$25B Kroger, Albertsons Merger Crumbles With Multibillion-Dollar Suit

A lawsuit filed Wednesday morning by Albertsons put the final nail in the coffin for the grocer's pending $25B merger with Kroger. The merger's failure means the expected sale of 579 grocery store locations to a third party is also off the table.

Boise, Idaho-based Albertsons announced Wednesday that it was not only terminating its merger agreement with Kroger but also suing its spurned partner for breach of contract. 

Albertsons' lawsuit seeks billions of dollars in damages from Kroger to recover what Albertsons alleges was its competitor’s unwillingness to make enough concessions to regulators to close the deal. The suit also seeks a $600M termination fee Albertsons says was part of the merger negotiations.

“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,” Albertsons’ General Counsel Tom Moriarty said in a statement. “Kroger’s self-serving conduct, taken at the expense of Albertsons and the agreed transaction, has harmed Albertsons’ shareholders, associates and consumers.” 

Cincinnati-based Kroger called the claims baseless and without merit in a statement Wednesday and said Albertsons had made "repeated intentional material breaches" throughout merger negotiations. 

"This is clearly an attempt to deflect responsibility following Kroger's written notification of Albertsons' multiple breaches of the agreement, and to seek payment of the merger's break fee, to which they are not entitled," the company said.

The collapse of the deal follows more than two years of efforts to structure a merger that could get past federal regulators' antitrust concerns, and it comes a day after the plan was dealt a major court loss. 

Judge Adrienne Nelson of the U.S. District Court in Oregon ruled in favor of the Federal Trade Commission Tuesday, granting a temporary injunction against the merger, saying that its result would be to lessen competition and thus the deal was “presumptively unlawful,” The New York Times reported.  

The FTC, along with attorneys general from eight states and Washington, D.C., sued to block the merger in February over antitrust concerns. 

Kroger and Albertsons, the country’s second and third-largest grocers behind Walmart, had argued in court that the merger was necessary for the companies to compete with the world’s largest retailer. The merger would have created a grocery giant with 5,000 stores.

Kroger, which has more than 2,700 stores across multiple brands, and Albertsons, with more than 2,200 stores across its brands, had been negotiating with regulators at the federal and state level to try to push the deal through.

Among the concessions the pair made was the agreement to sell 579 locations to C&S Wholesale Grocers for $2.9B in cash. The sale was meant to help ease concerns that the merger would be anticompetitive, given that the two chains frequently anchor competing shopping centers close to each other. 

C&S Wholesale Grocers, which operates chains like Piggly Wiggly and Grand Union, partnered with SoftBank to commit to the acquisitions. The chain said in a statement to Bisnow Tuesday that the merger’s collapse had no impact on the company’s long-term growth priorities. 

“C&S remains committed to our transformation strategy, which includes being an industry-leading grocery wholesaler and retailer,” the statement said. 

While the merger's termination means an expected shift for the chains and their real estate will not come to fruition, it does have implications for antitrust law in an era of increased mergers and acquisitions among consumer-facing brands.

Christine Bartholomew, a law professor with antitrust experience at the University of Buffalo, told Bisnow Wednesday morning that if the court had accepted the grocers’ argument, the decision would have cleared the way for further consolidation of corporate ownership. 

“The main argument was that they needed the mergers to survive Walmart, Amazon and whatever else. If it succeeded, it would have meant the vast majority of mergers would have been going through,” she said. “It would have been a radical shift in our antitrust enforcement policy.”

Kroger said the merger would have led the grocer to invest $1B in lowering prices, $1B in paying higher wages and an additional $1.3B on store upgrades. In light of the ruling, “the Company is currently reviewing its options,” the spokesperson said Monday night. 

Albertsons said it would accelerate value-creating initiatives and increase its quarterly dividend by 25% in light of the deal’s failure. The grocer provided a statement from its largest shareholder, Cerberus Capital Management, where the investment firm committed to maintaining its position in the company.

“We believe that [the stock] is significantly undervalued in its current trading range,” the statement said. 

Bartholomew was surprised by Albertsons’ suit. There was nothing unusual in how Kroger handled the negotiations, both grocers knew the deal would face legal challenges and there were several roadblocks that put the merger on shaky ground before the preliminary injunction, she said. 

“This was a good day for competition,” Bartholomew said. “People wanted to treat this merger as somehow weird and new and whatever else when, quite frankly, it was straight-up traditional antitrust.”