Albertsons: Kroger “willfully squandered every opportunity” for the merger to work

Albertsons’ lawsuit against Kroger accusing it of bombing their $24.6 billion merger reads a lot like a gossip column detailing a bitter divorce. 

In a lawsuit filed last week and unsealed Monday, Albertsons said Kroger “derailed the merger after suffering a classic case of buyer’s remorse.” The allegations came less than a day after an Oregon federal judge blocked the merger between the two largest grocery chains in America.

The suit, filed in Delaware Court of Chancery, gives a rare, detailed look (from Albertsons’ perspective) at how the merger negotiations played out. According to Albertsons, the merger negotiations went down like this: 

In September 2022, the two grocery chains started negotiating a merger out of a common fear that retail giants like Walmart and Amazon were coming for their lunch. That fear led them to a familiar answer: get bigger.

Albertsons — the party being acquired — wanted Kroger to divest up to 725 stores to appease antitrust regulators. Kroger didn’t want to trim more than 600. To agree to that, Albertsons wanted the breakup fee upped to $800 million from $600 million.

Ultimately, the CEOs shook hands on a deal that required Kroger (the larger of the two) to divest no more than 650 stores and guaranteed Albertsons a $600 million breakup fee.

The deal was announced in October 2022. Kroger’s stock price dipped, as did its credit rating after it took out $10.5 billion in bonds to pay for the deal. According to Albertsons, this made Kroger less motivated to put forth their “best efforts” to make sure the deal went through, as required in their contract. 

According to Albertsons, Kroger agreed to the ceiling of divesting 650 stores but tried to shoot well below it — initially offering only to trim 238 “cherry-picked” stores with poor financial performance. Out of about 60 potential bidders for the stores, Kroger chose C&S Wholesale Grocers, a grocery distributor that operates only about 160 retail locations. 

By early 2024, Kroger had agreed to divest 579 stores, still well below the 650 Albertsons had bargained for, and had “willfully squandered every opportunity to obtain antitrust approval through a divestiture.” The Federal Trade Commission was indeed concerned Kroger was picking its worst stores and that they had chosen an unpromising bidder for the deal who might resell the stores in the near future.

The FTC filed its lawsuit seeking to block the merger in February. On December 10, an Oregon federal judge scrapped the deal, saying: 

“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. C&S’ history of unsuccessful grocery store ventures and its continuing dependence on defendants throughout the TSA period also suggest that the divestiture will not adequately restore competition.”

Now that the deal is in the trash, Albertsons says Kroger owes it “billions” for sabotaging the deal and costing it years of uncertainty. Kroger denies those allegations and said Albertsons is not entitled to the $600 million breakup fee.

Investors, on the other hand, appear ready to move on. Albertsons is up more than 4% and Kroger is up more than 6% since the deal was blocked.