As the case to allow Kroger and Albertsons to merge their organizations dragged through the legal process for more than two years, I increasingly felt there was little chance that this $24.6 billion deal would be approved.
So when U.S. District Judge Adrienne Nelson, after more than two months of deliberating, sided with the Federal Trade Commission (FTC) in rejecting the merger effort, citing that “the merger would lead to undue market concentration in multiple geographic markets in both the supermarkets and large format stores markets that would presumptively lessen competition,” the result was not surprising.
Less than an hour later, King County (WA) Superior Court Judge Marshall Ferguson ruled that the merger attempt was unlawful, stating: “In my view, the evidence convincingly shows that the current competition between Kroger and Albertsons stores is fierce in the State of Washington. By contrast, the divestiture buyer, C&S Wholesale, with its limited retail experience, will not be able to replicate the ferocity of that competition or compete in Washington against the colossus of a merged Kroger and Albertsons.”
A decision on whether the deal would have been legal has yet to be adjudicated in Colorado. But those decisions became moot once Albertsons sued Kroger in Delaware Chancery Court, claiming Kroger’s willful breach of contract and breach of the covenant of good faith and fair dealing since the company failed to exercise best efforts and to take any and all actions to secure regulatory approval of the companies’ agreed merger transaction.
The comments by Tom Moriarty, Albertsons general counsel, summarizes the company’s legal position:
“A successful merger between Albertsons and Kroger would have delivered meaningful benefits for America’s consumers, Kroger’s and Albertsons’ associates, and communities across the country. Rather than fulfill its contractual obligations to ensure that the merger succeeded, Kroger acted in its own financial self-interest, repeatedly providing insufficient divestiture proposals that ignored regulators’ concerns. Kroger’s self-serving conduct, taken at the expense of Albertsons and the agreed transaction, has harmed Albertsons’ shareholders, associates and consumers. We are disappointed that the opportunity to realize the significant benefits of the merger has been lost on account of Kroger’s willfully deficient approach to securing regulatory clearance. We are taking this action to enforce and preserve Albertsons’ rights and to protect the interests of our shareholders, associates and consumers. We believe strongly in the merits of our case and look forward to presenting it to the Court to hold Kroger responsible for the harm it has caused.”
My translation: A desperate money grab by a chain whose institutional investors have milked the Boise, ID retailer for years and now find themselves to be the last men standing on an undesirable island.
That’s not to absolve Kroger entirely, though. As the lead dog in the hunt, Kroger supervised the playbook on how to pitch the deal (while Albertsons publicly agreed with Kroger’s strategy). While it did a good job of positioning the benefits of the alliance (and in my view the merger would have improved Albertsons in several ways including store conditions and everyday pricing), Kroger never played offense in more aggressively defending the deal.
From day one, consumer advocacy groups, politicians, legislative agencies and labor unions strongly denounced the deal as being anticompetitive. During that initial flurry of negative press, Kroger (and Albertsons) offered no demonstrative counterattack. The court of public opinion quickly sided with those who sought to reject the merger. It’s also true, as Albertsons claims, that Kroger’s initial list of 413 stores to be sold to C&S Wholesale Grocers contained many undesirable locations. However, does that make Kroger’s self-serving strategy illegal? And in the end, Kroger did revise that initial store list and added 166 additional supermarkets to the divestiture batch.
And the FTC also certainly deserves to be heavily criticized for not allowing the merger effort to be judged using the entire retail landscape as the foundation for the fairness of the deal. To not include Walmart, Costco, Target and Amazon (and dozens of other non-supermarket operators that sell groceries) was ludicrous and flat out wrong (Lina Khan, the chairwoman of the FTC and the architect of the agency’s game plan, was for all intents and purposes fired on December 11 when Trump announced he would nominate pro-business attorney Andrew Ferguson to take over atop FTC in the new administration).
While CEO Vivek Sankaran expressed optimism about Albertsons’ future, I’m not a believer and would openly question how much longer this c-suite executive will be running a company whose need to be more competitive on several levels now becomes even more urgent.
In its suit, Albertsons is asking for billions of dollars in damages to make its shareholders whole; while also seeking money to recover the time, energy and resources it invested in the process. Albertsons is also seeking to recover the $600 million termination fee which was part of the original merger terms.
