CINCINNATI — The Kroger Co. and its acquisition target, Albertsons Companies Inc., have spent a combined $864 million on merger-related expenses through the first quarter of this year, according to filings with the U.S. Securities and Exchange Commission.
That represents about 3.5% of the deal’s $24.6 billion price tag and includes legal and consulting fees, financing costs and employee-retention expenses. It’s also enough money to give every Kroger and Albertsons employee a $1,200 bonus.
Those merger costs are certain to grow as the companies defend their deal at a federal antitrust hearing in Portland next month, followed by two state court cases in Colorado and Washington and an administrative hearing at the Federal Trade Commission in Washington, D.C.
It's already a big enough chunk to provoke a strong reaction from the deal’s critics.
“It’s amazing to me that they’ve spent that much money,” said Kathy Finn, president of UFCW 770, which represents about 17,000 Kroger and Albertsons employees in Los Angeles. “They could have done a lot of things with that money. It seems like a waste that they’re spending it on trying to just eliminate their competition.”
Kroger declined to be interviewed for this story but provided a statement:
“Kroger is making record investments in associate wages while continuing to lower prices for customers, and our work to close the proposed merger with Albertsons Cos. has done nothing to change our course. Since 2018, Kroger invested an incremental $2.4 billion to improve wages, which is a 33% increase in rate in five years ... Kroger committed to investing an additional $1 billion in wages and benefits post-close. For our customers, we invested $5 billion to lower prices in the last two decades. We committed an additional $500 million to lower prices in stores after the merger closes.”
Kroger announced plans to merge with its largest supermarket rival in October 2022 to create a nationwide chain with roughly 5,000 stores and 700,000 employees. Kroger said the deal would help it compete against larger rivals like Amazon and Walmart, while generating $1 billion a year in cost savings that it would reinvest in store improvements, price reductions and employee wages.
But the deal quickly drew criticism from unions and consumer advocates who claimed it would give Kroger too much market clout in cities where the Kroger and Albertsons are longtime competitors. The Federal Trade Commission sided with critics, while rejecting the companies’ offer to maintain competition by selling 579 stores in 18 states to one of the nation’s largest privately owned companies: C&S Wholesale Grocers.
After 21 months of negotiations and legal sparring, the companies will state their cases in a three-week trial that begins Aug. 26 in Portland, Oregon.
The FTC will ask U.S. District Judge Adrienne Nelson to block the merger with a preliminary injunction. Experts say that case is the most important of the four pending legal reviews in the Kroger-Albertsons merger.
“By and large, this is the moment of truth,” said Professor Spencer Waller, who teaches antitrust law at Loyola University of Chicago. “If the government wins the preliminary injunction, history tells us that this case is effectively over, unless the companies just decide they want to fight to the death. Nine times out of ten, the companies fold.”
Waller also thinks an appeal is more likely in this case because the companies have already spent nearly $900 million.
“The more chips they have on the table, the more incentive they have to fight to the end,” Waller said.
That’s especially true for Kroger, said James Lewis, portfolio manager and senior equity research analyst at Bartlett Wealth Management.
Kroger spent $535 million on merger-related expenses through the end of its first quarter on May 25. That's 1.6 times more than Albertsons total spending - $329 million through June 15.
Beyond those tallies, Kroger also agreed to pay Albertsons $600 million if the merger fails.
“The incentive is there to exhaust all legal options,” Lewis said. “I think that and obviously the synergies provide motivation to keep going.”
Lewis applauds the merger because of the cost savings Kroger identified when it announced the deal.
“They were talking about synergies generating at least $1 billion on an annual run rate for the first four years,” Lewis said. “And they were also talking about how the deal will boost total shareholder returns to the 8-11% range.”
While those are powerful incentives for Kroger to appeal any court ruling that blocks the merger, no one knows how far Kroger will go to defend the deal.
Kroger CEO Rodney McMullen has repeatedly said the companies are “committed to litigate.” Their original merger agreement says the companies “shall take any and all actions” to challenge “any decree, order, judgment, or injunction” that blocks the deal.
But does that mean they would appeal a state court ruling that blocks the deal only in Colorado? Or would they limit their appeals to the federal case in which the FTC joined nine states to oppose the merger? And if they lose on appeal, would they continue the fight?
Lewis thinks presidential politics might influence the companies’ appellate strategy.
“Right now, we do have a more vigilant FTC than what we’ve had in the past,” Lewis said. “If you go back and look at Trump’s prior presidential term, you’re looking at an FTC that was pretty conservative.”
No matter who wins the White House in November, Waller doubts the companies would appeal to all the way to the U.S. Supreme Court. That’s because its hasn’t agreed to review the legality of a merger since the 1970s.
“This is a big deal, but in general the Supreme Court has simply chosen to spend its time on other matters,” Waller said. “It is very rare that two companies want to hang in there for another two or three years to hear what the Supreme Court might have to say.”
Back in Los Angeles, the president of UFCW Local 770 thinks the legal fight has been costly enough.
“It’s ridiculous, it’s actually obscene,” said Kathy Finn. “We have such a hard time whenever we’re in bargaining, getting a one- or two-dollar increase for folks. That money should have been spent on making their stores better, investing in safety for their workers and their customers, lowering prices."
