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:
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.