paper proceeds as follows. Section 2 provides some background on the
grocery store industry and the takeover contests involving Kroger and Safeway.
Section 3 summarizes the changes in ownership structure, board composition,
and executive compensation following Kroger’s recapitalization aAidSafeway’s
LBO. Section 4 reports operating improvements and changes in asset structure
and investment policy following each firm’s HLT. Section 5 discusses changes in
value surrounding each transaction, and Section 6 concludes.
2. Background
2.1. The grocery store industry
The grocery store industry is a highly competitive, low margin industry in
which net profit margins typically average only 1% to 1.5% of sales. The
industry has traditionally been heavily unionized, with u&n membership
averaging 54% of store employees in the early 1980s (‘\IVruck,1992). It is also
196
i).J. DenislJournal of Financial Economics 36 (1994) 193-224
a capital-intensive industry, requiring continual investments in remodeling and
updating existing stores. Major store remodelings take place every three to eight
years (Standard and Poor’s Industry Surveys, May 2, 1991). According to 1985
COMPUSTAT data, capital expenditures averaged 13.6% of total assets for
firms in the grocery store industry (SIC code 5411). This is substantially higher
than the rate of capital spending for firms undergoing HLTs in general. Capital
expenditures are a median 4.1% of total assets in Kaplan’s (1989) study of
management buyouts and 4.9% of assets in Palepu and Wruck’s (1992) study of
leveraged payouts.
Table 1 reports several characteristics of Kroger and Safeway as of year-end
1985. Kroger operated 1,367 food stores, 872 drug stores, and 643 convenience
stores, a total of 2,882 units, primarily in the Midwest, South, and West. With
a book value of total assets of $4.2 billion and approximately 178,000 employees, 59% of whom were unionized, Kroger produced $17.1 billion in 1985
revenue (Kroger 1985 Annual Report). Its December 31, 1985 market value of
equity was $1.8 billion.
Safeway operated 2,365 grocery stores primarily in the West, Southwest, and
Mid-Atlantic regions. As of year-end 1985, Safeway had book value of total
_ employees, 90% of whom were unionized, and
assets of $4.8 billion, I‘7O;Z)Oo
produced revenues of $19.7 billion (Safeway 1985 annual report). Its December
31, 1985 market value of equity was $2.2 billion.
Despite nearly constant increases in earnings, there was evidence that both
firms were underperforming their industry peers. Fig. 1 plots the ratio of
operating income to total assets for Kroger, Safeway, and the median firm in the
grocery store industry over the years 1975-1985. While Kroger’s and Safeway’s
operating profits are similar to one another, they are substantially below that of
the median grocery firm in every year (except for Safeway in 1975). The
Table 1
Pre-HLT characteristics of Kroger and Safeway; all characteristics are obtained from annual reports
and proxy statements as of December 31, 1985
Characteristic
-_
Sales revenue
Total assets
Market value of equity
Number of storesa
Number of employees
Percentage of employees unionized
Primary geographic markets
Kroger
Safeway
$17.1 billion
$4.2 billion
%1.8 billion
2,882
178,000
59%
Midwest, South, West
$19.7 billion
$4.8 billion
$2.2 billion
2,365
170,000
90%
West, Southwest, Mid-Atlantic
‘Kroger’s total number of stores includes 1,367 food stores, 872 drug stores, and 643 convenience
stores. Safeway’s stores are exclusively grocery stores.
D.J. DenislJournal
qf Financial Economics
36 (1994) 193-224
197
24
22
20
18
16
14
12
IO
1
75
I
76
77
78
79
80
81
82
83
84
85
Fig. 1. Operating income/total assets (%) for Kroger and Safeway relative to the grocery store
industry for the fiscal years .975 through 1985.
Industry operating performanceis the median ratio of operating income to total assets.for ten firms
in the grocery store industry (SIC 5411) operating over the 1975-85 period. All data are obtained
from COMPUSTAT.
difference between each firms’ profitability and the industry median is statistically significant at the 0.01 level in each year between 1980 and 1985.
One explanation for Kroger’s and Safeway’s poor operating profits was the
increasing presence of regional, nonunionized chains in their markets. As a result, both Kroger’s and Safeway’s employee costs were becoming much greater
than the industry average. By their own estimates, Safeway paid hourly workers
33% more than the industry average wage (Wruck, 1992). Similarly, according
to Rotan Mosle analyst Gary Giblen, ‘. . . labor costs at half of Kroger’s stores
exceed those of its competitors’ (‘Kroger Stockholders Could Be Bewildered in
Selecting from Competing Offers for Firm’, kvbll Street Journal, September 21,
1988).
The impact of higher labor costs on operating profitability can be substantial,
given the industry’s low profit margins and the fact that labor costs account for
approximately 70% of nonfood costs (Vulue Line InoestmentSurvey,August 31,
1984, p. 1507).To see this, consider Safeway’s 1985 operating results. Safeway’s
nonfood costs were approximately $5.2 billion (Safeway 1985 annual report). If
labor costs comprise 70% of these costs, this implies total labor costs of about
$3.6 billion. In 1985, Safeway had an operating income of $754 million and total
assets of $4.8 billion. Safeway would therefore need a 6% reduction in its total
labor costs to increase its ratio of operating income to total assets by the 23%
necessary to achieve the industry median ratio of 20.4%.
In an effort to improve their profitability, both Kroger and Safeway initiated
modest restructuring programs in the early 1980s. Kroger closed 100 of its
unprofitable grocery stores, sold underproductive manufacturing facilities, and
sold the company’s 8’70drug stores (Kroger 1986 annual report). Between 1982
and 1985, Safeway sold 149 overseas stores and 73 of its poorest performing
198
D.J. DenislJournal of Financial Economics 36 (1994) 193-224
domestic supermarkets (Wruck, 1992). As Fig. 1 shows, these restructuring
efforts were moderately successful in moving profitability closer to the industry
median. However, both Kroger’s and Safeway’s operating profitability remained
significantly below that of their industry peers.
Thus, prior to their HLTs, the two firms faced similar situations. Nevertheless,
the firms are not identical in every respect. Differences in restructuring actions
and value creation following their HLTs could be due to factors other than
differences in organizational form. For example, differences in the type of
restructuring may indicate that the optimal restructuring was different for
the two firms. It is therefore important to clarify the role played by organizational form in determining the consequences of Kroger’s recapitalization and
Safeway’s LBO.
2.2. Summary of takeover threats and leveraged restructurings
In July 1986 the Dart Group, a firm controlled by the Haft family, announced
a hostile tender offer for Safeway, offering $58 per share, or a total of $3.54
billion. This represented a 33% premium over the price of Safeway’s common
stock forty days prior to the offer. Ultimately, Safeway agreed to be acquired
through a leveraged buyout involving buyout specialist KKR and a group of
Safeway managers. The KKR group offered $69 per share, or $4.2 billion,
representing a 57.7% premium over Safeway’s pre-takeover contest price.
Panel A of Table 2 summarizes the financial structure of Safeway’s buyout.
The transaction was predominantly debt-financed, with debt accounting for
over 97% of the new capital. The buyout increased the firm’s total debt from
41% to 96% of the market value of the firm (defined as the market value of
equity plus the book values of debt and preferred stock). KKR contributed
approximately 96% of the initial equity capital; the remainder was supplied by
management investors through a subscription agreement with KKR. In addition, top managers were given the option to purchase additional shares at the
same subscription price of $2.00 per share. Shortly after the close of the buyout,
these managers exercised some of their options, bringing their fractional ownership to 10.3%.
In September of 1988, the Haft family attempted a takeover of Kroger,
offering $55 per share, or a total of $4.36 billion. This represented a 39%
premium over Kroger’s stock price forty days prior to the takeover contest.
