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When Kroger agreed a $25bn deal to buy rival US grocer Albertsons, it hoped to pull off the largest transaction in US supermarket history. Instead it has become one of the ugliest bust-ups in recent memory in mergers and acquisitions.
The merger was blocked temporarily by judges last December, delivering a death blow to the deal. But Albertsons thinks it is still entitled to some of the Kroger bounty. A red-hot legal fight that has since erupted between the parties shines a light on how important the wording of transaction agreements is when things go wrong.
Albertsons, which is partially owned by Cerberus Capital, quickly sued Kroger after the judicial rulings for damages. It alleged that the deal’s legal defeats were the result of Kroger’s inept regulatory strategy, which violated the merger contract. “Kroger derailed the merger after suffering a classic case of buyer’s remorse,” wrote Albertsons in its lawsuit.
As such, Albertsons now demands perhaps billions of the proposed deal premium as a form of damages. Last week, Kroger filed its response, denying wrongdoing and separately alleging Albertsons was liable for its own perceived treachery in the window when the deal sought regulatory sign-off.
“On information and belief, at the same time, Albertsons began manufacturing a ‘Plan B’ litigation record against Kroger to deflect blame and position Albertsons to sue Kroger if the Merger did not close,” Kroger wrote in its reply. Each side denies wrongdoing.
Negotiations prior to signing a deal are usually done at arms length. The tactics and strategy involved is what makes M&A so compelling. But what happens after signing is almost more interesting: two parties trying to close the transaction but for very different respective outcomes. A merger contract provides for an allocation of risk. If a deal collapses, it should set out each side’s obligations and how any penalties can be assessed. In the Albertsons case, there were some clear tensions from the start.
Albertsons says it agreed to let Kroger take the lead on regulatory approval strategy — but Kroger had to be willing to make any concession the Federal Trade Commission demanded. The only limit was that Kroger would not have to accept more than 650 store divestitures out of the 2,200 it originally agreed to buy. This led to inevitable issues. For Albertsons and its shareholders, the priority was for the deal to close, giving them cash and the chance to move on. The degree of pain in the concessions mattered less.
Divestitures were, however, painful for Kroger. Selling off parts of the chain, where there was too much overlap, could mean losing high-earning stores at cut-rate prices. Kroger ultimately agreed to divest more than 500 stores. Albertsons said that if Kroger had gone up to the contractual limit — 650 — the deal would have had the maximum chance at regulatory success.
For its part, Kroger says this deal was likely doomed no matter what it had done. The then-FTC chair Lina Khan, an antitrust hawk, did not like grocery consolidation and the company believes her agency’s tightened 2023 merger guidelines were not foreseeable in 2022 at the time of the deal’s signing. If a judge overseeing the duelling lawsuits concludes that the combination never had a chance, Albertsons’ claim for damages may not be viable.
That would still leave a termination fee left to adjudicate. Kroger, according to the contract, owes Albertsons $600mn if the deal had not closed by late 2024. Kroger, however, claims that Albertsons was improperly communicating with a third company, C & S Wholesale, the putative buyer of the divested Albertsons stores. Kroger alleges C & S was trying to take advantage of the regulatory review to get as many stores as it could. Kroger will attempt to show the court that Albertsons violated its own obligations to support it in divestitures and that it should thus not even get the termination fee.
According to the court filings, the two heavyweights of the transaction — Kroger’s longtime chief executive Rodney McMullen and the Cerberus co-founder Stephen Feinberg — had, in 2022, personally negotiated the crucial divestiture requirement clause that is at the centre of the current legal dispute. Their testimony in any coming court case would be riveting.
In retrospect, whatever the agreed-upon risk allocation in this deal, it seems hard to believe today that both Kroger and Albertsons thought rolling the dice on this transaction was a wager worth taking.
