NPI's Cascadia Advocate

Offering commentary and analysis from Washington, Oregon, and Idaho, The Cascadia Advocate provides the Northwest Progressive Institute's uplifting perspective on world, national, and local politics.

Friday, October 14th, 2022

Federal government should move swiftly to thwart Kroger/Albertsons merger

Once upon a time, the gro­cers Fred Mey­er, Qual­i­ty Food Cen­ters, Kroger, Albert­son’s, and Safe­way — which col­lec­tive­ly have a pret­ty dom­i­nant pres­ence in the Pacif­ic North­west — were dif­fer­ent com­pa­nies with dif­fer­ent ownership.

Start­ing in the 1990s, that began to change. Fred Mey­er bought QFC and was then itself bought by Kroger. Albert­sons, mean­while, went through a num­ber of trans­for­ma­tions before it com­bined with Safe­way in the mid-2010s.

Today, Kroger and Albert­sons are giants. But their exec­u­tives aren’t con­tent. They want to build an even big­ger gro­cery empire. Accord­ing­ly, they have struck a deal for Kroger to buy Albert­sons and form a food retail­ing mon­stros­i­ty:

Kroger (NYSE: KR) and Albert­sons Com­pa­nies, Inc. (NYSE: ACI) today announced that they have entered into a defin­i­tive agree­ment under which the com­pa­nies will merge two com­ple­men­tary orga­ni­za­tions with icon­ic brands and deep roots in their local com­mu­ni­ties to estab­lish a nation­al foot­print and unite around Kroger’s Pur­pose to Feed the Human Spir­it. Through a fam­i­ly of well-known and trust­ed super­mar­ket ban­ners, this com­bi­na­tion will expand cus­tomer reach and improve prox­im­i­ty to deliv­er fresh and afford­able food to approx­i­mate­ly 85 mil­lion house­holds with a pre­mier omnichan­nel experience.

A pre­mier omnichan­nel expe­ri­ence… now there’s some cor­po­rate mumbo-jumbo!

Lat­er on, the press release says:

Togeth­er, Albert­sons Cos. and Kroger cur­rent­ly employ more than 710,000 asso­ciates and oper­ate a total of 4,996 stores, 66 dis­tri­b­u­tion cen­ters, 52 man­u­fac­tur­ing plants, 3,972 phar­ma­cies and 2,015 fuel cen­ters. The com­bi­na­tion cre­ates a pre­mier seam­less ecosys­tem across 48 states and the Dis­trict of Colum­bia, pro­vid­ing cus­tomers with a best-in-class shop­ping expe­ri­ence across both stores and dig­i­tal chan­nels. Both Kroger and Albert­sons Cos. are anchored by shared val­ues focused on ensur­ing asso­ciates, cus­tomers and com­mu­ni­ties thrive. The com­bined com­pa­ny will dri­ve prof­itable growth and sus­tain­able val­ue for all stakeholders.

Notice the use of the word “stake­hold­ers” here instead of “stock­hold­ers.” Kroger and Albert­sons are try­ing to claim that their merg­er is in the pub­lic interest.

But it’s not.

This pro­posed tie-up isn’t going to make any Amer­i­can fam­i­ly’s life bet­ter. There will cer­tain­ly not be any ben­e­fits from econ­o­my of scale. These two gro­cery com­pa­nies are already huge, as they them­selves admit.

In truth, if this merg­er goes through, the gro­cery sec­tor will have more con­cen­trat­ed own­er­ship and less competition.

Con­sid­er these snip­pets from the Wikipedia entries for these companies:

Kroger: The Kroger Com­pa­ny is the Unit­ed States’ largest super­mar­ket oper­a­tor by rev­enue and fifth-largest gen­er­al retail­er. The com­pa­ny is one of the largest Amer­i­can-owned pri­vate employ­ers in the Unit­ed States. Kroger is ranked #17 on the For­tune 500 rank­ings of the largest Unit­ed States cor­po­ra­tions by total revenue.

Albert­sons: With 2,253 stores as of the third quar­ter of fis­cal year 2020 and 270,000 employ­ees as of fis­cal year 2019, the com­pa­ny is the sec­ond-largest super­mar­ket chain in North Amer­i­ca after Kroger. Albert­sons ranked 53rd in the 2018 For­tune 500 list of the largest Unit­ed States cor­po­ra­tions by total revenue.

So, if you’re keep­ing score, the largest gro­cer by rev­enue in the Unit­ed States of Amer­i­ca wants to buy the sec­ond largest and cre­ate a retail colossus.

On that basis alone, the deal should be scuttled.

The Depart­ment of Jus­tice should fight this merg­er — includ­ing in court if nec­es­sary — to uphold our antitrust laws, defend U.S. house­holds from anti­com­pet­i­tive busi­ness prac­tices, and pro­tect the share­hold­ers of these com­pa­nies from exec­u­tives’ coun­ter­pro­duc­tive empire-build­ing ambitions.

We can say from a share­hold­er point of view that this merg­er isn’t a great idea because past research has shown that the vast major­i­ty of merg­ers — yes, the vast major­i­ty — either don’t cre­ate val­ue for share­hold­ers or worse, destroy value.

As I men­tioned before here on the Cas­ca­dia Advo­cate, a 1999 study by account­ing giant KPMG (PDF) found that eighty-per­cent of merg­ers “failed to unlock val­ue”. What’s more, half of the merg­ers exam­ined destroyed val­ue.

Merg­ers also com­mon­ly involve over­pay­ment, a Wall Street-dri­ven ten­den­cy can­did­ly dis­cussed by authors Dan and Chip Heath in their book Deci­sive.

