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Last week, Cincinnati-based Kroger announced it hopes to buy Boise-based Albertsons Companies.
I’ve chosen the words carefully there. This isn’t a merger in the strictest sense – it’s an acquisition. And the word hopes is important. Far from a done deal, the two companies have to get through a number of hoops to make their unification dream possible.
What the blockbuster purchase means for Boise remains to be seen.
What we know
The last few years for Albertsons have been especially eventful. And could provide clues to what’s to come.
On Friday, BoiseDev gave you a rundown of the benefits the two companies say the merger will bring.
The companies have pointedly not said where the company would be based. It’s clear from messaging and even more subtle clues (like the image of a Kroger shopping bag at the top of the merger website) that Kroger will be in charge. Kroger’s CEO and CFO are the only two individuals announced for the newly combined company.
At this point, we don’t even know what the company will be called – but it won’t be Albertsons or Kroger. The companies said they would pick a new name for the corporate brand — but the individual store names won’t change.
In their public announcements of the deal, Kroger and Albertsons said the agreement would help them better compete, lower costs, and accelerate transformation in an increasingly online world.
But those reasons, for Albertsons, are secondary. The company has been casting about for a solution to a complicated problem that dates back to 2006.
The last time Albertsons was acquired, in a deal that sent most of its stores to Minnesota’s Supervalu, spun off a small number of so-called underperforming stores to a new entity. That company – Albertsons LLC, eventually bought back all the stores from Supervalu and eventually bought Safeway, largely creating the Albertsons Companies of today.
Albertsons LLC was made possible by funding from a coalition of institutional investors – including Cerberus Capital Management, Kimco Realty, Klaff Realty LP, Lubert-Adler Partners LP, and Schottenstein Stores Corporation. Those institutional investors still hold the lion’s share of Albertsons – and have been looking for a way out. But if they all sold shares at once or rapidly, it could cause the stock to fall quickly. It’s what’s called an overhang.
In February, Albertsons put up a flag. The company said it would start a strategic review. It sent analysts to speculate that Albertsons was looking for a deal.
Months went by with no news. This summer, the company’s CFO pointed to a review of real estate and made it appear that Albertsons might sell or spin out its real estate holdings.
But in August, the company landed interest from Kroger, according to the Wall Street Journal. Kroger executives certainly read the trade press (or Wall Street Journal) and knew Albertsons was in play. Why it took five months to seriously engage in deal talks isn’t as clear.
Hours after the deal was announced, Kimco sold $301 million worth of stock – about a quarter of its shares. The companies announced early Monday that they had modified their deal not to sell most of their Albertsons stock.
Will it happen?
Kroger and Albertsons have to make their way through a number of checkpoints. Albertsons’ shareholders have to approve the deal – though because the company remains controlled by those large groups mentioned above, that’s fairly likely.
Kroger’s shareholders also have to approve the deal. The initial reaction to the agreement was somewhat muted. Kroger’s stock fell below the level it traded at before the companies leaked the news to Bloomberg on Thursday. Albertsons has had trouble on this road before. In 2018, Albertsons said it would buy Rite Aid – again pressed by the Cerberus-led group. Rite Aid shareholders weren’t particularly happy, and the two companies pulled the deal on the eve of the shareholder vote.
The biggest concern will be if the government – particularly the Federal Trade Commission – doesn’t stand in the way. It’s clearly an outcome Kroger is concerned about. It’s already said it is willing to spin off between 100 and 375 stores into a newly created company owned by Albertsons’ existing shareholders.
The New York Times notes that the FTC will likely look at the companies’ past promises and if they’ve kept them. A page in the Albertsons history book will surely come up.
When Albertsons bought Safeway, it agreed to offload 146 stores to Bellingham, Washington-based Haggen. Haggen struggled and blamed Albertsons in a lawsuit. Ultimately, Haggen declared bankruptcy. With few folks willing to buy the stores, Albertsons got the stores back. It promised to help ease antitrust concerns but ultimately ended up with the stores anyway.
For instance, in Baker City, OR, an Albertsons, and a Safeway sit across the street from each other. One of the stores was initially sold to Haggen. But after the bankruptcy, Albertsons got it back. Today, it controls both stores – still the only mainstream supermarkets in the Oregon town. Instead of price competition from two separately-owned companies, the prices in the two Baker stores are identical.
