By Jinjoo Lee
Antitrust enforcers have successfully blocked the merger of Kroger and Albertsons, a deal that would have brought the two largest U.S. supermarket chains together. Now Albertsons is crying over its spilled milk, and for good reason.
Last week, Albertsons said it is suing Kroger for damages, alleging that it didn't do enough -- such as offer more store divestitures -- to quell regulators' concerns. In court documents that were unsealed on Monday, Albertsons argued that Kroger "derailed the merger after suffering a classic case of buyer's remorse" and sought at least $6 billion in damages. That would be more than half of Albertsons's current market capitalization.
The rationale for the deal was straightforward and urgent: Supermarkets were losing grocery market share to giants such as Walmart, Amazon and Costco. The only way to battle it out was through combining forces. "I always looked at the merger of Kroger and Albertsons as something they had to do," said Scott Mushkin, chief executive officer of retail-focused research firm R5 Capital.
Nevertheless, Kroger would have taken on a sizable amount of debt to fund the acquisition and investors seemed relieved when it became apparent that the deal faced slim odds. Its shares are up 35% compared with the undisturbed price before deal rumors emerged in October 2022. The opposite is true for Albertsons, whose shares have declined 23% over the same period. It is now trading at about 0.14 times forward-12-month sales, about half the multiple that Kroger and peer Ahold Delhaize go for.
A cheap multiple had been a chronic issue for Albertsons since its public debut, partly driven by concentrated positions held by private-equity firms and an overhang of convertible preferred shares. As of mid-2023, all of its convertible preferred shares had been converted to common shares. But one concern remains: While other private-equity investors have exited their positions, Cerberus Capital Management still holds a 26% stake in the company. For its part, Cerberus said last week that it wouldn't be selling its Albertsons shares. It is also possible that there is an ownership vacuum left after merger arbitragers left the stock.
There might be more fundamental reasons, too. Albertsons's grocery market share has been shrinking, according to estimates from BMO Capital Markets. There has been concern among some investors that Albertsons's grocery pricing skews more expensive compared with peers like Kroger, which means the retailer might have to lower prices going forward, according to Steven Shemesh, equity analyst at RBC Capital Markets. Kroger has already said that it will be lowering its grocery prices. Meanwhile, Albertsons's growing pharmacy business and online sales have both been putting pressure on margins.
What are Albertsons's options going forward? Given its recently launched lawsuit, another deal attempt with Kroger seems unlikely. Ahold Delhaize or Amazon might be big enough to buy Albertsons, but they would need to want it very badly given the scrutiny that any big supermarket merger is likely to invite.
A stand-alone path looks more likely for now. The company has said it would look at optimizing its "substantial real-estate footprint," suggesting possible moves to sell and lease back stores. It will also invest in stores and its technology. With some cash on its balance sheet and shares looking cheap, another option for Albertsons might be a bigger buyback program, Shemesh notes.
Whatever its strategy, going it alone won't be easy. Giants such as Walmart, Costco and Amazon are miles ahead on investments. Rival Kroger is less distant but has spent more than twice as much as Albertsons on capital expenditures over the past 12 months. Kroger has a much more advanced advertising business, an important margin driver, according to Mushkin.
The two supermarket giants were already vying for a shrinking share of the grocery market. With the merger now called off, this food fight is about to get more intense.
Write to Jinjoo Lee at jinjoo.lee@wsj.com
(END) Dow Jones Newswires
December 17, 2024 07:00 ET (12:00 GMT)
Copyright (c) 2024 Dow Jones & Company, Inc.
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