Could a $4B dividend wreck Kroger’s $24.6B deal with Albertsons?

Attorneys general in multiple states concerned about improper giveaway to some shareholders.

CINCINNATI — The attorneys general of five states and the District of Columbia are asking Albertsons Cos. Inc. to cancel a special dividend payment that’s part of the Kroger Co.’s acquisition of the Idaho-based grocery chain.

“We’re specifically concerned about this deal because with the announced merger was a significant, nearly $4 billion special dividend announcement, which could be valid or could amount to a massive improper giveaway to certain shareholders,” said Karl Racine, attorney general for the District of Columbia, in an interview on CNBC Wednesday morning.

In a letter to Kroger CEO Rodney McMullen and Albertsons CEO Vivek Sankaran, Racine and the attorneys general of California, Arizona, Idaho, Illinois and Washington State argue the dividend “deprives Albertsons of the cash it needs to operate competitively.” It urged Albertsons to cancel the dividend payment by Friday and postpone of other dividends “until regulatory review of the merger is complete and the merger closes.”

Albertsons released a statement that says the merger “will provide significant benefits to consumers” while returning cash to all shareholders.

“Following the dividend payment, Albertsons Cos. will continue to be well capitalized with a low debt profile and strong free cash flow. Given our financial strength and positive business outlook, we are confident we will maintain our strong financial position as we work toward the closing of the merger,” the statement said.

Albertsons is planning to pay the dividend on Nov. 7 to reward its majority shareholders for approving Kroger’s acquisition of the company. Private equity firms Cerberus Capital, Klaff Realty LP and Lubert-Adler will claim about half of that money, which will drain 60% of Albertsons available cash and require a loan of up to $1.5 billion, according to Albertsons’ securities filings.

Those details were disclosed when the merger was announced on Oct. 14. But they’re starting to sink in for critics of the deal, including unions that want regulators to halt the dividend and derail the acquisition.

“Taking billions in assets out of a company that is running well, employs hundreds of thousands of essential workers, and provides daily necessities for millions of customers is a bad idea for the workers as well as customers,” said Kathy Finn, UFCW 770 President in California. “That $4 billion could be much-better spent to lower prices of food for consumers facing unprecedented levels of inflation, pay workers more or invest in safer stores for workers and customers. Our essential grocery store members will do everything we can to stop Albertsons from squeezing workers and customers to the bone to shower executives and shareholders with billions.”

That kind of rhetoric could open the door to broader scrutiny of the Kroger-Albertsons merger, said Professor Christine Bartholomew, who teaches antitrust law at the University of Buffalo.

“I would pressure them if I were a regulator,” Bartholomew said. Distributing cash to shareholders “sure doesn’t sound good at a time when each one of us feels the pinch when we go grocery shopping.”

Kroger did not respond to questions about the dividends. It has been previously reported that the deal has potential for lowering prices and forcing the sale of stores.

Bartholomew thinks Kroger will face questions about the dividends when the Senate Judiciary Subcommittee on Competition Policy, Antitrust, and Consumer Rights holds a hearing on the merger next month. The panel’s co-chairs, Minnesota Democrat Amy Klobuchar and Utah Republican Mike Lee said they have “serious concerns about the transaction” when they announced the hearing. The committee has yet to announce a hearing date or details on what to expect.

Bartholomew said Kroger should expect scrutiny on several topics, including what impact the deal could have on food deserts, Kroger’s use of data and its treatment of suppliers.

“When you have a merger that’s going to increase market power, separate and apart from market share, the concern becomes what we call predatory buying,” Bartholomew said. “The larger the buyer, the more potential they have to influence whether that seller can sell to other companies, and on what terms.”

But the ultimate challenge for Kroger is to demonstrate how the merger will lead to lower prices for consumers, she said.

“Just because a company, through its merger, might be able to save money, or to get better pricing for the company, this does not mean the company is going to pass on those savings. Antitrust laws are focused on making sure that consumers are protected,” Bartholomew said.

And that’s where the dividend could become a problem.

“When you look at the $4 billion that Albertsons is paying, that puts Albertsons in a much weaker financial position,” said James Lewis, portfolio manager at Bartlett Wealth Management downtown. “I think that could become a topic of conversation when they appear before the Senate.”

But it’s less of a problem if you view the dividend as a small piece of a much larger puzzle, Lewis explained.

Kroger is making the largest acquisition in its history, a $24.6 billion purchase that will ultimately pay Albertsons stockholders $34.10 per share. By committing Albertsons cash to pay $6.85 per share upfront, the companies secured “written consent” for the deal from a majority of Albertsons shareholders. That benefits Kroger because it eliminates the risk of shareholders rejecting the deal after regulators review it. It also reduces the amount Kroger must borrow for the remaining $27.25 per share.

Less debt means more ability to use cost savings from the combined companies to lower prices.

“When you look at the deal, they’re talking about generating an annual run rate of $1 billion in synergy, or savings and that savings will be passed along to the consumer,” Lewis said. “I don’t think the special dividend really impacts the prices that consumers pay at the store level. It’s just the way they structured the deal to, one, limit the amount of debt and two, ensure that they get Albertsons shareholder approval.”

Morningstar analyst Zain Akbari said the structure of the deal was driven by Albertsons’ majority shareholders, who didn’t want to wait for payment until the end of a regulatory approval process that could last more than a year. He agreed with Lewis that the deal is risky for Albertsons, which would receive a $600 million termination fee from Kroger if regulators reject the merger. That’s enough to repay 40% of the debt Albertsons is adding to its balance sheet, while replacing none of the cash.

While Akbari thinks the FTC will focus mostly on market share in cities where the two retail chains have the most stores, he points out that Federal Trade Commissioners are political appointees who’ve promised a more progressive approach to antitrust regulation.

“We need to take a holistic approach to identifying harms,” FTC Chair Lina Khan wrote in a 2021 memo outlining her strategic vision for the agency. “Antitrust and consumer protection violations harm workers and independent businesses as well as consumers.”

That approach could lead to more than just selling off stores.

“The overall environment with people concerned about pricing, food deserts and other issues will weigh into the minds of people voting on this transaction,” Akbari said.

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