Albertsons’ special dividend leads to controversy

Boise-based Albertson’s is now facing legal action in both Washington state and in U.S. District Court. The controversy is over a special dividend originally scheduled for Monday, Nov. 7. When Albertsons and Kroger announced their intent to merge on Oct. 14, the terms of the deal outlined this special dividend that Albertsons would issue to its stockholders.

Paying $4 billion for the Nov. 7 special dividend would use $2.5 billion of Albertsons’ cash on hand with the remainder coming from a revolving line of credit belonging to the grocery retailer.

The Albertsons special dividend story is a quickly evolving news event with a complex background. This Idaho Business Review deeper-dive coverage outlines the legal and financial events leading to the current court actions currently pending in both state and federal courts.

The merger backstory

On Oct. 14, the nation’s largest grocery-store chain, Kroger, and the second-largest, Albertsons, announced their intent to merge. In reality, Kroger offered to buy out all Albertsons’ shares at $34.10, minus adjustments. One of those adjustments would be a reduction by the per share amount of the Nov. 7 special cash dividend. According to the merger statement, the special dividend was projected as $6.85 per share. It would be paid to all shareholders of record at the close of business on Oct. 24.

The language surrounding the special dividend has become part of the controversy, so we will quote the merger statement issued by the two grocers here. The statement has been edited to reflect just the effect that the special dividend would have on the final purchase of Albertsons: “The per share cash purchase price payable to Albertsons Cos. shareholders in the merger would be reduced by an amount equal to…the per share amount of a special pre-closing cash dividend of up to $4 billion payable to Albertsons Cos. shareholders, which is expected to be approximately $6.85 per share. This cash dividend is expected to be payable on November 7, 2022, to shareholders of record as of the close of business on October 24, 2022.”

The financial backlash

Reaction to merger of the two largest grocers was immediate and negative, right down to the stock market flinch. Kroger stock (NYSE: KR) closed on Oct. 14 nearly 1% down from the previous day and Albertsons (NYSE: ACI) closed down 8.4%. Overall, since then, Albertsons stock has fallen a further 20%.

Credit markets also did not respond favorably to the merger news. Giant market analyst firm Morningstar opined on Oct. 18 that: “The Kroger Co.’s acquisition of Albertsons Companies Inc. for $24.6 billion will have a net negative effect on Kroger’s overall credit risk profile, at least over the near-to-medium term following the close of the acquisition. This is based on our view that the initial strain the acquisition places on Kroger’s financial risk profile, combined with integration and execution risks including uncertainties around the ability to achieve growth, synergy and deleveraging targets, especially against the backdrop of a weakening macroeconomic environment, outweighs the benefits associated with the acquisition.”

Big-three corporate credit rating service Moody’s downgraded Kroger’s credit immediately after the news of the merger on Oct. 14: “Moody’s Investors Service today changed The Kroger Co.’s outlook to negative from stable. At the same time, Moody’s affirmed Kroger’s senior unsecured rating at Baa1 and its commercial paper rating at Prime-2.” A Baa1 rating from Moody’s means Kroger’s credit is: “Subject to moderate credit risk…Considered medium-grade and as such may possess speculative characteristics.”

Moody’s moved Albertsons’ credit rating from “stable” status to “on review” and downgraded its speculative grade liquidity rating from SGL-1 to SGL-2. Moody’s stated: “The review for upgrade reflects the pending acquisition by Kroger and that the remaining Albertsons’ debt and heritage Safeway debt will be pari-passu (Latin: ‘on equal footing’) with Kroger’s debt.”

Moody’s also noted the liquidity downgrade was due specifically to the special dividend: “Prior to close of the transaction Albertsons will issue a special $4 billion dividend to its shareholders. The dividend will be financed with approximately $2.5 billion of Albertsons’ balance sheet cash and the balance from a revolver draw from Albertsons fully available $4 billion asset based revolving credit facility. The downgrade to SGL-2 reflects Albertsons lower cash balances and reduced revolver availability following the payment of the dividend.”

Congressional and union backlash

The merger announcement from Kroger and Albertsons made a case that the combined companies would be able to reduce prices for grocery buyers. The argument is interesting in the face of well-cited economic studies like the 2010 paper by Ashenfelter and Hosken, which showed for four of the five large mergers they studied, that: “Prices appeared to increase a small but significant amount, typically between 3% and 7%.”

Given the trends from antitrust research, a common assumption is that prices will rise in the wake of a merger of the two largest grocers, regardless of other studies that might make an opposing case. This common assumption was in play immediately after the merger announcement when former Harvard professor and current U.S. Sen. Elizabeth Warren tweeted: “I’m calling on the FTC to block this deal. Big grocery chains like Kroger and Albertsons are already gouging families with inflated prices. More mergers and less competition would mean even higher prices — and layoffs for employees.”

Several other Congress members shared the same band wagon, including Sens. Amy Klobuchar of Minnesota, Mike Lee of Utah and Bernie Sanders of Vermont.