Subsequently, KKR topped the Haft family’s bid with a $58.50 per share bid of
their own. They eventually raised their bid to $64 per share, or $5.08 billion,
representing a premium of 61.8% over the pre-takeover contest price of
Kroger’s shares. However, Kroger’s board rejected the bid and pursued its own
leveraged recapitalization plan instead, even though analysts placed a higher
value on KKR’s offer. [An lysts valued KKR’s offer at $64 per share while
Kroger’s recapitalization was valued between $57 and $61 per share. In a letter
D.J. Denis / Journal of Financial Economics 36 (1994) 193-224
199
Table 2
Summary of sources and uses of funds and financial structures of Kroger’s leveraged recapitalization
and Safeway’s leveraged buyout; all dollar amounts are expressed in millions of dollars (columns do
not foot due to rounding error)
(A) Safeway
Sources of funds
Bank credit agreement
Issuance of long-term debt
KKR equity investment
Loan from KKR partners
Other”
Uses of funds
$2700
$1025
$130
$320
$121
(63%)
(24%)
(3%)
(7%)
(3%)
Purchase of shares:
45 million shares @ $69
16.6 million shares @ $61.60
Related fees and expenses
%4320 (100%)
$3105 (72%j
$1023, (24%)
$189 (4%)
S4320 (100%)
Pre-buyout total debt/market value of firmb = 41%
Post-buyout total debt/market value of firm = 96%
(B) Kroger
Sources of funds
Bank credit agreement
Private placement of
increasing rate notes
Junior subordinated
discount debenture
Working capital facility
Uses of funds
$2375 (60%)
$1000 (20%)
$704 (14%)
$293 (6%)
Special dividend:
$40 cash x 80.7 m shares
Junior debenture
Repayment of other debt
Redemption of preferred shares
Related fees and expenses
Cancellation of stock options
$4971 (100%)
$3239
$704
$560
$250
$175
$44
(65%)
(14%)
(11%)
(5%)
(4%)
(1%)
$4971 (100%)
Pre-recap total debt/market value of firm = 42%
Post-recap total debt/market value of firm = 91%
“Includes a note payable to the Dart Group ($59 million), a short-term bank loan ($52 million), and
a decrease in working capital ($10 million).
bMarket va 1ue of firm is defined as the market value of equity plus the book values of debt and
preferred stock.
to Kroger’s board, KKR noted that ‘. . . we were not even asked if we were in
a position to improve our offer. We can only conclude that the board has
decided that the company isn’t for sale at any price’ (see ‘KKR Ends Bid to Buy
Kroger, Avoiding Fight’, Wail Street Journal, October 12, 1988)]. Under the
recap plan, shareholders received a special dividend of $40, a junior subordinated debenture that traded initially at $8.69, and a stub share of
common stock that initially traded at SS;f in exchange for each common share
held.
200
D.3. Denis/ Journal of Financial Economics 36 (1994) 193-224
Panel B of Table 2 summarizes the financial structure of Kroger’s recapitalization. The payout was financed pramarily through a $3 billion loan from
a consortium of banks and through the private placement of $1 billion of
increasing rate notes. (These notes were redeemed shortly thereafter following
Kroger’s public offerings of $625 million of senior subordinated debentures and
$625 million of subordi ated debentures in January 1989.)The recapitalization
increased the firm’s total debt to firm value ratio from 42% to 91%. Moreover,
because shares held in employee stock option plans received additional Kroger
shares rather than the cash dividend, employee ownership increased to 25% of
outstanding shares.
It is interesting to note in Table 2 that the fees paid in each transaction were
nearly identical, both amounting to 4% of the total consideration paid. These
fees are somewhat lower than the median fees for large buyouts in the same
years, documented in Kaplan and Stein (1993). For example, the median
percentage fees for buyouts completed in 1986,the year of Safeway’s buyout, was
5.1%, while the comparable figure for buyouts completed in 1988, the year of
Kroger’s recapitalization, was 6.0%.
3. Changes in incentives and monitoring
3.1. Managerial ownership
Table 3 documents the changes in managerial ownership following Kroger’s
recap and Safeway’s LBO. (All ownership stakes shown are fully diluted,
reflecting the exercise of any stock options that could be exercised within six
months of the HLT.) There were no changes in the set of individuals occupying
the top three management positions - CEO, chairman, president - at either firm
as a result of their HLTs. Prior to its recapitalization, Kroger’s officers and
directors controlled 1.4% of the common shares with an aggregate dollar value
of $62.7 million. Following the recap, the officers and directors controlled 3% of
the shares, with an aggregate value of just $21.5 million.
The small increase in the fractional ownership by officers and directors is
similar to that documented in large-sample studies of leveraged recapitalizations. For example, Denis and Denis (1993) find that equity ownership of
officers and directors increases from a median 1.7% to a median of 3.6%.
Similarly, Palepu and Wruck (1992) find that ownership increases from 2.9% to
5.9% in their subsample of defensive recapitalizations. Kroger’s ratio of postrecap to pre-rczsp dollar ownership, 0.34, is nearly identical to the median ratio
of 0.35 found in Kaplan and Stein (1993) for buyouts completed between 1985
aplan and Stein argue that this ‘cashing out’ can create the e.y ante
incentive for managers to pursue a transaction that pays a high upfront premium even if the price is too high or the deal is poorly structured. See Jensen
D.J. Denis / Journal of Financial Economics 36 (1994) 193-224
201
Table 3
Common stock ownership of top officers and directors prior to and following Kroger’s recapitalization and Safeway’s LB0
(A) Kroger
Stock owners
Pre-recap
Post-recap
Change
Officers and directors
Fractional stake
Dollar stakea
1.4%
$62.7
3.0%
$21.5
1.6%
%- 41.2
2.1
0.34
Top two managers
Fractional stake
Dollar stakea
0.4%
$19.7
1.2%
$8.2
0.8%
%- 11.5
3.0
0.42
CEO
Fractional stake
Dollar stakes
0.3%
$14.8
0.9%
$6.3
0.6%
%- 8.5
3.0
0.43
Stock owners
Pre-LB0
Post-LB0
Officers and directorsb
Fractional stake
Dollar stake -
0.7%
$24.6
10.3%
$19.3
9.6%
$ - 5.3
14.7
0.78
Top two malagers
Fractional stake
Dollar stalkeD
0.2%
$8.2
29%
$6.0
- 2.7%
$ - 2.2
14.5
0.73
CEO
Fractional stake
Dollar stakea
0.2%
$7.9
1.9%
$3.9
- 1.7%
$ - 4.0
9.5
0.49
Ratio
(B) Safeway
Change
Ratio
Ownership data prior to each HLT is obtained from the last proxy statement prior to the start of the
control contest. Post-HLT ownership data is obtained from the first proxy statement following
completion of the HLT. Both pre- and post-HLT ownership are measured on a fully diluted basis by
including any options exercisable within six months of the date of the proxy statement. The column
labeled ‘Change’ represents the difference between pre- and post-HLT percentage ownership, while
the column labeled ‘Ratio’ represents the ratio of pre- to post-HLT percentage ownership.
“Dollar ownership stakes are computed by multiplying number of shares owned times the firm’s
stock price. All dollar amounts are expressed in millions of dollars. The pre-HLT share price is the
firm’s stock price immediately prior to the execution of the transaction ($56 for Kroger and $61;
for Safeway). The post-HLT prices are the first price following Kroger’s recapitalization ($8:) and
the price paid for shares in Safeway’s buyout ($2).
bSafeway’sownership by officers and directors excludes those shares held by its LB0 sponsor KKR.
(1991) for further discussion of this issue. See Wruck’s (1991) study of
failed LB0 for an analysis of how, in addition to managerial ‘cashing out’, the
fee structure for financial advisors can create the incentive to overpay for
a company.] Table 3 also indicates that similar results are obtained if the
ownership stakes of just the top managers of the firm are considered.
202
D.J. Denis/Jourd
of F,,,ancial Economics 36 (1994) 193-224
In Safeway’s case, officers and directors own 0.7% ($24.6 million) of the firm’s
equity prior to the buyout and 10.3% ($i9.3million) following the buyout. By
way of comparison, in a study of 124 large management buyouts during the
198Os,Kaplan and Stein (1993) find that managers own 5.0% of the firm’s equity
prior tn the !xycu), z:r,C223% after the buyout. Safeway’s ratio of post-buyout
to pre-buyout dollar equity ownership of 0.78 is higher than that of Kroger and
that of the buyouts studied by Kaplan and Stein (1993) during the same time
period.
On the basis of these findings, one could argue that managerial incentives
should improve much more following Safeway’s buyout than after Kroger’s
recapitalization. Safeway managers increase their fractional ownership by
a greater amount and, by cashing out less, are less likely to accept a poorly
structured or overpriced deal.
3.2. Board composition
Prior to their restructurings, Kroger and Safeway were typical of large U.S.
corporations in that they had large, stable boards of directors that owned
negligible amounts of the firm’s equity. Jensen (1991) argues that such boards
have been largely ineffective in monitoring managers of large corporations.
Kroger’s board consisted of fourteen members; two members were top officers
of the firm, two were officers of Kroger’s main subsidiary (Dillon Companies),
and ten were independent outside directors. The independent directors consisted
of four CEO/chairmen of other large firms, two retired CEOs, two executives
now associated with universities, one economic consultant, and one attorney.
The independent directors had been board members for a median of eleven
years and collectively owned just 0.02% of Kroger’s common stock. Kroger’s
ratio of independent outside board members to total board members, 0.71, was
slightly higher than the 0.54 average documented in Hermalin and Weisbach’s
(1988) sample of 142 New York Stock Exchange firms in 1983.
