States Attorneys General Challenge Albertsons Private Equity Payout
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When the 2nd and 4th largest grocers, Albertsons and Kroger, announced plans to merge last month, their agreement included an unusual and controversial feature: a $4 billion special dividend from Albertsons to its shareholders, 75% of which are private equity firms. Unions representing Kroger and Albertsons workers, along with advocacy groups, have raised concerns about handing over the bulk of Albertsons’s cash on hand to Wall Street when workers’ pensions are underfunded and shoppers struggle to afford rising food prices.
In a novel use of antitrust law, the Washington state attorney general sued to pause Albertsons’s special dividend on the grounds that the payout would make the company less competitive while antitrust regulators review its deal with Kroger, making it more likely to be approved. In response, a Washington court commissioner filed a temporary restraining order preventing the special dividend from going out to shareholders this week, and on Thursday the court will decide how long this order holds. Attorneys general from California, Illinois, and the District of Columbia followed with a similar suit in federal court, but the judge refused to issue another temporary restraining order. Albertsons strongly denied both charges and filed opposition memos defending its ability to pay the dividend and still run a strong business.
Successful or not, these antitrust suits put an important spotlight on private equity extraction, which drives corporate consolidation and weakens healthy businesses to the detriment of workers and consumers. In sworn testimony, Albertsons’s chief financial officer admits that both the dividend and the deal with Kroger were part of a strategic effort to return more capital to its private equity investors, several of which are anxious to cash out on their uncharacteristically long-term holdings. Pressures to pay out private equity owners take resources from workers and shoppers in the near term and could irreparably roll up the grocery industry in the long term, should Kroger’s takeover go through.
In her testimony submitted to U.S. district court late last week, Sharon McCollam, the President and CFO of Albertsons, explained that in November 2021 Albertsons started a “strategic review process” of options to “maximize stockholder value” and “[return] capital to the Company’s stockholders.” McCollam is referring to a process that Albertsons started last year to evaluate options for allowing their impatient private equity owners, who control 75% of Albertsons’s stock, to have a payday.
Albertsons’s primary private equity owner, Cerberus Capital Management, first bought 600 Albertsons stores in 2006. More than 15 years later, Cerberus has extracted at least $350 million in fees and dividends from Albertsons, sold the land out from under its stores, and made an estimated 200% rate of return over the lifetime of its investment. This is not unusual for private equity owners, which have a history of loading chains with debt and paying themselves by issuing dividends or cashing out on company assets. Between 2015 and 2018, private equity firms bankrupted seven regional grocery chains this way. What is unusual is how long Cerberus has owned a large chunk of Albertsons: the average private equity owner holds onto a company for under six years. Since at least 2015, Cerberus has unsuccessfully tried to cash out on its ownership stake in Albertsons through an initial public offering (IPO) on the stock market or through a sale of the company.
Most recently in June 2020, Albertsons went through with an IPO, but due to lackluster performance, the company limited how many shares it made public, and private equity owners still held onto the bulk of company stock. Cerberus has nearly 30% of the stock and five other investment firms, including Apollo Global Management, hold another 45%. If all these investors wanted to liquidate their holdings at the same time, they could end up flooding the market with Albertsons shares and collapse its stock price.
Thus, Albertsons’s “strategic review process” was likely aimed at finding a way to pay out all these competing investors at once without harming their stock, or at least to concoct a payout to replace their longest and largest owner, Cerberus. In her testimony, McCollam says Albertsons considered seeking a new third-party investor, selling more company assets, or recapitalizing the company before the board landed on selling to Kroger and issuing a special dividend of $4 billion as their solution.
This deal would make a clean payday for Cerberus, which will claim nearly $1 billion of the dividend and roughly $4 billion if Kroger buys Albertsons. But combining two of America’s largest grocers into a 5,000-store empire possess serious risks for shoppers, workers, suppliers, and small grocers, as Food & Power covered in its last issue. With as many as 1,400 overlapping stores, according to The Capitol Forum, the deal is sure to face intense regulatory scrutiny.
