Kroger & Albertsons’ announcement of their proposed merger last Friday was followed almost immediately by wailing and gnashing of teeth over the deal’s antitrust implications by everyone from Public Citizen to the U.S. Senate. The fact that the parties’ announcement included plans to divest 100 to 375 stores through a spinoff suggests that this reaction likely didn’t come as a big surprise to them. Since Kroger & Albertsons know that their deal will face some pretty stiff antitrust headwinds, I thought it might be interesting to take a look at the merger agreement and see what it had to say concerning their obligations when it comes to regulatory approvals.
The relevant language appears in Section 6.3 of the agreement, which addresses “Regulatory Matters,” and while it lashes Kroger & Albertsons together pretty tightly, it isn’t a “hell or high water” provision. For example, Section 6.3(d) only obligates Kroger to use its “best efforts” to take “any and all actions necessary to avoid, eliminate, and resolve any and all impediments under any Antitrust Law,” and as this Harvard Governance Blog post points out, a true “hell or high water” clause will impose an unconditional obligation to take such actions. Furthermore, Section 6.4(d) contains the following proviso:
provided, further, however, that nothing contained in this Agreement shall require Parent or the Company to take, or cause to be taken, or commit to take, or commit to cause to be taken, any divestiture, license, hold separate, sale or other disposition, of or with respect to assets of the Company or any of its Subsidiaries, or Parent or any of its Subsidiaries, if doing so would result in a Material Divestment Event.
Section 1.1 of the agreement defines a “Material Divestiture Event” to mean the divestiture of “in excess of 650 Stores.” That number includes however many stores end up being part of the spinoff and if the antitrust cops insist on anything bigger than that, Kroger won’t have to go along with it under Section 6.3.
What may be more interesting is whether the FTC or DOJ take the bait on divestitures. Traditionally, one of the concerns with putting a specific upside number on a divestiture obligation is the concern that the government’s response will be “yes, please – do that.” Of course, the Biden Administration’s approach to antitrust merger review & remedies is anything but traditional, so it seems unlikely that the parties’ commitment to divestitures will be sufficient to placate them.
Then again, the FTC & DOJ are probably not their intended audience. My guess is that Kroger & Albertsons fully expect a challenge from regulators and know that although divestitures may not move the needle with them, recent experience suggests that courts still look favorably on this kind of conduct-based remedy for potential antitrust concerns.
– John Jenkins