Safeway’s board consisted of eighteen members; four were employed by the
firm, one was the brother of the CEO, and thirteen were independent outside
directors. The outside directors had been board members for a median of seven
years and collectively owned 0.03% of Safeway’s common stock. The ratio
of independent outside directors to total directors was 0.72, almost identical
to that of Kroger. The fact that both Kroger and Safeway had boards predominantly made up of independent outsiders prior to their HLTs suggests that
a greater number of outside directors alone is not sufficient for effective board
monitoring.
Table 4 summarizes the composition of the board of directors following
Kroger’s recapitalization and Safeway’s LBO. The HLTs of the two firms had
dramatically different impacts on board composition. There were no changes in
Kroger’s board as a result of their recapitalization. Following the recap,
46
53
45
51
45
62
64
64
49
69
62
54
67
55
56
55
55
66
67
-l_l_.----
I--__--
-__
_I
___-
..._-_-_._ -__
CEO, Safeway
Vice-chairman, Safeway
General Partner, Kohlberg, Kravis, and Roberts
General Partn_.er, Kohlberg, Kravis, and Roberts
General Partner, Kohlberg, Kravis, and Roberts
Chairman and CEO, Kroger
Vice-chairman, Dillon Cos. (Kroger subsidiary)
Chairman, Dillon Cos. (Kroger subsidiary)
President, Kroger
Retired Chairman, Eagle-Picher Ind.
Chairman, ADT Security Systems
CEO, BellSouth Corp.
Retired CEO, Entex Inc.
Senior Partner, The Longe Company
Executive in Residence, University of Louisville
CEO, Burlington Resources
CEO, BFGoodrich
Executive VP Emeritus, Indiana University
Counsel to Lewis, White & Clay
Age __-__--- Occupation
____I
___-
‘Kravis, MacDonnell, and Roberts collectively control 89.7% of Safeway’s shares as KKR general partners.
__. --_. -_ ------^ _____~__
Total board equity c-dnership = 92.6%
Outside board ownership = 89.7%
Peter Magowan
Harry Sunderland
Henry Kravis
Robert MacDonneli
George Roberts
(B) Safeway
_._-_-__ -.__ - .--- _-_-_-___.-___
Total board equity ownership = 1.8%
Outside board ownership = 0.06%
Thomas O’Leary
John Ong
W. Gear ge Pinnell
Otis Smith
Lyle Everingham
Richard Dillon
Ray Dillon Jr.
Joseph Pichler
William Atteberry
Raymond Carey, Jr.
John Clendenin
Jackson Hinds
Patricia Shontz Longe
(A) Kroger
Director
--_-
-__--___
I_
7 yrs.
4 yrs.
0 yrs.
0 yrs.
0 yrs.
18 yrs.
5 yrs.
5 yrs.
5 yrs.
8 yrs.
11 yrs.
2 yrs.
13 yrs.
11 yrs.
20 yrs.
11 yrs.
13 yrs
22 yrs.
5 yrs.
Board
tenure
--__-
--
______
__
1.9%
1.0%
89.7%”
89.7%”
89.7%”
<o.ot %
0.01%
< 0.0 1%
< 0.1%
0 O!Y!&
Q40%
0.16%
0.28%
< 0.0 1%
0.02%
< 0.0 1%
0.02 %
<O.Ol%
0.0 1%
Equity
Table 4
Structure of board of directors following Kroger’s recapitalization and Safeway’s LBO; each director’s name is followed by his/her age, occupation, tenure
on the board, and fractional equity ownership
204
D.J. Denis/ Journal of Financial Economics 36 (1994) 193-224
Kroger’s board held just 1.8% of the firm’s equity, with the outside board
members holding a mere 0.06%. In contrast, Safeway’s board size was reduced
from eighteen to five members. Only two members of the old board, CEO Peter
Magowan and Vice-chairman Harry Sunderland, remained on Safeway’s board
following the buyout. The remaining three seats on the new board were occupied Henry Kravis, Robert MacDonnell, and George Roberts, the general
partners of KKR’s common stock partnerships. Collectively, the board represented 92.6% of the firm’s equity, with the outside board members (KKR)
representing 89.7%.
These data suggest that the incentives for closer board monitoring of managerial behavior should be much stronger in Safeway’s case. Indeed, there is
evidence that this has been the case. According to Safeway CEO Peter
Magowan (Roundtable Discussion, 1991):
I think I had a good board when Safeway was a public company before the
LBO. But the level of scrutiny and questioning is just not comparable. In
our board meetings with KKR, anything can be brought up, and management has to really work to defend itself. It is just utterly different from what
goes on in public companies.
Thus, it appears that KKR has exerted significant influence over Safeway’s
management since the buyout. In contrast, there is no evidence from public
sources of any change in the influence that Kroger’s board had over managerial
decision making.
3.3. Executive compensation
Prior to their HLTs, Kroger and Safeway were similar to the large firms
studied in Jensen and Murphy (1990a) in that there was a low correlation
between the cash compensation of the top executive and the performance of the
firm. Regressions similar to those estimated in Jensen and Murphy (1990a)
indicate that at Kroger, over the years 1975-89, CE@ cash compensation
increased by $0.063 for every $1000 increase in shareholder wealth. In comparison, Jensen and Murphy’s sample shows that the average change in CEO pay
for each $1000 change in shareholder wealth is $0.022. At Safeway, CEO
compensatior changed by $0.276 per $1000 change in shareholder wealth.
Coupled with the low equity ownership of top executives at each of the firms
(documented in Table 3), these findings imply a very low correlation between
CEO wealth changes and changes in shareholder wealth prior to the Kroger and
Safeway HLTs.
Table 5 summarizes the primary features of the executive compensation plans
at Kroger and Safeway following their HLTs. Kroger’s proxy statements reveal
that there was no formal change in the structure of executive cash compensation
D.J. Denis/ Journal of Financial Econon~ics 36 ( 1994) 193-224
205
Table 5
Primary features of executive compensation plans at Kroger and Safeway after the recapitalization
and buyout; details of compensation plans are obtained from corpora;e proxy statements and 10-K
reports immediately following Kroger’s leveraged recapitalization in 1988 and Safeway’s leveraged
buyout in 1986
Kroger
Safeway
Salary/bonus
Low pay/performance sensitivity.
Bonus tied to EBITDA and Sales.
Avg. bonus = 56% of salary.a
High pay/performance sensitivity.
Bonus tied to return on market value
of assets.
Max. bonus = 110% of salary.
Stock options
507,800 (0.6% of shares).
1,037,078(1.4% of shares).
Implied ser,sitivity: $3.60 per $lOWb Implied sensitivity: $8.40 per $1000.
Direct ownership
of shares
198,538 (0.3% shares)
Implied sensitivity: $3.00 per $1000
712,922 (1.O% of shares)
Implied sensitivity: $10 per $1000.
aPrior to 1992, Kroger’s proxy statements give few details on the criteria used for awarding bonuses
to top executives. Hence, it is not possible to identify the maximum bonus. However, Kroger’s 1992
proxy statement indicates that CEO bonuses averaged 56% of salary over the 1990-92 period.
bImplied sen s’itivity
’
of options is estimated as 0.6 times the implied sensitivity of the same fractional
stake of common stock.
as a result of the firm’s recapitalization. Prior to 1992, Kroger’s proxy statements give few details on the criteria used for awarding bonuses to top executives. However, the 1989 proxy states that the average yearly bonus paid to CEO
Everingham over the 1987-89 period was equal to 60-70% of his salary.
Following the recap, the 1992 proxy indicates that CEO bonuses averaged 56%
of salary over the 1990-92 period and were awarded on the basis of sales and
operating earnings.
Unfortunately, it is not possible to judge from the above information alone
whether the sensitivity of executive pay to firm performance changed following
the recap. However, although the limited data points suggest caution in interpreting the results, Jensen/Murphy regressions for the years 1989-92 indicate
that Kroger’s pay/performance sensitivity was actually negative over this
period.
In addition to cash compensation, Kroger’s CEO owned options on 0.6%,
and directly owned 0.3%, of the firm’s shares following the recapitalization. The
sensitivity in the value of the options is assumed to be 0.6 times the sensitivity of
the same percentage of common stock,3 implying a pay/performance sensitivity
3?‘his approximates the slope of the option-pricing function and has been shown in Jensen and
Murphy (1990b) to work fairly well in large-sample simulations. Gilson and Vetsuypens (1993) also
use this scale factor in their study of CEO compensation in financially distressed firms.
206
D. J. Denis/ Journal of Financiai Economics 36 t 1994) I93--224
of $3.60 per $lUOO.When added to the $3.00 per “SlOOO
sensitivity implied by the
CEO’s direct equity ownership, these two components of CEO wealth alone
imply a pay/performance sensitivity of $6.60 per $1000.
