Kroger-Albertsons divestiture team tackles regulatory challenge
Kroger-Albertsons’ voluntary proposal to sell off up to 375 stores before even sitting down with regulators could be indicative of an approach more mega-merger companies will emulate — get ahead of a very active Federal Trade Commission before more questions roll in.
Why it matters: The U.S. regulator which oversees antitrust issues has become more interested and active in mergers under chair Lina Khan.
State of play: Proposals are being floated both on the federal and state side to change up the threshold for merger approval, but also on the data gathering around mergers, says Christine Bartholomew, a professor of law at the University of Buffalo who focuses on antitrust law and consumer protection.
Between the lines: “If you've got a company that says: ‘Look, we're aware that there are some consequences. We thought about it ahead of time and already have a plan that puts us strategically in a negotiation posture against a regulator’ is a much better posture than saying, ‘we promised there's no problem,’” Bartholomew says.
Context: To appease regulators, Kroger said it intends to spin off a standalone unit to Albertsons’ shareholders ahead of the deal’s close. The spinoff would house between 100 and 375 divested stores, in the hopes that packaging the assets will make it more appetizing to buyers.
- “We believe we have a clear path to achieve regulatory approval with divestitures,” Kroger CFO Gary Millerchip told investors on a call Friday.
To be sure: Regulators are likely concerned it could price out smaller competitors, as well as the consumers themselves, because it may leave them with fewer grocery alternatives to go to.
- “If you're closing stores, what does that mean for consumers in terms of price choice between competitors?” Bartholomew asks.
- She says that there are certain towns that may have two groceries under both Kroger and Albertsons banners and if there isn’t anywhere else to go, the impact of a merger will be felt much greater than in a neighborhood where there are many stores with many different competitors.
- “They're starting with the recognition that there could be divisive issues suggests to me that they are aware that in certain markets, there's going to be some questions about the impact to consumers from this merger,” Bartholomew says.
What they’re saying: Mike Lee, the top Republican on the U.S. Senate antitrust panel, promised Friday there would be a significant oversight.
Meanwhile, the proposed merger comes at a time when the grocery industry, already known for thin margins, is facing increasing costs and budget-conscious consumers.
- The company has pledged to reduce prices for shoppers and claims that they will reap more benefits with the combined company such as fresher produce and more personalized coupons.
- Kroger said it will set aside around half a billion dollars to bring down prices for consumers.
- The deal would also lower manufacturing and distribution costs, and give it better bargaining power among suppliers, it said.
Yes, but: “When you have high inflation and high-profit margins, it becomes a lot more complicated,” Bartholomew says.
- With inflation pressuring businesses, the product seller will continue to call for higher profits, too.
- “There's really only so much control the grocery stores would have on their downstream pricing to the consumers," Bartholomew says. "They're going to be squeezed by other market forces as well.”
The bottom line: Wall Street has high hopes. Oppenheimer analysts say, “the earnings/cash flow accretion could be quite compelling down the road assuming minimal divestitures.”