November 14, 2022
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1 big thing: Kroger prepared for litigation
The merger agreement between Kroger and Albertsons indicates the companies could divest up to 650 stores, but the total will likely veer closer to 375, the number of locations at which the Spinco is capped, sources familiar with the situation tell Richard.
Why it matters: The merging grocery store chains set the number of stores artificially high to avoid a breakup fee and to make it easier to argue in court, sources say.
Between the lines: Sources say the discrepancy between the cap on the Spinco, set at 375, and the total number of stores overall, set at 650, is a negotiating tactic with the Federal Trade Commission, the regulatory body reviewing the deal, sources say.
- The two parties did not want to chance blowing through a lower number and have the deal unravel.
- In fact, there is a likelihood that a deal with the FTC, which one source says is the real counterparty in this deal, will be difficult to reach and the merger will go before a judge.
- FTC declined to comment.
Be smart: The hope is that the Spinco speeds the overall merger review and process so that Kroger and Albertsons can close as quickly as possible, sources say.
- Aside from negotiating with the FTC, or even the specter of litigation, multiple divestitures take time, sources note.
Details: Not only was the Spinco created as a negotiating tool to get deal approval, but it was also formed to create a competing bidder to set a "marker" or a floor on how much Kroger and Albertsons would sell each store it is asked to divest, sources say.
- For example, Kroger is effectively buying each Albertsons location for a little more than four times four-wall EBITDA, sources say.
- The Spinco, however, will be offering about three times four-wall EBITDA per location, they say.
- It addresses the risk of having only one, or even no bidders, for a particular location and as a result, avoids a fire sale, sources say.
Yes, but: Kroger would prefer to absorb all the stores as a first option, obviously, but its best second option is to find a buyer for those it is asked to divest without even having to create the Spinco.
- Note that whatever stores are divested must be economically viable, as determined by the FTC, if spun off or sold, the sources say.
- And the Spinco itself must have a viable capital structure.
The bottom line: Both sides always expected a lengthy regulatory review process, with a 24-month drop dead date to get the deal done, though it is likely to close in early 2024.
- It's also important to separate the politics, which can blur perception, from how the FTC will actually end up ruling, sources caution.