In contrast to Kroger, there were major changes in execuiive compensation
following Safeway’s buyout. While there were no changes in salary levels, there
were substantial changes in bonus payments. The maximum bonus paid to a top
executive prior to the buyout was equal to approximately 40% of the executive’s
base salary. Following the buyout, bonuses paid to top executives ranged as
high as 110% of the executive’s salary (Safeway 1991 proxy statement).4 Moreover, following the buyout, a greater attempt was made to tie bonus payments to
performance measures. Top executive bonuses are paid on the basis of
a measure of the return on the market value (ROMV) of the firm’s assets in
excess of targeted returns. As explained by CEO Peter Magowan (Roundtable
Discussion, 1991):
If our managers don’t hit 90% of their plan, they get no bonus. If ;hev hit
their plan, they get half of the potential bonus they can earn, and $i they
beat their plan by 20%, they get the other half. So there is a big incentive to
beat the plan.
Also, in order to guard against short-run behavior, only half of the bonuses are
paid out in the year they are earned. The other half is paid out two years after
being mitially awarded, but only if pre-established ROMV goals are achieved
during the two-year period (Safeway 1991 prtixy statement).
In addition to cash compensation, Safeway’s CEO Magowan owned options
on 1.4%, and directly owned l.O%, of the firm’s shares. These two components
of CEO wealth imply a pay/performance sensitivity of $18.40 per $1000, much
higher than that documented in Jensen and Murphy’s (1990a) sample and more
than double that for Kroger.
3.4. Sunzmar~~of changes in incentives and monitoring
In short, there appear to be large differences in the organizational structures
of Kroger and Safeway following their I-ILTs. Ownership structure and board
composition at Safeway are altered in a way that not only gives top managers
more incentive to maximize firm value, but is also likely to increase the
monitoring of top management. In addition, there is a shift in executive compensation policy that ties compensation more closely to firm perftirmance. Similar
changes are not present at Kroger.
4These changes in bonus payment ;=s:ky 2:~ very similar to those following the buyout of O.M.
Scott. See Bake-r cd -JvruclC( !%9).
Journal of Financial Ecomnaics $8
207
4. The consequences of high leverage
4.1. Meeting debt service requirements
Table 6 compares projected interest and principal payments in the first three
years following each HLT with the difference between earnings before interest,
taxes, depreciation, and amortization (EBITDA) and capital expenditures as of
the year ending just prior to the HLT. In other words, Table 6 reports how much
additional cash is required by Kroger and Safeway to meet projected interest
Table 6
Projections of cash shortfalls and debt coverage ratios for Kroger and Safeway for the first three
years following their respect sve H LTs
Yr. I
Yr. 2
Yr. 3
Average
Yr.l-Yr.3
Total
(A) Kroger
- Capital expenditures (Yr. - 1) 169.5
Interest payments
(651.0)
Principal payments
(335.0)
169.5
169.5
169.5
(563.8)
(238.6)
(535.2)
(339.4)
(583.3)
w4.39
508.5
(1749.9)
(912.9)
Estimated shortfall
(632.9)
(705.1)
(718.1)
(2154.3)
EBITDA
(816.5)
interest coverage
Interest + Principal coverage
0.97
0.64
1.12
0.79
1.18
0.72
1.08
0.71
1.08
0.71
Shortfall/EBI TDA
Shortfall/Total assets
Shortfall/Capital expenditures
1.29
0.18
1.76
1.00
0.14
1.37
1.12
0.16
1.53
1.14
0.16
1.55
1.14
0.48
1.55
EBITDA - Capital expenditures (Yr. - 1) 135.0
Interest payments
(579.7)
Principal paymentsa
(397.7)
135.0
(402.9)
(578.9)
135.0
(384.5)
(340.8)
135.0
(455.7)
(439.1)
405.0
(1367.1)
(1317.3)
Estimated shortfall
(842.4)
(846.8)
(590.3)
(759.8)
(2279.4)
Interest coverage
Interest + Principal coverage
1.31
0.85
1.88
0.77
1.97
1.05
1.67
0.85
1.67
0.85
?jhortfall/EBITD,4
Shortfall/Total assets
Shortfall/Capital expenditures
1.11
0.19
1.35
1.12
0.19
1.36
0.78
1.00
0.17
1.22
1.00
0.51
1.22
(B) Safeway
0.14
0.95
Cash shortia!!s are estimated assuming that the difference between earnings before interest, taxes
depreciation and amoriization (EBITDA) and capital expenditures in the years following each HLT
remains unchanged from the year prior te the HI*T. Debt coverage ratios are defined as EBITD.4
divided by debt service requirement for the particular year.
“Principal payments for Safeway reflect the refinancing of a portion of the bank debt used in the
LRO through the issuance of $1.1 billion of junior subordinated debentures in early 1987.
288
D.J. Denis/Journal of Financid Economics 36 (1994) 193-224
and principal payments in the first three years following each HLT, holding the
level of EBITDA and capital expenditures constant at pre-HLT levels. Over the
first three years following its recapitalization, Kroger’s estimated cash shortfall
averages
$718 million per year, while the ratio of EBITDA to interest and
principal payments averages just 0.7 1. Similarly, Safeway’s projected shortfall
averages
$760 million per year over the three years following its buyout.
Safeway’s ratio of EBITDA to interest and principal payments averages 0.85
over the same period.
There are several means of generating the cash necessary to service debt
payments in excess of current EBITDA. These include (but are not limited to)
increases in operating performance, the sale of assets, and reductions in capital
expenditures. Table 6 provides data on how much EBITDA, total assets, and
capital expenditures would have to change in order to cover the projected cash
shortfall if each were the sole cash-generating source. (Other potential sources of
cash, such as reductions in pension contributions and working capital changes,
are ignored for simplicity.) For each of the three years following each HLT,
Table 6 reports the ratio of the estimated cash shortfall to EBITDA, total assets,
and capital expenditures.
To meet the expected annual shortfall over the three years following its
recapitalization, Kroger would need to increase EBITDA by 114%, reduce total
assets by 16% annually, or reduce annual capital expenditures by 155% (or, of
course, some combination of these actions). Similarly, in the three years following its buyout, Safeway would need to increase EBZTDA by lOO%, reduce total
assets by 17% annually, or reduce capital expenditures by 122%. In other
words, even if Kroger and Safeway eliminated all capital expenditures, current
EBITDA would be insufficient to cover projected debt obligations. Thus, operating improvements or asset sales are necessary in order to avoid default.
Both firms are also initially constrained to some extent by the covenants of
their bank credit agreements. Kroger is required to maintain an interest coverage ratio of 1: 1, total liabilities must be no more than 27.5 times net worth, and
net worth must be at least $20 million. Any asset sales must be approved by the
members of the bank consortium, and all proceeds of asset sales greater than $10
million must be used to prepay the senior loan. Capital expenditures are initially
constrained to $215 million; lease obligations are restricted to $275 million. In
the year prior to the recapitalization, capital expenditures were $464 million and
lease obligations were $236 million.
Safeway is required to maintain an interest coverage ratio of 1.1: 1 and senior
debt must be no more than twice net worth. Like Kroger, asset sales must be
approved by the bank consortium and all asset sale proceeds must be used to
prepay the senior loam. Capital expenditures and lease obligations are initially
constrained to $232 million and $340 million, respectively. In the year prior to
the buyout, capital expenditures were $623 million and lease obligations were
!M3 n?!lion. Safeway has no minimum net worth requirement.
D.J. Denis/ Journal of Financial Economics 36 (1994) 193-224
209
4.2. Changes in EBITDA
Panel A of Table 7 indicates that bot6 Kroger and Safeway experience large
increases in operating performance following their HLTs. From the year prior
to the HLT through the fourth full year following the HLT [ - 1,4], the ratio of
EBITDA to total assets increases 49.0% for Kroger and 69.3% for Safeway, and
Table 7
Changes in operating returns, asset structure, and investment policy following Kroger’s recapitahzation and Safeway’s LBO; percentage changes are measured for various windows surrounding the
year of the MLT (year 0): data are obtained from proxy statements and 10-K reports
Percentage changes
Yr. - 1
level
c-3,
-1-J [-
l,l]
[-1,2-J
c- 1331
C-U1
(A) Changes in operating performance
EBITDA/Assets
Kroger
Safeway
14.2%
15.7%
- 4.0%
- 3.4%
33.7%
48.5%
44.2%
26.0%
61.6%
3.6%
3.9%
- 0.6%
5.9%
23.1%
25.7%
23.1%
14.5%
9.1%
30.3%
6.8%
16.0%
- 4.9%
- 34.4%
- 7.7%
- 41.7%
- 7.8%
- 36.8%
- 3.5%
- 36.8%
57.1%
49.0%
69.3%
EBI TD A/Sales
Kroger
Safeway
14.5%
41.5%
(B) Effect of asset sales
Total assets’
Kroger
Safeway
$4,46Om
%7,5OOm
Number of grocery stores
Kroger
Safeway
1234
2325
- 6.4%
1.0%
0.0%
- 32.6%
1.7%
- 50.8%
2.4%
- 52.0%
3.2%
- 52.7%
170
164
- 4.8%
1.4%
0.0%
0.0%
0.0%
11.7%
- 20.3%
- 34.8%
-- 33.1%
- 30.5%
10.4%
8.3%
15.9%
- 0.9%
- 70.0%
- 41.7%
- 75.1%
- 29.0%
- 46.9%
- 3.0%
- 46.2%
24.1%
2.6%
3.2%
18.2%
10.3%
- ?3.1%
- 59.4%
- 57.7%
- 28.1%
- 61.5%
- 18.8%
- 58.1%
3.1%
-
Number of employees (000s)
Kroger
Safeway
(C) Changes in investment
Cap. exy./Assets’
Kroger
Safeway
Cap. exp./Sales
Kroger
Safeway
“Sa.feway’syear - 1 book value of total assets has been written up to reflect the restatement of asset
values associated with the purchase method of accounting for the buyout. Thus, the year - 1 levels
of total assets and capital expenditures/total assets are not directly comparable for the two firms.
