CINCINNATI — A federal judge has blocked the biggest merger in Kroger’s history, saying the $24.6 billion acquisition of the Albertsons grocery chain would cause "undue market concentration" and "lessen competition."
Judge Adrienne Nelson, in a 71-page ruling, also agreed with the Federal Trade Commission's criticism of the companies' plan to sell off 579 stores.
"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 Wholesale Grocers) as a competitor.
Less than a day after the ruling, Albertsons announced it "exercised its right to terminate its merger agreement with Kroger," effectively ending the prospect of the deal, regardless of the court proceedings.
“Given the recent federal and state court decisions to block our proposed merger with Kroger, we have made the difficult decision to terminate the merger agreement. We are deeply disappointed in the courts’ decisions,” said Vivek Sankaran, CEO of Albertsons.
Kroger CEO Rodney McMullen told investors last week that the company can grow without a merger.
“Regardless of the outcome of the trials, Kroger is operating from a position of strength and we are optimistic about our future,” McMullen said in Kroger’s 3rd quarter earnings call. “Our business is more diverse than ever and our value creation model provides us with multiple ways to drive sustainable growth.”
Investors seem to be betting on long-term growth for Kroger. Its shares closed at $57.77 Monday, up 31% since the deal was announced in October 2022. Albertsons closed at $18.94 Monday, down 51% in the same period.
Eight of the 13 analysts following Kroger have buy ratings on the company, with an average price target of $65.10. Albertsons 12-month price target is $22, according to TipRanks.
But not every analyst is sold on Kroger’s ability to compete against larger rivals, particularly Amazon and Walmart.
“Without the Albertsons merger, our analysis leads us to conclude that Kroger’s market share is likely to shrink over the coming years, potentially at an increasing rate,” wrote Scott Mushkin, founder of R5 Capital, in a June 30 note to investors.
Mushkin is a veteran Wall Street analyst who thinks Amazon and Walmart will make life difficult for many retailers because of their growing efficiencies in same-day delivery. Both companies are investing billions of dollars in their distribution networks. The bigger and faster they get, the more both companies are using discounts to keep them busy.
“Those networks thrive off of volume,” Mushkin said. “Kroger’s investing in this as well, but the scale that Walmart and Amazon (have achieved) is something that Kroger is going to be hard-pressed to match.”
Mushkin has criticized both Kroger and the FTC for not settling the case months ago. He thinks the grocery industry has gotten much more competitive since the deal was announced.
“Kroger missed the mark in trying to get this done and the government missed the mark in understanding what’s happening in the marketplace,” Mushkin said. “And in the end, it’s what neither Kroger nor the government want. I think it’s going to end up likely limiting consumer choice.”
Kroger released the following statement about the federal court ruling:
“Through its proposed merger with Albertsons, Kroger would invest more than $1 billion in lower grocery prices, invest an additional $1 billion in higher grocery worker wages, and invest an additional $1.3 billion to improve Albertsons stores. Kroger is disappointed in the opinions issued by the U.S. District Court for the District of Oregon and the Washington State Court, which overlook the substantial evidence presented at trial showing that a merger between Kroger and Albertsons would advance the company’s decades-long commitment to lowering prices, respecting collective bargaining agreements, and is in the best interests of customers, associates, and the broader competitive environment in a rapidly evolving grocery landscape. The Company is currently reviewing its options.”
