Albertsons Sues Kroger And Calls Off Merger, After Double Court Denial

(Updated with a statement from Kroger responding to Albertsons’ allegations)

The Kroger-Albertsons deal is dead. And it looks like the two erstwhile partners have suddenly become enemies.

After two severe strikes against their proposed $25 billion merger, Albertsons has announced it has “exercised its right to terminate its merger agreement with Kroger” – and has now sued Kroger as well, saying it “refused to offer an adequate divesture package and repeatedly ignored regulators’ concerns, causing the merger with Albertsons to be blocked,” causing “billions of dollars in damages” to Albertsons’ business, employees, shareholders and consumers.

“Given the recent federal and state court decisions to block our proposed merger with Kroger, we have made the difficult decision to terminate the merger agreement,” CEO Vivek Sankaran said in a statement released this morning. “We are deeply disappointed in the courts’ decisions.”

A follow-up statement by Albertsons’ General Counsel and Chief Policy Officer Tom Moriarty, however, brought apparent behind-the-scenes tensions between the two retailers out into the open. “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,” Moriarty said. “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.”

In a statement responding to Albertsons’ lawsuit, Kroger called the claims “baseless and without merit,” and held Albertsons responsible for impeding the deal. “Kroger refutes these allegations in the strongest possible terms, especially in light of Albertsons’ repeated intentional material breaches and interference throughout the merger process, which we will prove in court,” Kroger’s statement read. It went on to call the lawsuit a clear “attempt to deflect responsibility,” denied that Albertsons is entitled to a breakup fee, and argued that Kroger “went to extraordinary lengths to uphold the merger agreement throughout the entirety of the regulatory process and the facts will make that abundantly clear.”

The one-two punch from Albertsons follows a federal judge in Oregon’s decision to temporarily block the deal pending a full decision on the merits yesterday, which was itself swiftly followed by a separate decision by a judge in Washington state, permanently blocking the deal in that state. A decision in a third court challenge in Colorado remained pending. Any one of those rulings against the defendants was largely seen as a death knell for the deal.

Initially, at least, the two retailers held out hope. “We are carefully reviewing the Court’s opinion and are evaluating our options in accordance with the merger agreement,” Albertsons said in its first statement reacting to the Oregon decision. “We believe we clearly outlined during the proceedings how the proposed merger would expand competition, lower prices, increase associate wages, protect union jobs, and enhance customers’ shopping experience.”

“Kroger is disappointed in the opinions issued by the U.S. District Court for the District of Oregon and the Washington State Court,” Kroger said in its own statement. The rulings, it said, “overlook the substantial evidence presented at trial showing that a merger between Kroger and Albertsons would advance the company’s decades-long commitment to lowering prices, respecting collective bargaining agreements, and is in the best interests of customers, associates, and the broader competitive environment in a rapidly evolving grocery landscape.”

Briefly, it looked as though the retailers’ Hail Mary hope could have rested on the incoming administration in Washington, and the man set to replace the federal government’s lead plaintiff in less than six weeks. Shortly after both rulings came down, President-elect Donald Trump announced Andrew Ferguson as his pick to lead the Federal Trade Commission. Outgoing chair Lina Khan filed suit in Oregon to block the Kroger-Albertsons deal. Ferguson previewed his tenure by pledging to “reverse Lina Khan’s anti-business agenda,” which includes stopping her “war on mergers.” “Most mergers benefit Americans and promote the movement of the capital that fuels innovation,” he said in a pitch for the job, as first reported by Punchbowl News. “Focus FTC resources on the mergers that harm competition and hinder innovation.”

It’s not known whether a newly-constituted FTC would have decided that a Kroger-Albertsons merger would “benefit Americans” or “harm competition.” If the former, Kroger and Albertsons could have chosen to ride it out, hope that the temporary injunction would be overturned by a favorable decision in the FTC’s case against the merger, or the FTC could have dropped its challenge altogether.