210
D.J. Denisl Journal of Financial Economics 36 (1994) 193-224
the ratio of EBZTDA to sales irrcreases 14.5% for Kroger and 41.5% for
Safeway. If anything, these changes in operating returns are slightly larger than
those documented in previous studies. 5 Nevertheless, when they are compared
to the cash shortfalls in Table 6, it is clear that the increases in EBITDA are by
themselves insufficient to cover the projected cash shortfall of each firm.
The increases in EBITDA are consistent with improved operating performance following Kroger’s recap and Safeway’s LBQ. Of course, to the extent
that the firms ,sell unprofitable divisions following their HLTs, post-HLT
operating performance measures will present a biased view of estimated performance improvements within remaining divisions. This bias is particularly relevant in Safeway’s case. Prior to the LBQ, 40% of Safeway’s stores were
supporting the ther 600/o (Wruck, 1992). Following the buyout, as shown
below, Safeway sells a large fraction of its underperforming assets.
Also, operating performance may increase simply because managers cut back
on discretionary expense items such as advertising, maintenance, and repairs.
While exact figures are not available, it is apparent from the 10-K reports that
both firms do cut back on some of these discretionary expenditures. Reductions
in discretionary items may result in temporary increases in operating cash flows
even though the reductions may be harmful to the firm’s long-term competitive
position. Thus, it is not certain that the operating changes documented in
Table 7 represent valuable operating improvements. This issue is addressed in
Section 5, where I compare the value created in Kroger’s recapitalization to that
of Safeway’s LBO.
4.3. Asset sales
The appendix summarizes major asset sales by Kroger and Safeway following
their respective HLTs. Despite similar leverage-induced cash constraints and
operating changes, there is a dramatic difference in the magnitude of asset sales
for the two firms. Kroger’s asset sales are moderate, netting only $351 million,
and consisting of a mix of supermarkets and food processing facilities. In
contrast, Safeway’s asset sales in the two years following their buyout are
primarily supermarkets and net approximately $2.3 billion.
The fact that Kroger sold relatively more nonstore assets gives the impression
that Kroger had diversified more than Safeway into food processing and
warehousing. This does not, however, appear to be the case. Prior to the
--
‘See Denis and Denis (1993) and Palepu and Wruck (1992) for evidence on operating changes
following leveraged recapitalizations, Kaplan (1989), Muscarella and Vetsuypens (1990), and Smith
(1990) for operating changes following management buyouts, and Healy, Palepu, and Ruback (1992)
for operating changes following larger mergers. Similar results are obtained when the operating
returns are adjusted for contemporaneous industry changes.
D.J. DenislJournaI of Financial Economics 36 (1994) 193-224
211
recapitalization, Kroger operated 38 food processing plants and 12 membership
warehouses. Safeway operated 66 distribution-warehousing centers, 17 freestanding warehouses, and 72 manufacturing and processing facilities.
The net effect of these differences in divestiture programs is apparent in panel
B of Table 7 and in Fig. 2. Between the year prior to the NLT and the first full
year following the HLT, [ - 1,11,the book value of total assets is reduced by
4.9% for Kroger and 34.4% for Safeway. (Safeway’s percentage changes are
computed after having written up the book value of year - 1 assets to reflect the
restatement of asset values associated with the purchase method of accounting
7.5
7
6.5
6
5.5
5
4.5
4
3.5
3
-3
-2
-1
0
1
2
3
4
3
-2
-1
0
I
2
3
4
12
I1
10
9
8
7
6
5
4
3
2
Fig. 2. Book value of total assets (in §bilhons) and the ratio of capital expenditures to total assets
(%) for Kroger and Safeway for years - 3 through + 4 relative to their
All data are taken from annual reports and proxy statements. Safeway’s
0 book value of
total assets have been written up to reflect the restatement of asset values associated with the
purchase meCod of accounting for the buyout. Thus, levels of total assets and capital expenditures/total assets are not directly comparable for the two firms.
212
D.J. Denis/ Journal of Financial Economics 36 (1994) 193-224
for the buyout.) Similarly, for the year [ - 1,4] window, total assets are reduced
by 3.5% for Kroger and 36.8% for Safeway. These asset sales result in a net
increase in the number of grocery stores of 3.2% for Kroger and a net reduction
of 52.7o/ofor Safeway. When the amount of cash generated from these asset sales
is considered, it is apparent that Kroger’s asset sales alone are insufficient to
alleviate the firm’s cash shortage. As indicated in Table 6, Kroger’s total
projected shortfall in the first three years following the recapitalization is $2.2
billion, more than six times the $351 million generated by its asset sales. In
contrast, the $2.3 billion generated by Safeway’s asset sales is approximately
equal to the firm’s total year 1 through year 3 projected cash shortfall.
Given the similarities in leverage-induced cash constraints, such large differences in the magnitude of asset sales are surprising. These differences are,
however, consistent with the hypothesis that organizational form in part determines the consequences of highly leveraged transactions. Indeed, there is evidence that, absent the presence of an active monitor like KKR, Safeway would
have sold fewer assets. Safeway CEO Peter Magowan was initially opposed to
the extent of Safeway’s divestitures (Anders, 1992, p. 207), but ‘KKR officials
gave him little choice if he wanted to stay on board’ (See ‘The Reckoning:
Safeway LB0 Yields Vast Profits but Exacts a Heavy Human Toll’, BQll Street
Journ~I, May 16, 1990.) By contrast, Kroger sold fewer assets than expected.
After Kroger received KKR’s buyout offer, analysts speculated that the magnitude of post-buyout asset sales would be similar to what had been observed at
Safeway, and would come from Kroger’s food manufacturing and processing
businesses, their Price Saver warehouse club chain, their convenience store
division, and underperforming supermarkets in Texas, North and South
Carolina, Tennessee, and Detroit. Rotan Mosle analyst Gary Giblen noted that
this magnitude of asset sales ‘. . . will not be necessary, but will certainly be highly
desirable’ (see ‘Kroger Draws Bid Flurry; KKR Seen Likely Victor’, Supermarket News, September 26, 1988).
One possible exp!anation for Kroger’s low divestiture rate is that there was
some exogenous change - such as a reduction in the liquidity of the asset sale
market - that prevented Kroger from selling as many assets as expected.
[Shleifer and Vishny (1992) argue that an increase in the liquidity of asset sale
markets in the 1980s was at least partially responsible for the growth in the junk
bond market. Denis and Denis (1994) argue that the unusually high rate of
financial distress for leveraged recapitalizations completed in the late 1980s is
due in part to an exogenous reduction in the liquidity of the asset sale market
induced by unexpected economic and regulatory developments.] However, such
a change seems unlikely, given the fact that over approximately the same time
period,
Safeway sold over $2 billion of assets. Moreover, there is no evidence
that Kroger ever expected to sell any more assets than they ultimately sold. In
the announcement of the proposed recapitalization, CEO Lyle Everingham
stated that Kroger ‘. . . expects to raise about $333 million from the sale of
D.J. DenislJournal of Financial Economics 36 (1994) 193-224
213
certain assets . .’(see ‘Kroger Chief Expects Asset Sales to Reap $333 Million for
Bid to Stay Independent’, Wall Street JOUUU&September 27, 1988).