As the chair of the Senate Judiciary Subcommittee on Competition Policy, Antitrust, and Consumer Rights, Klobuchar announced on Oct. 18 that the subcommittee will hold a hearing sometime in November on the merger: “…We have serious concerns about the proposed transaction between Kroger and Albertsons. The grocery industry is essential, and we must ensure that it remains competitive so that American families can afford to put food on the table. We will hold a hearing focused on this proposed merger and the consequences consumers may face if this deal moves forward.”

The United Food and Commercial Workers International Union (UFCW) weighed in, opposing the merger, though UFCW local 324 (Los Angeles and Orange counties, California) released the most succinct of all the union statements: “We want to make it clear to our hard-working members that UFCW strongly opposes this dividend payout. Taking billions in assets out of a company that is running well, employs hundreds of thousands of essential workers and provides daily necessities for millions of customers is a bad idea for the workers as well as customers. That $4 billion could be spent to lower prices of food for consumers facing unprecedented levels of inflation, pay workers more or invest in safer stores for workers and customers.”

Legal backlash

On Oct. 26, six Attorneys General (AG) of the District of Columbia (DC), Arizona, California, Idaho, Illinois and Washington state wrote to request that Albertsons and Kroger delay the special dividend until after “the undersigned States have completed their review of Albertsons’ proposed merger…and the merger has closed.” The AGs cited concerns over price increases, assuming that a merger this large would create anticompetitive conditions. They also argued that the special dividend shouldn’t be paid so far in advance of the merger, projected to be complete in 2024, because it might falter on antitrust grounds.

In a letter dated Oct. 28, attorney Ted Hassi of the DC law firm Debevoise & Plimpton LLP, representing Albertsons, wrote: “To be clear, the special dividend that is the subject of your letter is independent of the proposed merger itself. Rather, it is part of Albertsons’ long-term strategy for growth, which includes plans to return capital to shareholders — a strategy that was determined well before Albertsons’ discussions with Kroger began. The special dividend is not Kroger paying  Albertsons to do (or not do) something, and it is not conditioned on the merger closing.”

Despite the downgrading of Albertsons’ credit and liquidity ratings, the letter went on to state: “With or without the payment of the special dividend, Albertsons will have the cash and liquidity needed to operate its business. As stated in Albertsons’ latest form 10-Q filed on October 19, 2022, Albertsons estimates its liquidity needs over the next 12 months to be approximately $10 billion, which includes the special dividend.”

An examination of Albertsons earnings calls archived at the Motley Fool investment site and Security and Exchange Commission (SEC) filings through the summer of 2022 do not mention any special dividend by that name. The Q1 2022 earnings call did state: “We ended Q1 22 with $3.2 billion in cash, which provides us with significant liquidity to invest in growth, and return cash to our shareholders.” Regardless, it is not clear what a return of cash to investors implies in this statement.

On Nov. 1, state of Washington AG Robert Ferguson filed for an injunction to block the Nov. 7 payout of the special dividend in King County Superior Court, arguing that Albertsons and Kroger violated the “Washington Consumer Protection Act, RCW 19.86 et seq.”

The filing used SEC filings and Albertsons’ less-than-great credit and liquidity to argue that the grocer would be pushed into a non-competitive posture by the payout: “Paying out the $4 billion will cripple Albertsons’ ability to operate its stores and meaningfully compete with Kroger during the time before the deal closes and leave it in a weakened state if the deal subsequently falls apart.”

The King County Superior Court in Washington state granted attorney general Robert Ferguson’s motion for a temporary restraining order on Nov. 3 barring the $4 billion special dividend that Albertsons intended to pay on Monday, Nov. 7.

Albertsons stated that it “intends to seek to overturn the restraint as quickly as possible because the temporary order was based on the incorrect assertion that payment of the special dividend would impair its ability to compete while its proposed merger (the ‘merger’) with The Kroger Co. (“Kroger”) is under antitrust review.”

A hearing on the state of Washington’s request for a preliminary injunction is scheduled for Nov. 10, according to a Nov. 3 press release from Albertsons.

The AGs of California, Illinois and DC filed to block the special dividend on the afternoon of Nov. 2 in the U.S. District Court in DC (case 1:22-cv-03357, District of Columbia et al v. Kroger Co. et al (sic)). Like the Washington request for injunction, the AGs in the suit argue that the special dividend will cripple Albertsons: “On November 7, 2022, defendants have arranged for Albertsons to pay $4 billion, roughly all the cash it has available to compete today, to stockholders, $1.5 billion of it from a loan it will take out. The merger agreement, now inked, limits Albertsons’ ability to seek additional financing, and Albertsons’ low bond ratings indicate that even if it could go out and try to raise capital, the national economic downturn will make doing so especially difficult.”

The suit seeks an injunction to stop the special dividend by “seeking equitable and injunctive relief to enjoin Kroger and Albertsons from acting in concert with each other or with any other party in restraint of trade. This includes reducing Albertsons’ ability and incentive to compete through an agreement to use a so-called ‘special dividend,’ which together with other merger agreement provisions will strip Albertsons of its capacity to compete pending regulatory review of its planned merger with Kroger.”

