Kroger’s $24.6 Billion Albertsons Deal Blocked by Judges (3)

A federal judge blocked Kroger Co.’s $24.6 billion acquisition of Albertsons Cos., finding the takeover would lessen competition for US grocery shoppers, in a ruling that marks a likely death knell for the deal.

In a decision filed Tuesday, US District Judge Adrienne Nelson in Oregon found in favor of the US Federal Trade Commission. Just over an hour later, a Washington judge in Seattle sided with the state attorney general and blocked the deal in that state.

The FTC had argued that the proposed tie-up violates US antitrust law and that a divestiture of hundreds of stores to C&S Wholesale Grocers Inc. wouldn’t do enough to replace the lost competition.

“There is ample evidence that the divestiture is not sufficient in scale to adequately compete with the merged firm and is structured in a way that will significantly disadvantage C&S as a competitor,” Nelson wrote. “The deficiencies in the divestiture scope and structure create a risk that some or all of the divested stores will lose sales or close, as has happened in past C&S acquisitions.”

Nelson’s decision is a major victory for the FTC and its outgoing Chair Lina Khan, who came under harsh criticism from conservatives and business groups for stepped-up antitrust enforcement under the Biden administration.

Kroger Disappointed

A Kroger spokeswoman said the company is disappointed in the opinions issued Tuesday and that the rulings overlook evidence showing that the deal is in the best interests of customers, employees and the broader grocery environment. The deal would have led to price cuts, higher worker wages and improved stores, she said. Kroger is currently reviewing its options as it relates to the acquisition.

An Albertsons spokesperson said the company is reviewing the court’s opinion and is evaluating its options in accordance with the merger agreement. Attorneys for the companies have said the acquisition would probably be called off if the judge ruled against the deal.

The FTC’s case was the most consequential of three court challenges to the tie-up. A Washington Superior Court judge said his ruling in favor of Attorney General Bob Fergusonwas “coincidentally” timed to the same day as Nelson, and only applies to stores in the state. Ferguson, a Democrat, was elected last month to be the state’s next governor.

Colorado’s attorney general filed a separate lawsuit in state court that remains pending.

“Today’s win protects competition in the grocery market, which will prevent prices from rising even more,” said FTC spokesperson Douglas Farrar. “This statement win makes it clear that strong, reality-based antitrust enforcement delivers real results for consumers, workers, and small businesses.”

A C&S Wholesale spokeswoman said the company is disappointed by the court’s decision and that it looks forward to seeing how Kroger and Albertsons will determine the next steps of the proposed deal.

Kroger rose 5.1% in New York trading to $60.73, while Albertsons fell 2.3% to $18.51.

Jacob Aiken-Phillips, an analyst at Melius Research, said in a Tuesday note that the merger would have allowed the combined entity to compete more effectively against Amazon, Walmart and other retailers that are excluded from the FTC’s definition.

“While we do expect more news to come and maybe a potential appeal, we wouldn’t be surprised if other retailers became interested” in Albertsons, he said. The breakup fee of $600 million will benefit Albertsons, but won’t affect Kroger.

Specific Market

Nelson agreed with the FTC that supermarkets constitute a specific market, countering the companies’ argument that the market extends to online retailers like Amazon.com Inc.

“Supermarkets are distinct from other grocery retailers,” Nelson wrote. “Supermarkets offer a larger selection of fresh and non-perishable items, a one-stop shopping experience that appeals to a particular consumer’s preference to meet all their grocery needs in one location, and a customer service focus with deli, bakery, meat, and other specialized departments.”

The ruling marks a disappointing end to a two-year odyssey by Kroger and Albertsons, which sought to become a bigger player with a more substantial national footprint to better compete against larger, non-unionized rivals including Walmart Inc.

Kroger and Albertsons agreed to combine in October 2022 in what would have been the biggest US grocery deal in history, bringing together more than 4,000 stores across 48 states and Washington, DC.

Kroger will likely turn its focus back to improving and investing in its existing network of about 2,750 stores. Albertsons, on the other hand, could emerge again as a deal target, but is expected in the near term to invest in its roughly 2,270 stores and technology.

The proposed deal has been a political hot potato, drawing pushback from elected officials, union groups and consumer advocacy firms. The companies vowed to spend $1 billion to cut prices, $1.3 billion to improve store conditions and $1 billion to raise worker wages and benefits following the deal.

The FTC has increased antitrust enforcement under the Biden administration, though the results in court have been mixed. The FTC lost a challenge to Microsoft Corp.’s acquisition of Activision Blizzard Inc. But more recently the antitrust agency won two other merger challenges against Illumina Inc. over its purchase of startup Grail and over Tapestry Inc.’s planned $8.5 billion acquisition of Capri Holdings Ltd.

Arguments

The companies and the agency fought their case in court for three weeks over the summer in Oregon, as grocery inflation came back into the political spotlight ahead of the US presidential election.

Grocery inflation hit a four-decade high in 2022 due to higher costs of labor, transportation and ingredients. Price increases have moderated and are expected to stay within historical ranges, though many American shoppers still say expensive groceries continue to squeeze their ability to spend.

The FTC argued that the deal would harm consumers by eliminating competition on prices and quality, making the combined entity less likely to improve its services by offering flexible hours and pickup services. It said the grocers would have more leverage over workers, which would slow wage growth and worsen benefits, and that the proposed divestiture would be inadequate.

Nelson however ruled against the FTC on the labor claim, saying she didn’t have economic evidence to determine the impact on workers.

The agency tried to depict Kroger and Albertsons as the most direct competitors. It said the deal would combine the two largest “traditional supermarkets” in a market that includes Walmart and Target, but does not include Amazon, Costco, Aldi and dollar stores.

The companies argued that such a definition is “antiquated” and no longer describes how people shop and pointed to various changes they have made in response to newer threats. The grocers also said joining forces would help them increase market share and improve technology to compete with Amazon, Walmart and other companies.

The case is Federal Trade Commission v. Kroger Co., 24-cv-00347, US District Court, District of Oregon (Portland).

(Updates with Albertsons comment in seventh paragraph. An earlier version of the story corrected the timing of Bob Ferguson’s election victory.)

--With assistance from Josh Sisco.

To contact the reporters on this story:
Leah Nylen in Washington at lnylen2@bloomberg.net;
Jaewon Kang in Chicago at jkang351@bloomberg.net

To contact the editors responsible for this story:
Sara Forden at sforden@bloomberg.net

Elizabeth Wasserman, Peter Blumberg

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