Prior to its LBO, Safeway was unable to obtain concessions from labor
unions, in part because the firm’s financial performance seemed relatively
strong. From 1981 to 1985, EPS increased at a rate of 20% annually and
dividends increased correspondingly. As emphasized in DeAngelo and
DeAngelo (1991). if a firm is to obtain wage concessions, it is important that
managers make a credible case that the firm’s viability is threatened. Following
the buyout and its increase in financial leverage, Safeway was able to make such
a case by offering certain assets for sale. Safeway’s strategy was to offer to sell
divisions intact to union buyers, thereby allowing as many employees as possible to retain their jobs, even if they no longer were employed by Safeway. Wage
concessions prior to the asset sale would allow Safeway to obtain a higher price
for the sold divisions, and therefore reduce the number of divisions sold. As
stated by Peter Magowan (Roundtable Discussion, 1991, p. 34).
l
The potential buyers said to us, ‘We will pay you a much higher price for
these assets provided we can get labor cost concessions.’ And though the
union, of course, didn’t want those concessions, they certainly did not want
the stores to be sold to non-union buyers. So, faced with that choice, the
union then made the concessions we asked for.
[After observing the shutdown of Safeway’s Dallas operations where labor costs
were deemed to be too high, one of the negotiators for the United Food and
Commercial Workers union likened the bargaining sessions to ‘. . . coming to the
table with a gun at our heads’ (see ‘The Reckoning: Safeway LB0 Yields vast
Profits but Extracts a Heavy Human Toll’, Wall Street Journai, May 16,1990).]
As a consequence, wages were cut by 20-30% in divisions 5at were sold by
Safeway (Anders, 1992, p. 209); however, wages were not renegotiated in divisions that were kept. In contrast, Kroger did obtain some reductions in hourly
salaries in stores that the firm did not sell. These reductions were, however,
generally smaller than those at Safeway. The average hourly salary of Kroger
store workers was reduced by approximately 13% and came in exchange for
additional stock options that were made available to all employees (see ‘Facing
Raiders, Kroger Took Another Path’, Wall Street Jsuraul, May 16, 1990).
4.4. Reductions in investment
Panel C of Table 7 and Fig. 2 summarize changes in capital expenditures at
Kroger and Safeway in the years surrounding their respective I-ILTs. The evidence
suggests that Kroger substitutes larger decreases in investment levels for its
reluctance to sell assets. The ratio of capital expenditures to total assets is reduced
by approximately 46% in the four years following Kroger’s recapitalization.
214
D.J. Denis/ Journal of Financial Economics 36 (1994) 193-224
Kroger’s proxy statements reveal that actual post-recap capital expenditures
were less than half of what had been expected prior to the recapitalization. This
translates into annual reductions of approximately $249 million, nearly as large
as the total cash generated through Kroger’s asset sales and approximately 35%
of the annual projected cash shortfall documented in Table 6. Moreover, the
reductions in investment appear to be long-lived. While actual capital expenditures can oniy be measured through year + 4 (1992), the 1991 proxy statement
indicates that Kroger expects capital expenditures to grow from $241 million in
1991 to an average of $300 million over the 1993-95 period. Thus, the ratio of
capital expenditures to total assets will remain approximately 33% below what
it was prior to the recapitalization. (This figure is estimated by first dividing the
expected capital expenditure level, $300 million, by the 1992 level of total assets,
$4303.1 million. The resulting ratio, 0.070 is then compared to the pre-recap
ratio, 0.104.)
In contrast, by selling a greater fraction of its assets, Safeway appears able to
minimize reductions in investment following its LBO. Capital expenditures 2,s
a percentage of total assets and sales are reduced by just 3.0% and 18.80/o,
respectively, over the three years following the buyout. Moreover, in 1990
(year + 4), Safeway initiated a $3.2 billion capital expenditure program to be
completed over the following five years. As a result, capital expenditures rose
dramatically in 1990 and 1991, such that the ratio of capital expenditures to
total assets was 24% higher than its pre-buyout level in 1990 (year + 4) and
48% higher in 1991 (year + 5).
It is noteworthy that, given Safeway’s increases in EBITDA following the
buyout, had the firm reduced capital expenditures by the same percentage as
Kroger, it would have generated sufficient cash to cover its projected cash
shortfall without selling any assets. Thus, it appears that Safeway’s strategy was
to remove the leverage-induced cash flow constraints as quickly as possible
through asset sales in order to increase capital expenditures, while Kroger chose
to handle the constraints of leverage by reducing investment.
Following Kroger’s announcement of its proposed recapitalizatzon, analysts
questioned the wisdom of a strategy that involved any sustained cutbacks in
capital expenditures. According to First Manhattan Co. analyst John Kosecoff
(see ‘Kroger Restructuring to Fend Off Takeovers’, Suplermarket News, September 19, 1988):
Kroger could certainly sustain a dramatic cut in capital spending for a year,
but they’d be unlikely to sustain it at that low a level over a longer period of
time. Supermarkets are a capital-intensive business, and you’ve got to
maintain your store base at a reasonable level.
Analysts also expressed concern over the fact that Kroger’s capital spending
levels remained at less than one-third the industry norm more than two years
D.J. DenislJournal of Financial Economics 36 (1994) 193-224
215
after the firm’s recapitalization. According to Value Line, ‘Kroger has to pass up
capital investments for the next few years which would likely generate annual
pre-tax returns of 20% or more’ (Value Line Investment Survey, May 24, 1991).
5. Value created throughthe Krogerand Safeway HLTs
Results from the previous section suggest that organizational form in part
determines the manner in which firms handle the constraints of leverage. This
section attempts to determine whether the differences in organizational form
and restructuring strategy are also associated with differences in the amount of
value created in each HLT.
5.1. Returns to shareholders
Table 8 reports nominal and abnormal returns earned by the pre-HLT and
post-HLT shareholders of each firm. Pre-HLT returns are measured over the
interval extending from 40 days prior to the start of each control contest
through the outcome of the control contest. For Kroger the control contest
begins with the announcement on 9/12/M of the Haft family receiving clearance
to buy an unspecified stake in the firm. For Safeway, the contest begins when the
Haft family announces on 6/13/86 that it holds a 5.9% stake and may attempt to
acquire the firm. The outcome date reflects a subjective judgment as to the date
upon which all uncertainty regarding the outcome of the takeover contest is
resolved. For Kroger, this date is the date at which KKR withdraws its bid
(lO/ll/SS), while for Safeway this date is the day on which Safeway agrees to be
aquired by KKR (7/Z/86).
Post-HLT returss are measured from completion of the recapitalization
through December 31, 1992 for Kroger and from the date of going private
through December 31, 1992 for Safeway. Annualized post-HLT abnormal
returns based on a 25O-trading-day year are also computed, Pre-HLT abnormal
returns are measured using the standard market mode! technique with parameters esrimated over the 250-trading-day period beginning 290 days prior to
the beginning of the pre-HLT period. Post-HLT abnormal returns are estimated
using the market-adjusted returns method since Safeway’s private status precludes the estimation of market model parameters. Stock prices for 1992 are
hand-collected from Standard 2ZI;CPoor’s Daily Stock Price Record. All other
data are obtained from the daily returns tape of the Center for Research in
Securities Prices (CRSP).
The results in Table 8 indicate higher returns to the pre-HLT shareholders of
Safeway. Cumulative abnormal returns (CARS) are 60.7% (t = 7.1) for Safeway
and 47.3% (t = 6.1) for Kroger in the pre-HLT period. The difference in the
CARS of the two firms is significant at the 0.10 level (t = 1.7). These abnormal
216
D.J. Denis/ Journal of Financial Economics 36 (I 994) 193-224
Table 8
Nominal and risk-adjusted returns to shareholders in Kroger’s recapitalization and Safeway’s LB0
Kroger
Safeway
(A) Pre-HLT returns
Nominal pre-HLT equity returns [R,,,]
Abnormal pre-HLT equity returns [ARpJa
Abnormal dollar gains to shareholders (millions)
59.4%
71.6%
60.7%
7.1)
47.3%
(t = 6.1)
(t =
$1294.1
$1434.8
(B) Post-HLT returns
Nominal post-HLT equity returns [I&J
Abnormal post-HLT equity returns [ARposc]’
Annualized post-HLT abnormal retumsb
Abnormal dollar gains to shareholders (millions)
74.1%
550.0%
23.7%
(t = 0.3)
482.9%
(t = 6.0)
5.7%
79.4%
$170.2
$653.5
177.5%
1015.4%
82.2%
836.9%
9.8%
128.8%
(C) Total returns
Total nominal equity returns [TR = (( 1 + Rpre)x (1 + R,,)) - l]
Total abnormal equity returns [TAR = ((1 + AR,,,) x (1 + AR,,,)) - l]
Annualized total abnormal equity returnsb
Total dollar gains to shareholders (millions)
Total dollar gains to shareholders as a percent of pre-HLT equity value
$1464.3
53.5%
$2088.3
88.3%
Returns are separated into pre-HLT and post-HLT periods. The pre-HLT period extends from 40
days prior to the control contest through the outcome of the control contest. For Kroger, the control
contest begins with the announcement on 9/12/88 of the Haft family receiving clearance to buy an
unspecified stake in the firm. For Safeway, the contest begins when the !-MI family announces on
a/13/86 that it holds a 5.9% stake and may attempt to acquire the firm. The post-HLT period
extends from the date of rei-apitalization through 12/31/92 (approximately 4.3 years) for Kroger and
from the date of going private through 12/31/92 (approximately 6.2 years) for Safeway.