Albertsons and Kroger have significant store overlap in a number of markets – particularly in the Pacific Northwest. In the Boise market area, it would own both Albertsons and Fred Meyer. In an area like Seattle, it would own stores under a dizzying array of brands – Albertsons, Fred Meyer, Safeway, QFC, and those Haggen stores. The combination of Kroger and Albertsons has 40% market share in the Seattle market.
“Part of the rationale for this deal is that ‘We need to be bigger,'” Bill Baer, who led the antitrust division of the Department of Justice under the Obama administration, told the New York Times. “Well, if you’re bigger and more significant, what does that mean to the markets where you’re dumping stores for some smaller guy who will not have the purchasing power that you claim you’re going to get from this deal?”
Political pressure & antitrust
The FTC has been a bit more aggressive in merger reviews in recent years – including under the Obama, Trump, and now Biden administrations.
In 2016, a merger between Staples and Office Depot fell apart after the FTC under President Obama won an injunction in court against the deal. Last year it sued to stop a merger between two chip makers. It even moved this year to stop Facebook parent Meta from buying a small VR firm.
A deal between Rite Aid and Walgreens Boots Alliance that would have united the two drug store companies also fell apart under FTC scrutiny. The Rite Aid/Walgreens deal was worth $17 billion (versus $24.6 billion for Albertsons/Kroger) and would have brought together the number one and number two drugstore operators. After pressure from the Trump-era FTC, the companies killed the deal and instead announced Walgreens would buy about half of Rite Aid’s stores.
Politicians across the aisle are already speaking out. Independent Bernie Sanders, who calls himself a democratic socialist, came out swinging, calling it an “absolute disaster,” and called for the Biden administration to reject it.
On the other side of the political spectrum, Republican Mike Lee of Utah issued a news release about the proposed deal, saying he would do what he could to ensure “antitrust laws are robustly enforced to protect consumers from anticompetitive mergers.”
Kroger expressed confidence it could get approval for the acquisition.
“We’re going to collaborate and cooperate with the FTC through the process,” company CEO Rodney McMullen said during an analyst call Friday. “Albertsons and Kroger both have been advised by attorneys around the FTC issues and feel very confident we’ll be able to find something that works for all, and we’ll sit down with the FTC as quick as we can.”
If the deal does not come together, Kroger will pay Albertsons a breakup fee of $600 million.
If the deal goes through, it’s hard to know what impact it will have on Boise. If a new standalone company with a few hundred stores is created, it’s possible that the new company could be based in Boise – even if the stores are not located here.
This happened before, in the Supervalu deal. The new, small Albertsons LLC was based in Boise. It started with those 661 underperforming stores but quickly began to sell and close locations, focusing on the most promising locations.
When Albertsons purchased Safeway, it, too, remained mum on where the company would keep its headquarters. Safeway was based in Pleasanton, CA – and the new combined entity took on many of Safeway’s back office functions. It wasn’t until Albertsons announced the deal to put its name on Bronco Stadium at Boise State University that the company made a firm commitment to keeping its base of operations here.
“We’re anxious to let people know we’re here to stay,” former Albertsons CEO Robert Miller said in 2014, according to an Idaho Business Review story at the time. “It’s our corporate headquarters, it’s going to be, and this is a good way to reinforce that message.”
Today, Albertsons maintains offices in both Boise and Pleasanton – and often posts jobs that allow employees to work in either area.
The Idaho Department of Labor reports Albertsons employs more than 5,000 people in the State of Idaho – though the tally includes folks employed at the 44 Albertsons and Safeway stores in the state. The Boise area is home to a network of suppliers and other businesses that support and sell to both Albertsons and another homegrown grocer, WinCo Foods – everything from a Boise office of Proctor and Gamble to small independent businesses employing a handful of people.
With Kroger doubling in size, it could look to keep some back-office operations in Boise, Pleasonton, or both. Or, it could move all operations to Kroger’s home base in Cincinnati, bringing an end to Albertsons’ 83-year corporate presence in the Gem State.