The Idaho Business Review requested clarification on the special dividend situation, including the apparent contradiction that the special dividend appeared to be part of the merger deal, according to the merger announcement.

“Albertsons Cos. continues to maintain that the lawsuit brought by the state of Washington, and the similar lawsuit brought by the Attorneys General of California, Illinois and the District of Columbia are meritless and provide no legal basis for canceling or postponing a dividend that has been duly and unanimously approved by Albertsons Cos.’ fully informed board of directors,” Albertsons stated in the press release. “Albertsons Cos. is a thriving business which has delivered over $75 billion in revenues in the rolling four quarters ended September 10, 2022, following strong performance of $71.9 billion in revenues in fiscal 2021. Albertsons Cos. is well-capitalized, with limited debt and significant free cash flow and is in a strong position financially. The size of the dividend reflects the Company’s strength, rather than the illogical and damaging accusation that it is an attempt to weaken the company.”

— Editor’s note: This article was updated Nov. 4, 2022 to reflect statements issued by Albertsons.

— Editor’s note: This is rapidly developing story which we will update as news continues to break.

Albertsons’ large-investment owners’ profiles

Cerberus Capital Management is a New York City-based limited partnership private equity firm founded in 1992. It manages over $60 billion in assets according to its website. Cerberus owns the largest share of Albertsons common stock.

Klaff Realty is a Chicago-based limited partnership that describes itself as a “global real estate and private equity firm.” Founded in 1988, Klaff manages over $800 million in capital assets in South America and the United States.

Lubert-Alder Real Estate Funds is a privately-owned real estate investment and management firm based in Philadelphia. Founded in 1997, the firm manages over $18 billion of assets, according to its website.

The Columbus, Ohio-based Schottenstein Stores Corp. is a holding company owned privately by the Schottenstein family. The firm holds mostly retail real estate and retail brand assets. The Schottenstein family founded and formerly owned the Midwest Value City Department store chain.

Kimco Realty is headquartered in Jericho, New York. It is one of the oldest and largest real estate investment trusts (REIT) in the country, with annual revenue over $1 billion, net just under $1 billion, and assets close to $12 billion, according to the SEC. Founded in 1958, Kimco owns and manages over 500 shopping centers and mixed-use developments in the U.S.

HPS Investment Partners is a New York City-based private equity firm founded in 2007. The firm raises and invests debt financing and buys and sells ownership in corporate ventures and companies. The company manages assets of approximately $89 billion, according to the firm’s LinkedIn page.

Apollo Global Management is a New York City-based publicly-traded private equity firm with international investments. It was founded in 1990 and manages over $500 billion in assets. It trades as APO on the New York Stock Exchange. It bought $1.75 billion in Albertsons “convertible preferred stock” just prior to the Albertsons’ IPO in 2020.

Albertsons corporate ownership timeline

1939 — Joe Albertson opens the first Albertsons store at 16th and State streets in Boise.

1959 — Albertsons goes public.

1989 — Albertsons opens its 500th store

1998 — Albertsons and American Stores Company merge, bringing Acme, Lucky, Jewel, Jewel-Osco, Osco Drug and Sav-On Drugs under Albertsons ownership. Albertsons becomes the largest grocery and drug retailer in the nation for a less than a year, until Kroger buys out Fred Meyer.

2006 — A consortium of Minnesota-based Supervalu, CVS Corporation and investors led by the Cerberus Group acquire Albertsons. Most drug retail goes to CVS while Albertsons Inc. stores are divided up and some rebranded in a split between Supervalu and the Cerberus consortium, which creates Albertsons LLC. In the years that follow, Supervalu’s Albertsons stores flounder while the Cerberus consortium Albertsons LLC thrives.

2013 — Supervalu sells all Albertsons, Acme, Jewel-Osco, Shaw’s and Star Market stores in a $3.3 billion deal to Cerberus Capital Management, reuniting Albertsons stores once again under one umbrella. Cerberus pays $100 million in cash and assumes $3.2 billion in existing debt.

2014 — Albertsons merges with Safeway in a high-leverage acquisition.

2015 — Albertsons acquires the remains of bankrupt Great Atlantic & Pacific Tea Company (A&P), once the largest grocery in the country in the early to mid-20th century. A&P’s iconic coffee brands are not part of the sale because they were sold off a decade before. Albertsons fails to launch an Initial Public Offering (IPO).

2018 — Albertsons’ acquisition of Rite Aid fails.

March 2020 — An Albertsons IPO is once again on the drawing board for mid-2020. In private equity moves after the March announcement of the IPO plans, Apollo Global Management initiated the purchase of $1.75 billion of Albertsons convertible preferred stock with an expected final closing before the commencement of the IPO.

June 2020 — Albertsons Companies Inc. goes public once again under the Albertsons name, trading on the New York Stock market as ACI. According to paperwork filed with the Securities and Exchange Commission, Cerberus will own 31.9% of ACI stock immediately following the IPO. Initially hoping to sell in the $18-$19 per share range, the stock opens at $16 per share.

Oct. 14, 2022 — Kroger and Albertsons announce merger plans.