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(Reuters) - Grocery distributor Spartan Stores Inc (SPTN.O) will acquire Nash Finch Co NAFC.O to become the largest food supplier to U.S. military stores and expand beyond its midwestern stronghold.
The all-stock deal was worth about $312 million to Nash Finch shareholders, based on Spartan's Friday closing. But with Spartan shares rising 8 percent on Monday, the equity portion of the deal rose to around $338 million.
"By teaming up with Nash Finch they get the military business plus a much wider footprint to grow both the distribution and the retail businesses," Wolfe Trahan & Co analyst Scott Mushkin said.
The deal will help expand Spartan's distribution presence beyond Michigan, Indiana and Ohio to 37 states and the District of Columbia. It also makes Spartan the largest food distributor to U.S. military commissaries and exchanges at home and abroad.
Military commissaries sell groceries and household goods to personnel and retirees at cheaper prices. Exchanges are retail stores operating on military installations and also include other services such as barbershops and fast-food outlets.
"The combined company can reach any commissary, any exchange location, anywhere in the world," Nash Finch Chief Executive Alec Covington said on a conference call with analysts.
Nash Finch posted total revenue of $4.82 billion in 2012, about half of which came from sales to military businesses.
The deal is the latest consolidation in the grocery industry as retailers ranging from dollar stores to larger chains such as Wal-Mart Stores Inc (WMT.N) compete by offering similar products.
Kroger Co (KR.N), the largest U.S. grocery chain, bought regional grocer Harris Teeter Supermarkets Inc HTSI.N in a $2.5 billion deal this month.
The offer of 1.2 Spartan shares for each Nash Finch share did not provide a premium to Nash Finch shareholders based on Friday closings, but has risen in value after Spartan shares rose on Monday.
Spartan will also assume about $380 million in long-term Nash Finch debt. Nash Finch shareholders will end up owning 42.3 percent of the combined entity.
The deal combines about 100 Spartan supermarkets in Michigan, operating under brands such as Family Fare Supermarkets and Glen's Markets, with around 75 Nash Finch grocery stores in the upper Midwest under the Bag 'N Save, AVANZA and other brands.
The new company will have 22 distribution centers and 177 retail stores, the companies said, and also have a portfolio of such private-label brands as Spartan, Nash Finch's Our Family and Nash Brothers Trading Co. It will generate pro-forma annual sales of about $7.5 billion.
The deal is expected to add to adjusted earnings within the first full year after closing, expected by the end of 2013. It is expected to generate savings of about $50 million annually by the third year.
Spartan CEO Dennis Eidson will head the combined company, while Nash Finch's Covington will serve in an advisory role.
Moelis & Co provided financial advice to Spartan Stores, while Nash Finch's financial adviser was J.P. Morgan Securities Inc. Warner Norcross & Judd LLP was legal counsel for Spartan Stores and Nash Finch's legal adviser was Morgan, Lewis & Bockius LLP.
Spartan shares were up 6 percent at $22.53 after touching a high of $24.40 earlier in the day. Nash Finch shares were trading at $26.92.
Reporting by Arpita Mukherjee and Siddharth Cavale in Bangalore; Editing by Sreejiraj Eluvangal and Sriraj Kalluvila