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BFD Expert Voices - Retail Deals

BFD Expert Voices

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, Richard writes. 

 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.

1 big thing: Albertsons' dividend pause more than a bother

Illustration of a hurdle with a gavel as the hurdle board. 

John Foley began 2022 as co-founder and CEO of Peloton when its pandemic shine had begun to tarnish. He'll end the year as co-founder and CEO of an entirely different startup, a direct-to-consumer custom rug business called Ernesta, Axios Pro Rata's Dan Primack writes.

Why it's the BFD: Ernesta this morning announced $25 million in Series A funding. Addition led, and was joined by True Ventures.

Both VC firms have early ties to Peloton. Addition was founded by Lee Fixel, who backed Peloton's Series B round via Tiger Global, while True Ventures joined in Peloton's Series C and took a board seat.

Foley is being joined by fellow Peloton co-founders Hisao Kushi (chief legal officer) and Yony Feng (chief technology officer). Plus a slew of other former Peloton execs.

The big picture: Foley tells Dan that the pitch is to sell custom rugs at the same price as store-bought, precut rugs.

Ernesta buys rolls of carpet from the big manufacturers in Dalton, Ga., and then does the custom cutting and binding itself.

"You might buy your first rug from Home Depot or Walmart, and then maybe later you're able to afford something from a place like Pottery Barn," Foley explains. "And then, just a fairly small number of people get to work with designers to get something much bigger and more beautiful and better for sound and comfort — really elevating their space. We want to make that experience accessible for regular people."

Risk factors: Foley acknowledges that custom rugs might not be top-of-mind for many, given an increasingly fraught economy, although he insists that people still will seek to protect the hardwood floors of their most valuable asset.

Lessons learned: Foley says that a throughline between Peloton and Ernesta is an understanding that every customer touch point matters, including interacting with online communities that spring up around the product.

He also lamented "racing" to take Peloton public. "I'd like to be in control of our financial fate a bit better this time."

The bottom line: It's common for founders to have a second act after licking their wounds. This one is coming a bit sooner than expected. 

2. The BFD: Foley gets up off the carpet

Photo of John Foley on colored background

Photo illustration: Sarah Grillo/Axios. Photo: Michael Nagle/Bloomberg/Getty Images

Walgreens Boots Alliance is in talks to combine its primary care subsidiary Village Practice Management with CityMD parent Summit Health in a deal that could be valued at $9 billion, the Wall Street Journal reports.

Health insurer Cigna could also invest in the combination.

It's in line with the strategy the pharmacy giant's CEO Rosalind Brewer set out when she took on the role to delve deeper into services.

Lowe's, the home improvement retailer, has agreed to sell its Canadian retail business to PE firm Sycamore Partners for $400 million in cash and performance-based deferred consideration.

The unit, based in Boucherville, Quebec, includes about 450 corporate and independent affiliate dealer stores under the banners of Rona, Lowe's Canada, Réno-Dépôt and Dick's Lumber.

Made.com, the U.K.-based online furniture retailer that said last week it plans to file for insolvency, has two potential acquirers circling, The Sunday Times reports.

The bidders include Next, which plans to offer about $2 million for Made's website, brand, intellectual property and customer base, while Frasers Group also made an offer.

Carvana, the used auto marketplace, saw its shares decline another 15%, on top of the nearly 40% drop on Friday, after reporting results that it missed both top and bottom-line expectations. 

It has been on Fitch Ratings' watchlist for potential default.

3. Retail therapy

Illustration of a therapy couch with a pillow made of money.

• Smartex, a textile manufacturing tech startup, raised $24.7m. Lightspeed Venture Partners and Build Collective co-led, and were joined by H&M Group, DCVC, SOSV's HAX, Spider Capital, Momenta Ventures, Bombyx Capital Partners and Fashion for Good. https://axios.link/3FG0Mh3

• PhotoRoom, a French photo-editing app for e-commerce and small businesses, raised $19m in Series A funding led by Balderton Capital. https://axios.link/3E7LO2c

• Reliance Retail, a unit of India-based Reliance Industries, is in talks to buy a 49% stake in Naturals Salon & Spa, Reuters reports. https://axios.link/3UaahK0

• Elliott Investment Management, the largest shareholder in smokeless tobacco products maker Swedish Match (SWX: SWMA), will tender its shares to Philip Morris International’s (NYSE: PM) $16b takeover offer. https://axios.link/3t4yWDR

• Peace Out Skincare, an acne dot brand, garnered a $20m minority investment from 5th Century Partners. https://axios.link/3t8GhCa 

• Birchbox, the beauty subscription company, is weighing its strategic options, including Chapter 11 bankruptcy, per WWD. An Axios Pro investigation found that BirchBox parent FemTec Health faces potential financial troubles. https://axios.link/3DJPoyi 

4. Retail transactions

• Instacart’s vice president of ad sales, Ryan Mayward, has left the company to join Walmart, where he will be a senior vice president of sales at the big box retailer’s retail media platform Walmart Connect. https://axios.link/3WHKlaj 

• Puma has tapped chief commercial officer Arne Freundt as its new CEO, effective Jan. 1. This comes amid reports that Puma CEO Bjorn Gulden, whose contract expires at the end of the year, is interviewing for the top job at rival Adidas. https://axios.link/3GaFcSn 

• Rothy’s, the direct-to-consumer shoe brand, has named Jamie Gersch, who most recently served as Old Navy’s chief marketing officer, as its CMO, and Heather Archibald as its chief product and merchandising officer. CFO Dayna Quanbeck will also take on the COO role and Rothys’s vet Heather Howard will become the chief of supply chain. https://axios.link/3NG7aah 

• Homeland grocery stores parent HAC Inc named Walmart International’s David Criscione as its new president and CEO. https://axios.link/3TmVmLm 

5. It's Personnel

🧁 Situational awareness: Crumbs, the New York-based bakery chain, is bringing back its cupcakes nearly a decade after closing its brick-and-mortar stores, this time in the form of a digital bakery.

😈 What we're watching: Richard's been watching "The Bastard Son & The Devil Himself," a story about love, witches and battling clans that involves lots of blood and gore, now airing on Netflix. 

🙏 Thanks to newsletter editor George Moriarty and copy editor Mickey Meece for the edits.

November 07, 2022

1 big thing: Albertsons' dividend pause more than a bother