In a statement, Kroger said that Albertsons’ claims are baseless: “Kroger refutes these allegations in the strongest possible terms, especially in light of Albertsons’ repeated intentional material breaches and interference throughout the merger process,” the release noted. “This is clearly an attempt to deflect responsibility following Kroger’s written notification of Albertsons’ multiple breaches of the agreement, and to seek payment of the merger’s break fee, to which they are not entitled. Kroger looks forward to responding to these baseless claims in court. We went to extraordinary lengths to uphold the merger agreement throughout the entirety of the regulatory process and the facts will make that abundantly clear. We are incredibly proud of the Kroger team for how they worked through the merger process with the highest degree of integrity and commitment.”
To protect the value of their stock, both chains said they will begin a buyback of shares – Kroger will repurchase up to $7.5 billion of its common stock; Albertsons’ board of directors has authorized a buyback of up to $2 billion worth of shares.
Both retailers saw the value of their shares dip after the merger was rejected on December 10. Kroger’s shares dropped to $57.77 before rebounding two days later to $62.78, a 52-week high. Albertsons, whose stock price has been falling over the past several months, saw its share price drop to $17.84 per share before climbing back to $18.56 per share on December 12, still well below its 52-week high of $23.47.
Functionally, Kroger will hardly miss a beat, except for some embarrassing write-downs for the cost of the attempted merger (including an estimated $1.5 billion in legal fees, which would be presumably shared by its once loyal and dedicated would-be partner).
As for Albertsons, operating as the same standalone company it had been prior to and during the merger attempt doesn’t seem plausible. My guess is that certain assets will be sold. Would the chain sell stores in its two most desirable operating areas – Northern California and Chicago? What about California, Colorado, Arizona and Washington where it competes with its newest enemy – Kroger? The East Coast (Acme, Safeway, Shaw’s Star Markets) seems almost impossible to divest given the burdensome labor contracts and declining market shares of Albertsons’ holdings in New England and the Mid-Atlantic. Another merger effort might be sought, but with whom?
As stated earlier, I can’t see Vivek Sankaran being part of the long-term solution. Sankaran’s corporate skills might have once been an asset in dealing with the financial markets, but not anymore. He’s not a merchant or an operator, so what can he possibly bring to the party now? And with his potential $43 million “parachute” package now a fleeting fantasy, what’s his motivation to stay?
If Albertsons really believes it can provide long-term value to its shareholders as Sankaran and chairman Jim Donald claimed after the merger effort failed, it had better start enhancing its store conditions, its non-competitive pricing strategy and its associate morale.
Without those improvements, Albertsons won’t make it two years in its current form.
In the meantime, both Kroger and Albertsons will continue to add to their legal expenses – wasted money that could have been spent improving their organizations.
‘Round The Trade
Everything being relative, UNFI had a solid Q1, posting a net sales increase of 4.2 percent to $7.9 billion. Now the more sobering news: its net loss was $21 million, marking the fifth consecutive quarter of posting red ink. Here’s some more UNFI reality: The Providence-based distributor is shutting its Lincoln, RI field office and laying off 121 administrative associates. That follows another job riffing in October that impacted about 300 administrative staffers whose jobs were outsourced to a third-party firm. At the warehouse level things aren’t that spiffy either. During the past two years, Teamsters have organized about a half a dozen UNFI distribution centers adding about 2,000 union members to UNFI’s payroll.
Another troubled company, Walgreens, is reportedly in talks with private equity firm Sycamore Partners to take the company private, the second attempt by the struggling drug merchant to leave the public markets in the last five years. The upside for the Deerfield, IL unit of parent firm Walgreens Boots Alliance is that, as a privately-owned firm, the pressure to improve immediately would be lessened. The second largest drug chain in the U.S. currently has a market value of about $8 billion (down from $100 billion 10 years ago) and plans to close 1,200 drug stores nationally. Its current long-term debt is approximately $8 billion. Among the Manhattan-based hedge fund’s current major holdings are Staples and Ann Taylor/The Loft.
More drug industry news: new federal legislation is set to be introduced in the U.S. Senate which would force health insurance firms that also own pharmacy benefit management companies (PBMs) to divest their pharmacy businesses within three years. The bill is sponsored by two Senators – Elizabeth Warren (D-MA) and Josh Hawley (R-MO) – who are usually as far apart on policy as any two politicians in America. This time they are aligned in the belief that health insurers use their PBMs to manipulate drug prices and policy harming consumers. The FTC also recently filed suit against the top three U.S. PBM firms – Caremark Rx (CVS Health), Express Scripts (Cigna), and OptumRx (United HealthCare – over alleged unfair and anticompetitive practices, one of the few good things Lina Khan did in her damaging tenure as FTC chairwoman.
