AGs add another roadblock to Kroger-Albertsons deal

In an unprecedented move, attorneys general from Washington state, California, Illinois and the District of Columbia filed lawsuits last week to block Albertsons' $4 billion special dividend payment to shareholders.

• A Washington state court temporarily blocked the grocery chain from making the payment last Thursday.

Why it matters: Regardless of political affiliation, states' attorneys general have been more aggressive at experimenting with new ways to apply existing regulations or laws in recent years.

The big picture: Their opposition to Albertsons' dividend likely comes out of the growing disillusionment or antipathy toward private equity, says Andrew Lacy, co-head of law firm Goodwin Procter's antitrust practice. He played an advisory role in the attempt to merge Staples and Office Depot.

• Due to antitrust scrutiny, the Kroger-Albertsons deal provides states' AGs with a legal opening to address the dividend, he posits.
• In this case, the AGs are arguing that a major competitor will be weakened as a result of the dividend, even though the payout to shareholders is not tied to the deal, Lacy says, adding he is not aware of another lawsuit like this as having been filed before.

The intrigue: The underlying theory only makes sense in the context of a pending merger, Lacy says.

• The intent may be to make the deal review process as uncomfortable as possible to discourage future transactions, he adds.

Flashback: When Albertsons retained Credit Suisse as its financial adviser last fall, the intent was to return money to shareholders, and this was always one of the options, sources say.

• The special dividend would have proceeded whether or not the merger with Kroger was struck, sources say, and is in addition to that deal rather than predicated upon, they say.

By the numbers: The dividend is being financed with $2.5 billion in cash from the balance sheet and a $1.5 billion draw on the grocer's asset-based loan, which carries interest of LIBOR plus 125 basis points.

• Based on $3.4 billion in cash and cash equivalents and $7.1 billion in long-term debt and finance lease obligations, according to filings with the SEC, Albertsons has net debt of $3.7 billion, or 0.7x trailing 12-month EBITDA of about $5.23 billion, according to PitchBook.

• Net debt as a multiple of EBITDA grows to 1.47x post-dividend.
• Kroger and Walmart tend to carry net debt of about 1.5x to 1.6x EBITDA.
• Both public and private companies have a history of issuing debt to finance dividends to shareholders.

Be smart: Although it may be up for debate whether it's advisable, it's never been legally challenged in the name of preserving competition.

The bottom line: The complexity of the merger demonstrates that the two grocers' bankers and lawyers anticipated this deal was going to get a lot of scrutiny.

• But opposition to the special dividend, something that never has happened before, indicates this may be a tougher fight than expected.