November 4, 2022
Antitrust: State AGs Mount Sherman Act Challenge to Albertsons’ Special Dividend
I’ve previously blogged about how the Kroger & Albertsons’s merger agreement dealt with the potentially significant antitrust issues associated with their deal, but I’m not sure that they anticipated the kind of legal challenge that a group of State AGs launched yesterday. In a complaint filed in DC federal court, the AGs of California, Illinois & DC have asked the court to enjoin Albertson’s payment of a $4 billion special dividend contemplated by the deal until regulatory review has been completed.
According to Albertsons’ press release announcing the deal, payment of this special dividend will be made on November 7, 2022, well in advance of the receipt of any regulatory clearances. The plaintiffs allege that the payment of the special dividend would impair Albertsons’ ability to compete against other supermarkets, including Kroger. As a result, they allege that the merger agreement involves an agreement in restraint of trade in violation of Section 1 of the Sherman Act and applicable state antitrust statutes. Here’s an excerpt from the complaint:
The Merger Agreement, and specifically the payment of the Special Dividend together with other terms limiting Albertson’s ability to finance its operations, will significantly reduce Albertsons’ ability to compete during the pendency of regulatory review of the merger, and possibly beyond. By stripping Albertsons of necessary cash at a time when its deteriorating bond ratings will make access to capital harder for Albertsons, this agreement between Kroger and Albertsons curtails Albertsons’ ability to compete on price, services, other quality metrics, and innovation. Because it increases Albertsons’ leverage, empirical economics suggests this reduction in Albertsons’ competitiveness will reduce the intensity of price competition market-wide.
Albertsons’ creditworthiness plays a central role in the complaint, with the plaintiffs noting that the company’s lack of an investment grade rating means that it may find it difficult to obtain financing necessary to support its post-dividend operations. The complaint also raises the possibility that the provisions of the merger permitting the payment of the special dividend before the deal received regulatory approval might involve some strategic behavior by the parties:
Discovery may reveal that the “Special Dividend” reflects a calculated effort to leave Albertsons just battered enough for Defendants to argue later (to regulators or a court) that it is a “flailing” or “failing” firm that Kroger should be allowed to acquire lest it go out of business anyway, but still worth its hard assets and Kroger’s gain from neutralizing a competitor.
– John Jenkins