Reuters reports that the Washington State Supreme Court extended a block on a $4 billion dividend payment by Albertsons to its shareholders that would precede the company's planned acquisition by Kroger.
The temporary injunction was imposed by a state court while the state's Attorney General appeals a previous decision to allow the dividend to be paid.
In a statement, Albertsons said that it has "filed a motion to expedite the Washington Supreme Court’s review."
And, the company said, it "continues to believe that the claim brought by the Attorney General of the State of Washington, and the similar lawsuit brought by the Attorneys General of California, Illinois, and the District of Columbia, are meritless and provide no legal basis for preventing the payment of a dividend that has been duly and unanimously approved by Albertsons Cos.’ fully informed Board of Directors."
Kroger, the country's second largest food retailer, said in October that it wanted to acquire fourth-ranked Albertsons for $24.6 billion, a move that would leave the newly combined company still at number two behind Walmart, but with some 5,000 stores around the US. The deal is subject to regulatory approval by the Federal Trade Commission (FTC), with the divestiture of a number of stores in select markets expected. However, the proposed deal has been roundly criticized by some lawmakers, labor groups and consumer advocates as being bad for competition and likely to result in higher prices for shoppers.
- KC's View:
While under any circumstances a merger of Kroger and Albertsons would have gotten both legislative and regulatory attention, the $4 billion dividend payment has heightened both the heat and light around the proposed deal. The dividend has been presented within the context of the merger agreement, though Albertsons has argued that it embarked on a return-value-to-shareholders strategy even before the merger was negotiated and actually has nothing to do with the deal. But the fact remains that it was announced at the same time as the merger, and so at the very least, the optics are bad.
I don't know a lot about the M&A business, and so I was interested to read a piece in the New York Times by Joe Nocera in which he looked at the proposed merger and dividend through the prism of how it rewards private equity.
You can read the entire piece here, but it essentially points out that "dividend recapitalizations — or dividend recaps, as they are called — have become a fairly common trick in the private equity playbook. Last year, according to a Bloomberg report, companies borrowed around $80 billion — a record — to pay out dividends to their private equity owners. Critics say that dividend recaps too often leave companies without enough capital to withstand a business downturn … Dividend recaps are usually under the radar, as private companies are not required to make the same level of financial disclosure as public companies. The Albertsons recap, however, was right there in the merger documents — and critics quickly pointed to it as a classic example of how private equity firms take care of themselves ahead of the companies they own."
The Albertsons dividend, Nocera writes in his Times piece, would happen despite the fact that "Albertsons did not have $4 billion in hand; it would have to borrow $1.5 billion, adding to its nearly $7.5 billion debt load."
Now, to be clear, Albertsons argues that even after the dividend is paid, it will still have $3 billion in liquidity and well-positioned to continue competing even if regulators decide not to allow the merger to take place.
Expect all of these numbers to be front and center as the FTC examines the rationale and likely impact of a Kroger-Albertsons merger. Nocera writes in the Times that "even if the higher court rules against Washington State, and the dividend is paid, the scrutiny it has received suggests that government officials are no longer willing to shrug their shoulders at the excesses of private equity. Almost everyone I spoke to about Albertsons’s dividend mentioned the Toys 'R' Us bankruptcy in 2017. The toy company’s debt rose to $5 billion from $100 million while under private equity ownership; in the end, that debt load sunk it."
I do think that there is one thing that the Kroger-Albertsons deal has lacked up to this point - a distinctive and credible voice that is able to put the facts in a context that creates a vision for how this deal, in the end, will be good for consumers, good for labor, good for suppliers, and not unfair to other retailers with a compelling competitive strategy. The Nocera piece in the Times only underlines the need for such a voice.