U.S. supermarket leaders Kroger and Albertsons Cos. are not parting ways on good terms.
Albertsons is backing out of the largest proposed grocery merger in U.S. history, leaving the fate of some combined 5,000 brick-and-mortar locations in much the same state as they were two years ago.
Just a day after a federal judge scuttled the grocers' proposed $24.6 billion merger, Albertsons filed a breach-of-contract lawsuit against Kroger. Boise, Idaho-based Albertsons is seeking a $600 million breakup fee from Kroger, as well as billions of dollars in damages.
The litigation hinges, in part, on allegations relating to Cincinnati-based Kroger's properties and the potential sale of some of its stores. The suit charges that Kroger failed to take appropriate action to win regulatory approval for the merger "by repeatedly refusing to divest assets necessary for antitrust approval, ignoring regulators’ feedback, rejecting stronger divestiture buyers and failing to cooperate with Albertsons."
Albertsons issued a statement on its lawsuit, which was filed Wednesday in Delaware chancery court. Its complaint against Kroger is temporarily under seal. Albertsons also said it had terminated its merger agreement with Kroger.
In response, Kroger said Albertsons' claims are baseless and without merit.
"Kroger refutes these allegations in the strongest possible terms, especially in light of Albertsons' repeated intentional material breaches and interference throughout the merger process, which we will prove in court," Kroger said in a statement. "This is clearly an attempt to deflect responsibility following Kroger's written notification of Albertsons' multiple breaches of the agreement, and to seek payment of the merger's break fee, to which they are not entitled."
Injunction sparks suit
The dust-up comes in the wake of U.S. District Court Judge Adrienne Nelson's decision Tuesday to block Kroger's acquisition of Albertsons, a deal announced in October 2022, based on antitrust concerns. The merger would have created a supermarket titan with about 5,000 stores. Kroger and Albertsons had argued the deal was necessary for them to compete for grocery sales in an arena that now includes discount giant Walmart, e-commerce juggernaut Amazon, Costco and expanding international chains Aldi and Lidl.
The Federal Trade Commission had sued to stop the merger, alleging it would hurt consumers by eliminating competition and that Walmart and Costco weren't direct competitors to supermarket chains. Nelson agreed with the agency, and voiced concerns over the viability of Kroger's store divestment plan. Albertsons now also claims that plan was inadequate.
In September last year, Kroger and Albertsons proposed selling roughly 400 of their grocery stores to C&S Wholesale Grocers of Keene, New Hampshire, for $1.9 billion to allay FTC concerns about their merger. When the FTC said that plan was inadequate, the two grocery chains revised it. They agreed to sell more than 160 additional stores — for a total of 579 stores and a new price of $2.9 billion — to C&S Wholesale. But Judge Nelson questioned whether C&S Wholesale had the know-how to run such a big operation or to compete with a merged Kroger-Albertsons.
In its suit, Albertsons put the blame on Kroger, which denies the accusations.
“Rather than fulfill its contractual obligations to ensure that the merger succeeded, Kroger acted in its own financial self-interest, repeatedly providing insufficient divestiture proposals that ignored regulators’ concerns," Tom Moriarty, Albertsons’ general counsel and chief policy officer, said in the company statement. "Kroger’s self-serving conduct, taken at the expense of Albertsons and the agreed transaction, has harmed Albertsons’ shareholders, associates and consumers. We are disappointed that the opportunity to realize the significant benefits of the merger has been lost on account of Kroger’s willfully deficient approach to securing regulatory clearance.”
A court date
Kroger said it looks forward to seeing Albertsons in court.
"We went to extraordinary lengths to uphold the merger agreement throughout the entirety of the regulatory process and the facts will make that abundantly clear," Kroger said. "We are incredibly proud of the Kroger team for how they worked through the merger process with the highest degree of integrity and commitment. We are confident in Kroger's value-creation model to drive sustainable growth."
Kroger's board is currently evaluating the "next steps that serve the best interests of Kroger's customers and associates, and create value for shareholders," according to the company.
In a note on Wednesday, CFRA Research analyst Arun Sundaram said by arguing that Albertsons isn't entitled to the termination fee, Kroger may be looking to avoid additional damages and settle at $600 million.
"Any litigation over damages beyond the $600 million could take years, with no guarantee of success," he said. "The key takeaway: The merger is dead after a two-year saga. [Albertsons], now in a more vulnerable position, will likely use any proceeds from [Kroger] to repurchase shares and could seek another buyer in the future."
In turn, Kroger "is expected to move forward without a transformational deal, focusing instead on accelerating share buybacks after a two-year pause," according to Sundaram. The company "remains in a strong financial position, with substantial cash and a low leverage ratio," he said.