Kroger’s Pursuit of Albertsons Hinged on Regulatory Strategy

(Bloomberg) — When Albertsons Cos. all but announced it was for sale in February, rival grocer Kroger Co. got to work.

Most Read from Bloomberg

Kroger had eyed Albertsons for a while. So it quickly assembled a team of lawyers and analysts to answer a basic question: Would it even be able to buy the parent of Safeway, Vons and Albertsons supermarkets, given antitrust concerns around the two largest US grocery chains pairing up?

The group spent months evaluating where it might have to unload stores, according to people familiar with the plans, who asked to not be identified because the details aren’t public. It drew up maps to understand shopping behavior like who shops where and how far they drive for groceries.

Satisfied it could pull off a deal that would give it the heft to take on Walmart Inc., Kroger started working with Citigroup Inc. and Wells Fargo & Co. to figure out other details of the $24.6 billion deal announced Friday.

Albertsons had already been working with Goldman Sachs Group Inc. and Credit Suisse Group AG on its review. Major shareholder Cerberus Capital Management had been looking to cash out, following the grocer’s initial public offering in 2020.

Cerberus was heavily involved in the talks, the people said, which started over Zoom and involved late-nighters in recent weeks. They used code-names to keep the project quiet: Acorn for Albertsons and Kettle for Kroger. At one in-person meeting, advisers snacked on Kroger chips.

Scrutiny

The transaction, which will create a giant with more than 5,000 stores and 700,000 workers, comes as regulators scrutinize how large companies influence prices with inflation driving up the cost of food. The US Federal Trade Commission, the agency likely to review this deal, has also taken a more skeptical view of big mergers under President Joseph Biden.

Kroger is the No. 2 US grocer by market share, while Albertsons is No. 4., according to Numerator data.

To appease antitrust concerns, they will seek buyers for the hundreds of stores they might need to divest, with a focus on Southern California and parts of Texas, the people said.

Between 100 to 375 stores can also be spun off into a new public company that Albertsons shareholders will have a stake in. If that happens, the cash consideration will be reduced.

The structure protects Kroger should the leveraged finance market stay rocky, making it tough for private equity firms — the normal buyer of last resort — to step in. The company also pledged to lower prices, improve the shopping experience and raise wages.

After Bloomberg News broke news of the deal Thursday, Kroger started getting buyer interest in some stores, according to a person familiar with the matter.

The so-called SpinCo plan is the keystone to agreement. Its a compromise on sharing antitrust risk, emboldening Kroger to pay a slightly higher price because it knew it wouldn’t lose money on any divestitures, they added.

It also means they didn’t have to iron out agreements with buyers for stores before announcing. Albertsons executives remembered the 10 months it took to close the Safeway acquisition in 2015 and the lengthy store-divestiture process.

A representative for Kroger declined to comment on details about how the transaction came together. Representatives for Albertsons didn’t immediately respond to requests for comment.

FTC Review

Mike Lee, a Republican on the US Senate Judiciary Committee, said in a statement Friday that he would do everything in his power to ensure “antitrust laws are robustly enforced to protect consumers from anticompetitive mergers that could further exacerbate the financial strain we already feel in the grocery store checkout aisle.”

FTC Chair Lina Khan hasn’t commented yet on the combination.

Her earlier criticism of Albertsons’ acquisition of Safeway could be salient. In a 2017 Harvard law review article, Khan concluded that FTC remedies, including selling stores in shared markets, failed to protect consumers.

Albertsons bought back 33 of 168 stores it sold less than a year after the deal closed when the company that had bought most of them filed for bankruptcy. Khan and her co-author called it a “spectacular” failure that a casual observer could have anticipated.

Still, Kroger says it’s confident it will win FTC approval.