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* Offer of $49.38/shr a 1.8 pct premium to Monday close
* Kroger to assume Harris Teeter's debt of about $100 mln
* Deal marks second-largest acquisition for Kroger
* Harris Teeter shares up 1 pct but below offer price
* Kroger shares up 2 pct (New throughout, adds analyst comments, updates stock prices, adds bylines)
By Lisa Baertlein and Jessica Wohl
July 9 (Reuters) - Kroger Co said on Tuesday it would buy regional grocer Harris Teeter Supermarkets Inc in a $2.5 billion deal, the latest in a string of grocery industry consolidations.
Shares of both companies rose, outpacing gains in the broader market.
The deal, approved by the boards of both companies on Monday night, will boost Kroger's presence in the U.S. southeast. Competitors there include privately held Publix and discounter Wal-Mart Stores Inc, the largest U.S. food retailer.
Cincinnati-based Kroger, the largest mainstream U.S. grocer, will also get a bigger presence in the mid-Atlantic region, slightly more upscale stores that do a strong business in fresh food and access to fast-growing markets.
As the supermarket industry has consolidated, chains like Harris Teeter, based in Matthews, North Carolina, have struggled to maintain market share against rivals such as Wal-Mart, Costco Wholesale Corp and Whole Foods Market Inc.
The deal is somewhat "out of character" for Kroger, which for 10 years or so has been "cherry picking stores vacated by downsizing or exiting competitors," said analyst Walter Stackow of Manning & Napier, whose holdings include Ahold, which runs U.S. grocery stores such as Stop & Shop and Giant.
Kroger's acquisition of Harris Teeter is the second biggest deal in the U.S. grocery industry this year, and the second-largest acquisition ever for Kroger after its $13.89 billion purchase of Fred Meyer Inc in 1999.
The grocery industry needs more consolidation as it faces pressure from a swath of retailers ranging from dollar stores and Wal-Mart to upscale grocers Fairway and Whole Foods, said Wolfe Research senior retail analyst Scott Mushkin. "There are just more stores trying to do the same thing," he said.
Tesco's Fresh & Easy chain could be the next business to be sold, Mushkin said.
Kroger's rivals Supervalu Inc and Safeway Inc have sold off significant assets. In January, Supervalu Inc struck a $3.3 billion deal to reduce debt by selling five of its chains to an investor group led by Cerberus Capital Management LP. In June, Safeway agreed to sell its Canadian operations to Sobeys operator Empire Co Ltd.
Kroger's offer of $49.38 per share in cash represents a premium of 1.8 percent to Harris Teeter's Monday close. The stock has run up 31 percent since Jan. 18, when the first reports emerged that the company was up for sale. Kroger will assume $100 million of Harris Teeter debt.
The deal value "seems pretty reasonable," said Telsey Advisory Group analyst Joseph Feldman.
Harris Teeter shares were up 1.6 percent on the New York Stock Exchange at $49.28, trading slightly below Kroger's offer price. Kroger shares were up 2.5 percent at $37.10.
The combined business will operate 2,631 supermarkets in 34 states and the District of Columbia, with over 368,300 employees. Harris Teeter has a non-union workforce, while Kroger largely operates with unionized staff.
Kroger Chief Financial Officer Mike Schlotman said during a conference call that the company is excited about entering markets such as Charlotte, North Carolina and Washington, D.C.
Harris Teeter currently operates 212 supermarkets in North Carolina, Virginia, South Carolina, Maryland, Tennessee, Delaware, Florida, Georgia and the District of Columbia.
With about $4.5 billion in revenue last year, it has stores in affluent vacation destinations, university communities and markets where populations are growing faster than the U.S. average. Kroger hopes to learn from the smaller chain's online shopping system and its strength in fresh categories.
Harris Teeter top management will continue to lead the business out of its North Carolina headquarters. No store closures are expected, though the U.S. Federal Trade Commission will be expected to look at their overlapping presence in Raleigh, North Carolina; Charlottesville and Hampton Roads, Virginia; and Nashville, Tennessee.
Kroger, which operates grocery stores as well as jewelry stores, said it would finance the deal with debt while maintaining its dividend and share buyback program.
Kroger said the deal should add 6 to 9 cents to its earnings per share in the first full year after it closes, excluding transition and transaction expenses. It has financing plans ready, including a bridge loan commitment.
Under certain circumstances, if Kroger were to walk away from the deal it would have to pay a breakup fee of $200 million to Harris Teeter. Harris Teeter could be required to pay a breakup fee of $75 million to Kroger.
Harris Teeter's biggest shareholder is private equity firm Neuberger Berman, with an 11.7 percent stake, according to Thomson Reuters data.
BofA Merrill Lynch is Kroger's financial adviser, while Arnold & Porter LLP is the legal adviser. J.P. Morgan Securities is the financial adviser to Harris Teeter and McGuireWoods is the legal adviser. (Reporting by Siddharth Cavale in Bangalore, Jessica Wohl in Chicago and Lisa Baertlein in Los Angeles.; Additional reporting by Maria Ajit Thomas, Patturaja Murugaboopathy and Olivia Oran; Editing by Saumyadeb Chakrabarty and Ted Kerr)