“Abnormal equity returns in the pre-HLT period are computed using the standard market model
technique with parameters estimated over the 250-day period beginning 290 days prior to the
beginning of the pre-HLT period. Post-HLT abnormal returns are computed using the marketadjusted returns method.
bAnnualized abnormal returns are computed on the basis of a 250-trading-day year.
returns translate into abnormal dollar gains of $1,435 million for Safeway and
$1,294 million for Kroger shareholders. The abnormal returns for both firms are
slightly higher than those documented in previous studies. Kaplan (1989)
reports median CARS of about 26% for a sample of management buyouts, while
Denis and Denis (1993) and Palepu and Wruck (1992) report average CARS of
32% and 24%, respectively, in samples of leveraged recapitalizations.
D.J. Den&/Journal of Financial Economics 36 (1994) 193-224
217
Shareholder returns in the post-HLT period are more than twenty times
higher for Safeway than for Kroger. Post-HLT abnormal returns are 482.9%
(t = 6.0) for Safeway and 23.7% (t = 0.3) for Kroger. The difference is significant
at the 0.01 level (t = 6.2). Annualized post-HLT abnormal returns are 79.4% for
Safeway and 5.7% for Kroger. These post-HLT returns translate into abnormal
dollar gains of $654 million and $170 million for the shareholders of Safeway
and Mroger, respectively.
The post-LB0 returns earned by Safeway shareholders are similar to those
documented in previous large-sample studies of management buyouts. For
example, the median post-buyout equity return in Kaplan’s (1989) sample is
785.6%. Similarly, the annualized equity return between LB0 and IPO is
268.4% in Muscarella and Vetsuypens’ (1990) sample of reverse LBOs. Kroger’s
positive post-HLT returns differ from the negative median post-recap abnormal
returns documented for defensive recapitalizations in Palepu and Wruck (1992).
Finally, Table 8 documents the total returns earned by pre-HLT and postHLT shareholders. Total abnormal equity returns axe 82.2% for Kroger and
836.9% for Safeway. Total annualized abnormal returns are 9.8% for Kroger
and 128.8% for Safeway. The total abnormal dollar gain of $1,464 million for
Kroger shareholders amounts to 53.5% of the pre-HLT market value of the
firm’s equity. Safeway’s total abnormal dollar gain of $2,088 million amounts to
88.3% of the firm’s pre-HLT market value of equity.
Fig. 3 shows the stock price performance of Kroger and Safeway for the
period extending from January 1, 1985 through December 3 1, 1992. For each
month, market-adjusted performance indices are computed for each firm as the
ratio of the fir.m’s cumulative raw return (from l/1/85) to the cumulative return
on the S&P 500 portfolio. Thus, if the firm’s stock price performance equals that
of the market, the index will equal one. Safeway’s performance index is assumed
to increase linearly during the time that the firm is a private company. For
purposes of comparison, Fig. 3 also presents the market-adjusted performance
index for the portfolio of firms comprising the S&P retail stores-food chains
index. This comparison provides some assurance that the abnormal performance of Kroger and Safeway is not due to industry etiects.
As depicted in Fig. 3, both firms outperform both the market and the industry
portfolio following their HLTs. Safeway’s market-adjusted performance index
reaches a high of 10.3 in mid-1.990, over six times the industry index of 1.7 at that
time. Kroger’s index reaches a high of 3.1 in late 1990, nearly double the industry
index of 1.6 at that time. Both firms display reductions rn their performance
index during the latter part of 1991 and 1992. Nevertheless, they continue to
outperform their industry peers. By the end of 1992, Safeway’s performance
index of 6.7 is still more than four times the industry index of 1.5, while Kroger’s
index is 2.2.
The findings in Table 8 and Fig. 3 are consistent with the hypothesis that the
strategic changes were more valuable for Safeway shareholders than were the
D.J. Denis/ Journal of Financial Economics 36 (1994) 193-224
KKRLBO
offer hr
Safeway
7t2a186
I
Dec.
1985
-.I
I
Jun.
1986
Dec.
1986
.
Jun.
1987
I
Dec.
1987
I
Jun.
1988
I
Dec.
1988
I
I
I
Jun.
Dec.
Jun.
1989
1989
1990
I
Dec.
1990
I
I
.
Jun.
Dec.
Jon.
1991
1991
1992
Fig. 3. Market-adjusted performance index for Kroger, Safeway, and a portfolio of grocery firms
from January 1, 1985 through December 31, 1992.
The industry portfolio consists of the eight firms (besides Kroger and Safeway) comprising the S&P
retail stores-food chains index: Albertson’s, American Stores, Bruno’s, Food Lion, Giant Food,
Great Atlantic and Pacific, Super Valu Stores, and Winn-Dixie Stores.
For each month, a market-adjusted performance index is computed for each firm and the industry
portfolio as the ratio of the firm’s cumulative raw return (since January 1, 1985) to the cumulative
return on the S&P 500. Since cumulative returns on the S&P 500 are small during 1985, the
performance indices are unusually high during this year. Safeway’s market-adjusted performance
index is assumed to increase linearly over the period between when it goes private (Nov. 1986) and
when it goes public through its IPG (April, 1990).
changes at Kroger. If it is true that differences in organizational form are
responsible for the different post-HLT strategies, then these findings support the
claim that the organizational form employed at Safeway was superior in bringing
about changes that maximized firm value. Note, however, that the large positive
abnormal returns earned by Kroger shareholders suggest that the pressures of
high leverage alone are sufficient to generate valuable operating improvements.
5.2. The marginal value of Kroger’s recapitalization
An alternative way to assess the valuation effects of differences in organizational form is to compare realized shareholder returns with an ex ante estimate
D.J. Denis/Jouwal
of Financia! Economics 36 (1994) 193-224
219
of what realized returns would have been under a different organizational form.
Such a comparison is possible in the case of Kroger since their recapitalization
came in response to a leveraged buyout offer from KKR. Investors were able to
assess the expected valuation consequences of a KKR-led buyout of the firm as
well as the expected valuation consequences of the recapitalization that was
ultimately adopted. Examining stock returns surrounding selected events during
Kroger’s control contest can therefore yield insights into the market’s view of
the marginal value of Kroger’s recapitalization relative to KKR’s proposed
LB0 for the firm. Although these returns represent ex ante expectations rather
than ex post realizations, the fact that Kroger shareholders do not earn significant post-recap abnormal returns (see Table 8) suggests that the market’s
ex ante estimate of the value created through the recapitalization was quite
accurate.
Table 9 lists a chronology of the major announcements in the Wall Street
Journal in the course of the contest for control of Kroger. The Dow Jones
Table 9
Chronology of events surrounding Kroger’s recapitalization proposal
Date
9/ 12/88
g/13/88
Event
Stock
price
Haft family receives clearance to buy unspecified
Kroger stake.
51t
Kroger proposes restructuring that may include
special dividend.
503
Kroger receives a takeover bid from Haft family
with indicated value of $55 per share
522
KKR makes unsolicited bid for Kroger with
indicated value of $58.50 per share.
AR
CAR
(15.3)
43.8%
(3.6)
-2.3%
41.5%
29.4%
1.2)
(3.4)
3.7%
(1.9)
46.0%
564
6.5%
(3.4)
52.5%
Kroger rejects KRR’s bid and announces plans
to proceed with its restructuring.
552
- 0.9%
( -0.4%)
51.5%
1O/5/88
Kroger receives a revised KKR offer valued at
$64 per share.
584
5.2%
(2.7)
55.3%
(3.8)
10:17/88
Kroger rejects latest KKR offer and says it will
pursue its leveraged recapitalization
58
- 2.5%
(- 1.3)
52.6%
(3.6)
10,111/88
KKR withdraws its hostile bid.
55
- 4.5y-t
47.3%
9/‘19/88
g/20/88
g/26/88
(-
( - 2.3)
(3.6)
(4.0)
(3.8)
(3.2)
For each event, Kroger’s stock price, the abnormal return (AR) on that day, and the cumu!ative
abnormal return (CAR) extending from 40 davs prior to the control contest through the event date
are listed.
“Abnormal returns are computed using the standard market model technique with parameters
estimated over the 250-day period beginning 290 days prior to the start of Kroger’s control contest.
