Business

Hiltzik: A big supermarket merger is a boon for rich insiders

It ought to be apparent by now that the driving pressure of many company mergers, if not most and even all mergers, is the aim of enriching insiders. The pending merger of supermarket giants Albertsons and Kroger, nevertheless, injects that impulse with steroids.

At the center of the $20-billion deal introduced Oct. 14 is a $4-billion dividend to be paid Monday to Albertsons stockholders. Who are these stockholders?

Six of them are company insiders, outlined as holders of greater than 5% of Albertsons shares every.

The particular dividend…is a part of Albertsons’ long-term technique for progress

— Albertsons lawyer Ted Hassi

The big canine amongst them is the non-public fairness agency Cerberus Capital Management, which owns almost 30% of the shares and holds two seats on the company’s board of administrators. The different 5 are funding and actual property funds that maintain a whole of an extra three board seats.

The six buyers management about 75% of Albertsons shares. Combined with the three present and former Albertsons executives on the board, they maintain a majority of seats. In different phrases, they voted themselves a multibillion-dollar handout.

The dividend is being challenged in federal court by the attorneys basic of California, Illinois and Washington, D.C., and separately by the attorney general of Washington state. The courts must transfer quick to dam the dividend, because the challengers ask: Once it’s paid out Monday, it’ll presumably be unattainable to recuperate. As of this writing, Albertsons hasn’t filed an answer to the movement and the courts haven’t dominated.

Regardless of how the motions for an injunction blocking the dividend fare, nevertheless, the payout deserves particular scrutiny for what it says concerning the structure of this deal and what its impact might be on Albertsons because the merger strikes towards closing subsequent year. The message is a darkish one.

We’ve already reported on the probability that the Albertsons/Kroger merger will drive costs increased on the supermarkets’ money registers.

The deal will deliver collectively the most important and second-largest supermarket corporations. In California, Kroger owns Food4Less and Ralphs; Albertsons owns Safeway, Vons and Pavilions. The two corporations management 38 different retail market manufacturers nationwide.

The merger ought to be a prime goal for antitrust officers on the Federal Trade Commission and Department of Justice.

Before we get additional into the implications of the $4-billion payout, it’s correct to notice that Albertsons apparently has been lower than candid about the way it happened. Way lower than candid.

After receiving an Oct. 26 letter from the attorneys basic of California, Illinois, Washington state, Idaho, Arizona and D.C. asking Albertsons and Kroger to place the dividend on maintain, Albertsons asserted that the payout had nothing to do with the merger.

The proposed merger of Kroger and Albertsons would create a nationwide supermarket behemoth. Will shoppers see any advantages?

(krogeralbertsons.com)

In a letter responding to the request, an Albertsons lawyer, Ted Hassi of the agency Debevoise & Plimpton, stated “the special dividend… is part of Albertsons’ long-term strategy for growth,” which was “determined well before Albertsons’ discussions with Kroger began.”

Is that so? The companies’ own merger announcement acknowledged explicitly that the $4-billion dividend is “part of the transaction.” It additionally counted the dividend as a part of the merger worth, accounting for $6.85 per share of the $34.10 per share payable to Albertsons shareholders.

According to the merger agreement, furthermore, the particular dividend was voted on by the Albertsons board on the identical meeting at which they accepted the merger deal itself.

Hassi, the Albertsons lawyer, advised the states that the dividend might be paid whether or not or not the merger really takes place. That factors to the principle subject raised by the plaintiffs within the lawsuits, which is that a $4-billion payout to shareholders will depart Albertsons as a floundering shell of itself in monetary phrases.

The dividend will sap Albertsons’ means to operate as an unbiased company, the plaintiffs assert. They have a level.

According to the company’s most up-to-date monetary disclosure, Albertsons had solely $3.4 billion money readily available, amongst $9.3 billion in property, most of which was tied up in stock.

The company must borrow to lift funds for the particular dividend, and that borrowing gained’t come low cost — the company’s present excellent debt is rated as junk grade by each Moody’s Investor Services and Standard & Poor’s.

Nor is the dimensions of the dividend something like regular for Albertsons. Its most up-to-date quarterly dividend was 12 cents per share, to be paid to shareholders on Nov. 14. The company paid out solely $207.4 million in shareholder dividends in fiscal 2021, the company says, and spent nothing on share buybacks, the opposite manner that firms reward shareholders.

The particular dividend, the states assert in court docket, would “reduce Albertsons’ ability to compete effectively with Kroger” if the merger doesn’t shut, leaving it spavined as a rival if it stays unbiased — say as a result of regulators have blocked the merger.

The orphaned Albertsons would have much less money to spend on maintaining its shops maintained, a lot much less upgraded, and fewer to pay in wages and worker advantages.

The dividend, in different phrases, is a straitjacket.

It’s exhausting to keep away from the impression that the $4-billion payout is a cynical money seize by Albertsons’ insiders, who will successfully be cashing out even when the merger fails to occur. Calling it a part of a “long-term strategy for growth,” as Hassi did in his letter to the attorneys basic, appears like some type of a joke.

It’s not particularly simple for a company to spend money on progress when it has disadvantaged itself of $4 billion in capital and pumped up its debt merely to funnel mortgage proceeds to shareholders. Hassi acknowledged in his response to the attorneys basic that the advantage of the $4-billion dividend is that it “provides near-term liquidity to all of its shareholders.”

In an annual report Hassi quoted, Albertsons stated that its capital allocation technique aimed to stability “investing for the future, strengthening our balance sheet and returns to shareholders.” Payouts to shareholders have been separate and distinct from investing for the long run. In different phrases, the $4 billion is a profit to Cerberus and its fellow funding companies.

It hobbles, reasonably than empowers, Albertsons’ investing for the long run. Whether the merger takes place or not, Albertsons clients are going to really feel the results they usually gained’t be fairly.

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