US grocer Kroger is carting away Albertsons for $25 billion but faces an antitrust test

Oct 14 (Reuters) – Kroger Co (KR.N) on Friday acquired Albertsons Cos Inc (ACI.N) in a $25 billion deal, creating a US grocery giant to do better with market leader Walmart Inc (WMT.N) to compete on price while preparing for potential antitrust roadblocks.

The mega-merger between the #1 and #2 independent grocers in the United States will bring nearly 5,000 stores under one roof, including banners like Albertsons’ Safeway and Kroger-owned Ralphs and Fred Meyer.

But the U.S. Federal Trade Commission (FTC) could challenge the deal between the two big grocers as antitrust scrutiny tightens under the Biden administration and decades of inflation weigh on budgets, three antitrust experts say.

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“There is a significant risk of a challenge,” said Andre Barlow of the law firm Doyle Barlow and Mazard PLLC. “This is the kind of deal the FTC wants to prevent.”

To address those concerns, the companies said they plan to divest some businesses and that Albertsons is poised to spin off a standalone entity to its shareholders immediately prior to closing of the transaction, which is expected in early 2024. The new public company is estimated to have had 375 blinds.

“We have a clear path to gain regulatory approval with divestitures,” company executives assured investors in a conference call on Friday, adding that it’s too early to narrow down which markets the restructuring would take place in.

Barlow said the US FTC still had questions about who would run the businesses and whether they would have enough assets and purchasing power to compete effectively.

Still, some analysts were optimistic that the plan to sell businesses would be enough.

Neil Saunders, Managing Director of GlobalData Retail, said: ‚ÄúThese (concerns) are mainly local issues, with a merger producing very high market share in certain areas. From a broader national perspective, a Kroger-Albertsons merger poses no major threat to the competitive dynamics of the market.”

“Scale is necessary to deliver the prices and investments that consumers demand.”

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FIGHT FOR THE LOWEST PRICES

With a customer base of 85 million homes and 66 distribution centers, Kroger and Albertsons together would have an advantage in negotiating product prices with suppliers, including consumer goods companies, at a time when the prices of groceries and essentials are skyrocketing in the country.

Kroger said it expects to reinvest about half a billion dollars in cost savings from deal synergies to lower prices for customers. In addition, $1.3 billion will be invested in Albertsons.

Market leader Walmart has doubled its own grocery store and traditionally uses its size to charge the lowest possible prices from food and beverage suppliers, putting competitors at a disadvantage when negotiating prices.

“The merger will strengthen our position as a more compelling alternative to larger, non-union competitors,” said Rodney McMullen, Kroger’s chief executive officer.

Kroger is paying $34.10 for each Albertsons share, a premium of about 33% to the stock’s closing price on Wednesday, a day before media reports of a deal between the two broke. Continue reading

Albertsons shares fell about 6% in morning trade after rising 11% on Thursday, while Kroger shares fell about 3%. Earlier in the day, shares of Ahold Delhaize (AD.AS) also rose on news of a potential deal, with analysts at JP Morgan saying a deal would bolster the Dutch supermarket major’s own M&A appeal.

Kroger CEO McMullen, who will serve as head of the combined company, said in an interview with Reuters that they approached Albertsons a few months ago after its smaller competitor began a strategic review process earlier this year.

“One of the things that’s going to be incredibly important to us is making sure that when we sell the (spun off) stores, they make it a viable, strong business from a competitive standpoint.”

Goldman Sachs and Credit Suisse were the Albertsons’ financial advisors, while Citigroup and Wells Fargo advised Kroger. Citi and Wells also jointly arranged $17.4 billion in debt financing to support the deal.

Kroger will have to pay Albertsons $600 million if the deal goes through.

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Reporting from Aishwarya Venugopal and Mehr Bedi in Bengaluru, Abigail Summerville in New York and Diane Bartz in Washington; Additional reporting from Deborah Sophia and Nivedita Balu in Bengaluru; Edited by Sriraj Kalluvila and Devika Syamnath

Our standards: The Thomson Reuters Trust Principles.

Diane Bartz

Thomson Reuters

Focused on US antitrust and corporate regulation and legislation, with experience covering the war in Bosnia, elections in Mexico and Nicaragua, and stories from Brazil, Chile, Cuba, El Salvador, Nigeria and Peru.

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