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Kroger CEO Rodney McMullen and Albertsons CEO Vivek Sankaran are scheduled to testify today about their proposed $20 billion merger before the US Senate's Subcommittee on Competition Policy, Antitrust and Consumer Rights.

Sen. Amy Klobuchar (D-Minnesota) and Sen. Mike Lee (R-Utah) lead the subcommittee;  both have questioned the impact the merger on competitive balance.

The Wall Street Journal writes that "Kroger and Albertsons have said the proposed merger would give them a more national reach with a bigger network of stores, distributors and suppliers. The companies have said they expect to invest $500 million in keeping prices low, along with spending $1 billion on wages and benefits and $1.3 billion on improving Albertsons stores.

"The chains have said they expect the regulatory review process to take as long as two years, with the deal closing in early 2024. They have submitted information on the proposed deal to the Federal Trade Commission for review and have said they expect to sell stores to secure approval. In grocery-sector deals, regulators typically have focused on examining market share and overlaps in specific geographic regions."

The Journal notes that "the proposed merger has drawn opposition from elected officials, independent retailers and some union groups over its potential impact on workers’ jobs, as well as on industry competition and food prices for consumers. Some lawmakers in Washington, including Ms. Klobuchar, and state-level officials have said they worry the merger could hinder competition."

The Journal reports that "also scheduled to testify are Michael Needler Jr., CEO of regional grocer Fresh Encounter Inc.; Sumit Sharma, senior researcher at Consumer Reports; and Andrew Sweeting, professor of economics at the University of Maryland."

The CEOs testify amid criticism of a planned $4 billion dividend that Albertsons wants to distribute to its shareholders, which has been delayed three times by a Washington State court.  Albertsons maintains that the dividend would have been distributed regardless of whether it had a deal with Kroger, and was part of an extended effort to increase shareholder value.  Washington Attorney General Bob Ferguson, along with a number of other attorneys general who filed separate suits in federal court, argues that paying out the dividend would hurt Albertsons' ability to compete in the event that the acquisition is not allowed to take place by the Federal Trade Commission (FTC).  But Albertsons has disputed that notion.

KC's View:

Expect that dividend to be a major subject of conversation today at the hearing, which I think should be interesting.

McMullen and Sankaran are going to have come in loaded for bear - there are considerable resources being put against the goal of stopping the merger.

Yesterday, I received an email making the opposition case from Carter Dougherty of Americans for Financial Reform (a coalition of several hundred labor and consumer groups), and Jonathan Williams of United Food and Commercial Workers Local 400, which said in part:

 "…the proposed merger has drawn intense opposition from a bipartisan group of elected officials, organized labor, consumer advocates, and antimonopoly groups. They have asked the Federal Trade Commission to reject the proposed combination. 

"These are the nation’s two largest standalone grocery chains. They overlap in many markets, including the Washington, D.C. area where Kroger’s Harris Teeter and Albertsons’ Safeway compete, and across large swaths of the West. (Albertson’s other brands, active around the country, include Vons, Jewel-Osco, Shaw’s, Acme, Tom Thumb, Randalls, United Supermarkets, Pavilions, Star Market, Haggen, Carrs, Kings Food Markets and Balducci’s.)

"The inevitable result of a monopolistic merger of this magnitude often results in store closures, laid-off workers, surging prices – which already rose at double-digital rates over the last year –, and proliferating food deserts in lower-income and rural areas.

"As part of the merger agreement, Albertsons is paying a special $4 billion dividend to its shareholders – 57 times the size of any previously paid dividend – before the sale to  Kroger. This payment has been engineered by Cerberus Capital Management, the private equity firm that heads a consortium of shareholders that controls Albertsons and has seats on its board. The company has already extracted $4 billion in dividends from Albertsons without the proposed payment.

"If this payment is made, it will wipe out virtually all of Albertsons’ liquid assets and force the company to borrow extra money. Afterward, the company will be left without cash on hand and saddled with a mountain of debt—$4.9 billion owed to worker pension funds and $7.5 billion to creditors."

Let's stipulate that McMullen and Sankaran will disagree with some of those numbers and conclusions.  But I think it is fair to suggest that they are going to have to be both aggressive and comprehensive in making their case.