This dividend will also weaken Albertsons. Albertsons’s cash on hand grew by more than seven times from $470 million in February 2020 to $3.39 billion today as grocery sales soared during the pandemic. Instead of investing this money back into the company or its workforce, Albertsons wants to give away 75% of its cash pile to shareholders. If Albertsons pays out its special dividend, it will have roughly $500 million left in cash, substantially less than competitors Kroger and Ahold-Delhaize, which have $2.18 billion and $3.66 billion cash on hand, respectively.
To make matters worse, Albertsons plans to take out $1.5 billion in debt from its $3.7 billion line of credit, backed by company assets to help fund the dividend. This will increase the company’s debt leverage ratio and make it harder to get future loans. Credit rating agency Moody’s recently downgraded Albertsons’s short-term liquidity grade, citing the dividend.
Local unions and consumer protection groups quickly criticized Albertsons for enriching its financiers before investing in its stores, paying off its $6.5 billion in existing debt, or contributing to workers’ pension fund, which is currently underfunded by $4.9 billion. “That $4 billion could be much better spent to lower prices of food for consumers facing unprecedented levels of inflation, pay workers more or invest in safer stores for workers and customers,” said Joe Mizrahi, Secretary Treasurer of UFCW 3000.
In a rare challenge to private equity pillaging, state attorneys general from Washington, California, Illinois, and the District of Columbia sued to block the special dividend under antitrust law, with mixed success. In two separate lawsuits filed last week, attorneys general alleged that giving most of Albertsons’s cash to financiers could make Albertsons less competitive before antitrust enforcers can fully review Kroger’s takeover, restraining trade under state and federal antitrust laws. “The agreement’s likely effect will be to restrict Albertsons’s ability to compete on pricing and service,” DC’s complaint says. “Economic empirical research shows that when a supermarket chain becomes significantly more leveraged, it weakens competition among supermarket incumbents.”
Albertsons fully denies these claims, asserting that between their remaining cash on hand and their existing credit lines, the company will have a healthy amount of liquidity to keep investing in stores and vigorously compete. In her sworn testimony, Albertsons’s CFO said that even if the dividend hurts their debt ratios, the company’s leverage measures will still be substantially improved from years past.
While it’s true that Albertsons’s leverage metrics will be at a relative company low even post-dividend, they will still be above industry averages. Over the years, Cerberus has loaded Albertsons with debt through highly leveraged takeovers and as recently as 2018, the company’s debt-to-earnings ratio was well more than twice most of its competitors. Just as Albertsons brings its debt under control, this dividend could set it back. Further, Albertsons owes much of its rosy financial projections to pandemic-driven grocery shopping and profiting off of food inflation. In a financial downturn, Albertsons could lose market share to lower priced competitors, and with less revenue, Albertsons could regret giving away its cash and taking on new debts.
A Washington court commissioner found it plausible that the special dividend could irreparably weaken Albertsons’s ability to compete in the state and impede the state’s right to enforce antitrust laws, so it issued a temporary restraining order against the dividend. A hearing today will determine how long this order remains in place. Meanwhile, on Tuesday a U.S. federal court judge rejected DC, Illinois, and California’s attempt to block the dividend.
Washington’s antitrust claim hinges, in part, on whether the special dividend represents an agreement between Albertsons and Kroger to restrain trade. Their complaint notes that the special dividend is included in the companies’ merger agreement. However, Albertsons contends that Kroger had no say in the company’s decision to pay the dividend and that the decisions to sell to Kroger and issue the dividend were made independently. Further, Albertsons says that the dividend had to be included in the merger agreement because it would lower how much Kroger pays for its shares if disbursed.
Proving a smoking gun agreement is often a hurdle for antitrust cases, but these suits nonetheless make an important case about the way private equity profiteering can harm companies, decrease competition, and roll up larger grocery markets in the process. Across the economy, private equity raiders push for mergers and takeovers that enrich financiers at the expense of fair competition, workers, customer service, and economic resilience. Federal antitrust enforcers have made statements about scrutinizing private equity’s role in plundering healthy businesses and driving consolidation, and hopefully they will consider this in reviewing Kroger’s takeover of Albertsons.
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