The situation was far more complicated in Washington state, though, and potentially in Colorado as well. The Washington ruling is not temporary, and not pending the outcome of a later case. Barring a successful appeal, it’s permanent – and blocks Kroger and Albertsons from combining in that state. That, to say the least, would severely complicate the retailers’ efforts to combine everywhere else.

The state judge in the Washington case used similar logic to the federal judge in the Oregon case, in rejecting the proposed merger: Their main competitors are other supermarkets – like each other – and not other retailers that happen to sell food. Their plan to preserve competition by divesting hundreds of stores is inadequate. And their promises to increase efficiencies and lower prices are dubious.

Kroger and Albertsons are “the number one and number two supermarket chains in Washington,” operating a total of 320 stores, the judge noted. They are “significant competitors,” they aim to match or beat each other’s promotions, and even watch what the other does when they attempt to raise prices – if the other follows suit, those higher prices stick. And with less competition, there’s less pressure to keep prices low. “In Washington, Kroger already charges higher prices for essential items where there is no nearby Albertsons store,” the judge pointed out.

Kroger and Albertsons contend that their primary competitors are not necessarily each other, but big national chains like Walmart. This is “not supported by the evidence,” the judge stated, noting that “Kroger’s aggressive promotional strategy is entirely directed at Safeway, given that Walmart does not engage in comparable promotions.”

As for the proposed plan to preserve competition by selling off hundreds of stores – including 124 in Washington state – “Kroger picked an inexperienced and ill-equipped divestiture buyer” in C&S Wholesale Grocers, and “kept the best performing assets for itself,” the judge noted in his decision. C&S currently operates just a couple of dozen of retail stores, which are “small and unsuccessful,” the judge went on, pointing out that “C&S has a lengthy history of buying retail stores to sell them to its wholesale customers” and “close unprofitable stores.”

C&S wasn’t even the most promising buyer. The judge noted that SpartanNash, another grocery wholesaler that currently operates nearly 200 grocery stores in ten states, submitted a bid for Kroger and Albertsons’ castoffs that was almost $200 million higher than C&S was offering.

In its initial statement reacting to the rulings, Kroger emphasized that it “would invest more than $1 billion in lower grocery prices, invest an additional $1 billion in higher grocery worker wages, and invest an additional $1.3 billion to improve Albertsons stores.” The Washington judge called these “unenforceable promises,” and that the merger’s “claimed efficiencies are speculative… There is not reliable evidence in the record that Kroger passed through efficiencies during prior mergers.”

While Kroger and Albertsons had argued they needed to merge to better compete in the marketplace, the bottom line according to the Washington judge is that both retailers are “in excellent financial condition now,” and “the merger is not necessary to enable Kroger and Albertsons to compete.”

The two well-reasoned rulings took Kroger and Albertsons’ arguments into account – and rejected them resoundingly. In the retailers’ vision for the future, a combined company would have provided shoppers with better promotions, lower prices and a healthy competitor run by C&S. In critics’ vision for the future, existing Kroger and Albertsons shoppers would have ended up with little choice about where to shop, C&S would fail, and the mega-grocer would be free to charge whatever it wants. A third vision for the future that is now coming into focus preserves the status quo – Kroger and Albertsons continue on as competitors, trying to match or beat each others’ prices, promotions and services, to the benefit of consumers.

All while battling each other in court. The unfavorable court decisions “could have been avoided but for Kroger’s breaching conduct,” Albertsons now argues. Albertsons says the scuttled deal now entitles it to “an immediate $600 million termination fee,” and its lawsuit against Kroger seeks additional billions in damages to account for the profits its shareholders would have made from the deal, and “the time, energy and resources” that Albertsons “invested in good faith to try to make the merger a success.”

Albertsons also notes that the end of the deal “removes contractual constraints on Albertsons’ ability to pursue other strategic opportunities” – suggesting it could now seek to combine with someone else.

So what would have been a blockbuster grocery deal is dead. But with both would-be partners now battling each other – it looks like the impact of this dead deal is far from over.

Image sources: Kroger/Albertsons