T-statistics are presented in parentheses below each CAR.
220
D.J. Denis,‘J~urnal of Financial Economics 36 (1994) 193-224
Broadtape is examined to obtain the exact time of day for each announcement.
For each event, Table 9 reports the stock price on that day, the abnormal stock
return on that day, the cumulative abnormal stock return from forty days
prior
to the start of the control contest through the event date, and the
t-statistics associated with the abnormal returns. (Abnormal returns are again
computed
using the standard market model technique with parameters estimated over the 250.day period beginning 290 days prior to the start of the
control contest.)
Not surprisingly, the control contest is associated with significant abnormal
returns for Kroger shareholders. The initial announcement of a toehold investment by the Haft family (9/12/88) is associated with an abnormal return of
29.4?6 (t = 15.3).Similarly, the subsequent takeover bids by the Haft’s (9/19,/88)
and KKR (9/20/88), and the revised KKR bid (10/S/88) are all met with
substantial abnormal upward revisions in Kroger’s share price.
There are four events relevant to assessing the marginal impact of Kroger’s
proposed recapitalization: the initial announcement of the recapitalization, the
two rejections of KKR’s bids, and the announcement of KKR’s withdrawal from
the control contest. Kroger first announced its restructuring plan following the
Haft family’s initial disclosure. On that day (9/13/88), Kroger’s share price fell by
$0.875 fo: an abnormal return of - 2.396 (t = - 1.2).Similarly, after rejecting
KKR’s bid on 9/26/88, there was a small negative AR of - 0.9% (t = - 0.4).
On 10/7/88 Kroger rejected KKR’s second bid and announced that it would
proceed with its recapitalization. On that day, the share price fell by an
abnormal - 2.5% (t = - 1.3). Finally, when KKR withdrew its hostile bid
(10/l l/88), clearing the way for Kroger to pursue its recapitalization, the stock
price fell by $3 for an abnormal return of - 4.5% (t = - 2.3).
Between the time of KKR’s revised bid on 10/5/88 and their vithdrawal from
the contest on 10/l l/88, Kroger’s cumulative abnormal return fell from a high of
55.3% to 47.3%, a loss of 8% (t = - 2.1) ($219 million) of the firm’s pre-recap
equity value. This most likely represents a lower bound on the total value
lost by rejecting KKR’s bid, since the market already appears to have discounted some probability of a failed bid at the time of KKR’s revised offer. On
October 5, 1988 analysts valued KKR’s revised bid at $44 per share (see ‘KKR
Sweetens Bid for Kroger to $5 billion’, W/allStreet Journal, October 5, 1988),
yet Kroger’s market price on that day was only %58$ The difference between the
estimated value of KKR’s bid ($64 per share) and the price of Kroger’s common
stock following the withdrawal of KKR on October 11 ($55 per share) is
therefore probably the most accurate estimate of the additional expected value
associated with the KKR buyout offer. This suggests that Kroger’s shareholders lost 14%, or $383 million, by rejecting KKR’s offer and pursuing the
recapi talization.
Note also that the premium of KKR’s bid over the stock price suggests that
the negative CARS following KKR’s withdrawal cannot be attributed to the
D.J. DenisiJournal of Financial Ecmontics 36 ( 1994 &193-224
2.21
market having incorrectly anticipated a higher valued alternative to Kroger’s
recap proposal. These results are similar to those documented in Dann and
DeAngelo’s (1988) study of defensive restructurings, and suggest that the expected value‘of Kroger’s recapitalization was below the expected value of the
various takeover proposals. Moreover, there is no evidence in press accounts to
suggest that Kroger made any attempt to bargain for a higher bid. In fact,
Kroger appeared to go to great lengths to retain its independence in the face of
the takeover bids of both the Haft family and KKR.
The evidence is thus consistent with the hypothesis that a KKR-led buyout of
Kroger would have generated greater gains for Kroger shareholders than the
firm’s recapitalization. Moreover, the fact that Kroger’s board rejected a higher-valued bid suggests that concerns other than value maximization were
important in determining the choice of restructuring method For example, it is
clear from Safeway’s experience that a KKR-led buyout of Kroger would have
resulted in large changes in corporate governance, and involved closer monitoring of managers by the board of directors. One plausible interpretation of the
evidence is that, given the small financial incentives of Kroger’s officers and
directors, they may have chosen the recapitalization as a means of avoiding
these changes in governance and monitoring while still generating some value
for shareholders.
6. Conclusions
Several large-sample studies have documented significant shareholder gains
and operating improvements following highly leveraged transactic -1s. These
gains are generally attributed to changes in the incentive, monitoring, and
governance structures of the firms. This study highlights the role of organizational form in determining the consequences of HITS. The results suggest that,
while high leverage is important in giving Kroger managers the incentive to
generate cash, higher managerial ownership of shares and improved monitoring
from the board of directors at Safeway are important in ensuring that c? ;h is
generated in a way that maximizes returns to shareholders.
It is important to note that, despite no major changes in r;lanagerial ow:lership, board composition, or executive compensation, Kroger’s recapitalization
still generates an improvement in performance This suggests that the adoption
of an entirely new organizational form is r;ot a necessary condition for motivating many of the value-enhancing changes associated with highly leveraged
transactions. For example, Wruck’s (1994) clinical study of Sealed Air Carp’s
leveraged special dividend suggests that leverage can be used to increase the
effectiveness of internai control systems. However, lacking the financial incentive of significant managerial equity ownership or the monitoring of a large
blockholder, this strategy may be risky. Recent evidence of poor ex post
D.J. Denis/ Journal of Financial Economics 36 (1994) 193-224
222
perfiyrmance for defensive leveraged recapitalizations documented in Palepu
and Truck (1992) provides support for this view.
Thz analysis presented here also provides the basis for some conjectures
as to why Kroger managers favored recapitalization over an LBO, even
though it appears (ex postjthat the LB0 would have made them wealthier
than did the recapitalization. The evidence suggests that Safeway’s increase
in value comes at a personal cost to Safeway managers in the form of substantially closer monitoring of top executives. Therefore, it is possible
that Kroger’s managers were willing to give up some expected value in
exchange for a corporate governance system that involved less monitoring. Moreover, in order to realize the larger returns earned by Safeway
managers, some Kroger executives would have had to increase the amount
of their personal wealth at stake by contributing capital to a buyout Thus,
even though the expected payoff to the buyout may have been higher, riskaverse Kroger manage rs may have preferred the recapitalization, since it
involved an immediate payout and did not require any additional contribution
of capital.
Appendix
This appendix summarizes the major asset sales following Kroger’s recapitalization and Safeway’s LBO. The sales price and buyer are also listed when
available. Dates listed are the dates on which the asset sale was announced in the
Wall Street Journal.
Table 10
Bate
~___--
Transaction
_--
--
--.-_____.
(A) Kroger
10/13/88
FTC approved the sale of 24 Florida Choice supermarkets and 24 liquor stores to
Kash ‘N Karry Food Stores Inc. for about $55 million.
2/l /89
Announced it will sell twelve of its food processing plants as part of its restructuring
plan. Later (1 l/7/89) the firm announced it will keep eight of the twelve plants it had
intended to sell.
4/5/ 89
Completed the sale of its Fry’s Food Stores division to Save Mart Supermarkets ior
an undisclosed price.
/89”
Sold Welcome Inc., a six-unit superwarehouse venture and 25 supermarkets in North
and South Carolina, for approximately $34 million.
189”
Sold certain land and buildings in Texas for an undisclosed price.
Total net proceeds = $351 million
-__------ -----.-- ..~______
.__ _~_________ __~_________.__~__
D.J. Denis,‘Jowral of Financial Economics 36 (1994) 193-224
223
Table 10 (continued)
Date
Transaction
(B) Safeway
l/26/87
Sold Distillers unit to Agryll PLC for $1.04 billion.
4/6/87
Scld eight retail food stores in Texas to Kroger for an undisclosed price.
4129187
Sold Salt Lake City division to Borman’s for $75 million.
6/4/87
Sold its Liquor Barn discount retail operation to Majestic Wine Warehouses Ltd.
for over $100 million.
8117187
FTC tentatively approved the sale of 59 grocery stores in Texas and New Mexicc to
Supermarket Dew%-k.-~e?t COT.
11/27j87
Sold its Oklahom:s ‘XX rn to a company formed by the division’s management and
Clayton & Dubiller 2~ for $165 million.
12/4/87
Vons Cos. agreed t _ ‘r~c;{Jiresubstantially all cf firm’s Southern California operations
for cash and stock sdari h $408 million.
6/l 6188
Agreed to sell its 99-s&e :!ouston division to a management-led group for an
undisclosed price.
Total net proceeds = $2.3 billion
aExact announcement dates could not be obtained for these assets sales.
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