Local Notes
Good news for our buddy Bill Chiodo, president at Affinity Group, and his team. The Buffalo area-based sales and marketing agency has acquired DMR Associates, Inc., another broker/agency that serves the New York Metro market. Gary Duncan, formerly of DMR, has been named executive VP and will supervise Affinity’s business in the nation’s largest market. In announcing the acquisition, Enzo Dentico, CEO of Affinity Group, stated, “DMR has built an outstanding reputation and has been operating in the Metro markets for many years. I’m excited to welcome Gary and his team to the Affinity Group family. This acquisition not only aligns strategically but also fits well with our culture. We expect significant benefits from this acquisition and look forward to further expanding across the Metro NY market and expanding the categories in our portfolio.” Added Chiodo: “From a strategic standpoint, this acquisition marks a significant milestone in our goal to establish Affinity Group as the leading retail sales agency in the all-important Metro NY market. We have established ourselves in the produce category, and this acquisition now puts our capabilities in all categories of the store. We want our clients and customers to understand that this new team will be seamlessly integrated into Affinity Group Retail, utilizing our trimester planning process, retail reporting system, and our data-driven category selling approach.”
Kudos also to another successful brokerage firm, JOH. The dynamic agency, based in Billerica, MA, announced earlier this month that Matt O’Hare will become CEO of the fast-growing agency and that former chief executive John Saidnawey will become executive chairman. Matt’s dad, Chip, remains chairman emeritus of the company that was founded by the late, great Harry O’Hare (Chip’s dad) in New England in 1956. I’ve been fortunate (and am that old) to have known all four men, and the growth of JOH shouldn’t surprise anybody. Talent, intellect, people skills and a strong work ethic go a long way toward building success.
A tip of the hat to Mark Tarzwell, COO of Mrs. T’s Pierogies (Ateeco) on his upcoming retirement. One of the best ambassadors in the grocery industry, Mark is hanging it up after 47 years in this great biz. He’s worked almost every aspect of the business – retail, wholesale, specialty distribution, manufacturing – and has never failed to leave a positive impression at every stop along the way. A big man, with a bigger heart, I wish you only the best in all future endeavors.
Utz Brands opened a new 650,000 square foot distribution center earlier this month near its corporate headquarters in Hanover, PA. The new depot, appropriately called the Rice Distribution Center, covers the equivalent of 11 football fields and will allow the publicly-traded snack food manufacturer to consolidate much of its diversified line under one roof. Especially rewarding was seeing Mike Rice (former CEO and chairman) and his wonderful wife Jane, at the dedication. You won’t find two nicer, more philanthropic people than the Rices, who have given so much back to the community over the past 50 years.
Some new and future store openings to report: Sprouts, which has been on a quite a growth spurt in the Mid-Atlantic over the past 18 months, cut the ribbon on its newest store in Middletown, DE on December 6, its second store in the First State. Whole Foods opened earlier this month in Stamford, CT (a 44,648 square foot supermarket in the former Lord & Taylor store), Lidl opened its Livingston, NJ discount unit on December 11 and a day later rival Aldi debuted its newest store in East Northport, NY (Suffolk County). Aldi also has new stores openings planned shortly in Springfield, NJ and Staten Island (New Dorp)
In an intra-family deal, DeCicco & Sons has acquired the site in Scarsdale, NY that until last month housed the DeCicco Family Markets in that tony berg. “We see this as an opportunity to not only expand our stores, but to keep our rich family history in the grocery industry well-rooted and alive, DeCicco & Sons is proud to take over legacy my brother has created in Scarsdale,” said John De Cicco Sr., founder of the DeCicco & Sons (in 2006). The store will remain closed for about a year while the location is transformed into what the company calls a “cutting-edge food and grocery destination.” DeCicco & Sons also has two other new stores under construction – in Sleepy Hollow, NY and Greenwich, CT.
The Whole Foods store in the Spring Garden area of Philadelphia might become the first unionized store in the company. Employees at the supermarket, owned by Amazon, have notified the National Labor Relations Board (NLRB) that they want to hold an election to become part of UFCW Local 1776, which is led by Wendell Young IV. The NLRB is currently reviewing the filing and will determine whether to schedule a vote. About 300 employees work at the Spring Garden location, one of two Center City stores that WFM operates. If an election is held and the associates vote to organize, expect Amazon to push back hard as witnessed by “Godzilla’s” actions at an Amazon fulfillment center in Staten Island whose associates voted to organize in April 2022, only to find that constant legal challenges by Amazon that have prevented that depot from currently operating as a union shop.
