Kroger-Albertsons Mega-Merger: Will the Biden Administration Allow It?

Kroger’s strategic acquisition of long-time rival, Albertsons, would allow two of the largest grocers in the US to merge and position them to compete more aggressively with Walmart in what would be one of the largest deals in American retail history. With a $24.6 billion valuation, due to the size of both companies, and the market in which they operate, such a deal is unprecedented for the industry.

Before Walmart established its dominant presence, the playing field in American grocery retail was concentrated, consisting of three major national grocers: Kroger, Albertsons, and Safeway. The game changed when Walmart entered the market in 1962, followed by Costco in 1976, and Amazon in 1994, amplifying the already aggressive competitiveness of the industry. In 2015, the merger of Albertsons and Safeway made Albertsons the fourth largest grocer in the United States. Today, Walmart is the leading American grocer, with an average market share of 19.9%. Kroger retains second place with an average market share of 9.5%, followed by Costco with roughly 7% of the market. Albertsons captures an average of 4.9% of the US grocery market. Private regional and local supermarkets, such as Publix, Aldi, and Whole Foods, capture the remainder of the market. Evidently, the grocery industry is now rather fragmented.

The Kroger-Albertsons merger would create one of the largest American grocers, concentrating the market once again. The deal has not gone through yet and is currently pending regulatory approval by the Federal Trade Commission (FTC) under the Hart-Scott-Rodino Anti-Trust Improvements Act of 1976. This act requires the FTC and the Department of Justice (DOJ)’s evaluation of the acquisition’s competitive impact, the determination of whether the transaction would result favourably for consumers, and the evaluation of the viability of Kroger’s proposed efficiencies. The FTC will seek to verify the transaction’s potential synergies. At the moment, investors are concerned with the industry monopolization that may result from this merger. In turn, decreased competition from this deal would increase food prices, decrease jobs, and pose a threat to small businesses, all during an inflationary period. The FTC, on the other hand, is additionally concerned with the pricing power that Kroger would be able to capture post-merger. At a time with soaring prices, high-interest rates, and reduced spending, the merger may raise grocery prices for already cost-conscious consumers. Last month, the Consumer Price Index (CPI) 12-month percentage showed that prices had jumped 8.2%. The food at home index, a proxy for grocery prices, shot up even further by 13%. Consumers cannot afford these price increases. The merger would allow Kroger to capture sufficient market share to reach and determine pricing for two in every three shoppers.

Kroger has agreed to acquire both the outstanding common stock and preferred stock of Albertsons for $34.10 per share, a 32.8% premium to its October 12th common stock closing price. Kroger expects to fund the deal using cash and capital raised through debt financing; Albertsons’ enterprise value is approximately $24.6 billion, assuming $4.7 billion worth of debt. To appeal to regulators, Albertsons will establish a subsidiary, SpinCo, in a spin-off; SpinCo will operate independently from Kroger and between 100 and 375 divested stores will comprise the spun-off company, for which existing Albertsons shareholders will receive shares on a pro-rata basis. This strategy aims to reduce Kroger’s market concentration – a major concern for the FTC. Further, Albertsons had announced that they would pay out roughly $4 billion to shareholders as a cash dividend, with each share receiving approximately $6.85. This payout has since been blocked by a court in Washington, following several motions previously filed to delay the merger. The cash portion of the deal’s per share purchase price will be reduced to account for the divestitures associated with the spin-off and by the amount of the cash dividend payout, should Albertsons be allowed to move forward.

Combined, Kroger and Albertsons employ over 710,000 employees. Since 2018, Kroger has incrementally invested $1.2 billion in employee wages and benefits; as a part of the transaction, Kroger expects to invest $1 billion to fund raises in employee wages and increased benefits. This initiative aims to further Kroger’s position as an alternative to non-unionized retail grocers since Kroger commits to securing non-union jobs. Further, Kroger expects post-divestitures synergies to amount to $1 billion within four years, with $500 million of this sum realized within the first two years post-merger. Consistent with their proven track record of lowering prices, Kroger has additionally committed to reinvesting $500 million from synergy-related savings to reduce prices for shoppers. Post-merger, the combined company aims to create a seamless ecosystem across physical stores and their digital presence while expanding to reach more of the United States. Albertsons is an ideal partner for the accomplishment of this objective, as its presence is especially heavy in the West of the US, the Mountain region, and New England. Complementarily, Kroger is concentrated in Eastern America. The combined company will operate roughly 5,000 stores. It would be able to capture an average of 13.4% of the market, making Kroger the only company capable of competing with Walmart in the double digits of market share. Kroger will reach roughly 85 million households across the US.

The combined company seeks to offer an omnichannel experience, in addition to its physical stores, with increased pickup capabilities and faster delivery times. With an extensive combined portfolio of brands and products, Kroger expects to equip itself with the means to offer lower-priced products to customers. Further, in merging customer bases, the combined company is expected to have one of the most comprehensive data repositories in its industry. This asset would give them a competitive advantage in terms of the personalization of customer experiences and implementation of loyalty programs. By expanding their network and supplier base, Kroger will drive heightened customer traffic, which, in turn, will drive higher profit. Should the transaction go through, the combined company will pilot not only a stronger business model and stronger cash flows, but also an enhanced customer base. Shareholders will  benefit as the transaction should be accretive to earnings within the first year and become double-digit accretive within four years post-merger. Further, Kroger intends to continue to pay out a quarterly dividend and increase these payments over time. Nonetheless, the fate of the merger rests in the hands of the FTC and the DOJ. At the moment, the question is whether Biden’s administration will block the Kroger-Albertsons merger or let two of the largest American grocers become one.