“It is an unwrit­ten law of the stock mar­ket that cor­po­ra­tions must keep grow­ing, year after year, and for the exec­u­tives of a com­pa­ny strain­ing to meet these growth expec­ta­tions, buy­ing anoth­er com­pa­ny can look like an awful­ly attrac­tive short­cut,” they observe in the open­ing pas­sage of Chap­ter 5.

“But it’s an expen­sive short­cut. For pub­lic com­pa­nies, the aver­age pre­mi­um paid in an acqui­si­tion is 41%, which means that if the tar­get com­pa­ny is val­ued by the stock mar­ket at $100 mil­lion, the acquir­er will bid $141 mil­lion for it. Or, to trans­late that into human terms, the acquir­ing CEO is basi­cal­ly say­ing to the tar­get CEO, ‘I can run your com­pa­ny at least 41% bet­ter than you can.’ ”

Giv­en that merg­ers and acqui­si­tions rarely live up to the grand promis­es that exec­u­tives and the P.R. flacks work­ing for them make in cor­po­rate press releas­es, you might won­der why merg­ers and acqui­si­tions con­tin­ue to be so common.

The answer is twofold: The busi­ness world is full of exec­u­tives who are deeply enam­ored with deal­mak­ing and there is mon­ey to be made “advis­ing” them.

M&A “advi­sors” are most com­mon­ly invest­ment banks and law firms, but they can also include con­sult­ing shops and busi­ness coach­es. The Kroger/Albertsons has a dis­clo­sure of the Wall Street play­ers in this par­tic­u­lar deal:

Advi­sors

Citi and Wells Far­go Secu­ri­ties, LLC are serv­ing as finan­cial advi­sors and Weil, Got­shal & Manges LLP and Arnold & Porter Kaye Scholer LLP are serv­ing as legal coun­sel to Kroger.

Gold­man Sachs & Co. LLC and Cred­it Suisse are serv­ing as finan­cial advi­sors and Jen­ner & Block LLP is serv­ing as cor­po­rate legal coun­sel and White & Case LLP and Debevoise & Plimp­ton LLP are serv­ing as antitrust legal coun­sel to Albert­sons Cos.

So, if you’re keep­ing score, two banks and two law firms are mak­ing mon­ey on this deal on the Kroger side, while two more banks and three more law firms are mak­ing mon­ey from it on the Albert­sons side. And again, those are just the banks and law firms… there could be con­sul­tants involved too.

Kroger and Albert­sons exec­u­tives know their pro­posed merg­er is unlike­ly to sur­vive reg­u­la­to­ry scruti­ny with­out divesti­tures, so they have cooked up a plan at the out­set to deflect crit­i­cism and objec­tions to their deal. This plan involves — and no, I’m not kid­ding — cre­at­ing a new com­pa­ny called “Spin­Co”:

In con­nec­tion with obtain­ing the req­ui­site reg­u­la­to­ry clear­ance nec­es­sary to con­sum­mate the trans­ac­tion, Kroger and Albert­sons Cos. expect to make store divestitures.

As described in the merg­er agree­ment and sub­ject to the out­come of the divesti­ture process, Albert­sons Cos. is pre­pared to estab­lish an Albert­sons Cos. sub­sidiary (Spin­Co). Spin­Co would be spun-off to Albert­sons Cos. share­hold­ers imme­di­ate­ly pri­or to merg­er clos­ing and oper­ate as a stand­alone pub­lic com­pa­ny. Kroger and Albert­sons Cos. have agreed to work togeth­er to deter­mine which stores would com­prise Spin­Co, as well as the pro for­ma cap­i­tal­iza­tion of SpinCo.

The estab­lish­ment of Spin­Co, which is esti­mat­ed to com­prise between 100 and 375 stores, would cre­ate a new, agile com­peti­tor with qual­i­ty stores, expe­ri­enced man­age­ment, oper­a­tional flex­i­bil­i­ty, a strong bal­ance sheet, and focused allo­ca­tion of cap­i­tal and resources to pro­vide cus­tomers with con­tin­ued val­ue and qual­i­ty ser­vice and asso­ciates with ongo­ing com­pelling career opportunities.

That last para­graph in par­tic­u­lar has a truck­load of cor­po­rate mum­bo jum­bo, like the phrase new, agile com­peti­tor with qual­i­ty stores.

A bet­ter idea would be for the fed­er­al gov­ern­ment to say “no” to this plan. Past gro­cery chain merg­ers have been allowed, but as we have seen, exec­u­tives are nev­er sat­is­fied. Enough is seem­ing­ly nev­er enough. This is one of those times where it’s very impor­tant for the Depart­ment of Jus­tice to say no.

Kroger and Albert­sons should focus them­selves on being “agile” com­peti­tors with “qual­i­ty stores” and “to pro­vide cus­tomers with con­tin­ued val­ue” rather than try­ing to get a merg­er past the feds with the divesti­ture of a few hun­dred stores as a peace offer­ing. The response needs to be a firm and emphat­ic fuhgetaboutit.

POSTSCRIPT: Paul Roberts has a good arti­cle in The Seat­tle Times look­ing at the poten­tial impact of the merg­er on the gro­cery mar­ket in the Pacif­ic North­west.

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  1. […] Coun­ty, home to the City of Seat­tle and most of its imme­di­ate sub­urbs, are opposed to Kroger’s pur­chase of fel­low gro­cer Albert­sons, a poll con­duct­ed last week for NPI […]

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