Column: That big Albertsons/Kroger merger will enrich millionaire insiders at your expense

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 grocery store giants Albertsons and Kroger, nonetheless, injects that impulse with steroids.

On the coronary heart of the $20-billion deal introduced Oct. 14 is a $4-billion dividend to be paid Monday to Albertsons stockholders. Who’re these stockholders?

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

The massive canine amongst them is the non-public fairness agency Cerberus Capital Administration, which owns practically 30% of the shares and holds two seats on the corporate’s board of administrators. The opposite 5 are funding and actual property funds that maintain a complete of a further three board seats.

The six buyers management about 75% of Albertsons shares. Mixed 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 docket by the attorneys basic of California, Illinois and Washington, D.C., and individually by the lawyer basic of Washington state. The courts should transfer quick to dam the dividend, because the challengers ask: As soon as it’s paid out Monday, it can presumably be inconceivable to get well. As of this writing, Albertsons hasn’t filed a solution to the movement and the courts haven’t dominated.

No matter how the motions for an injunction blocking the dividend fare, nonetheless, the payout deserves particular scrutiny for what it says concerning the construction of this deal and what its impact can be on Albertsons because the merger strikes towards closing subsequent yr. The message is a darkish one.

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

The deal will deliver collectively the most important and second-largest grocery store corporations. In California, Kroger owns Food4Less and Ralphs; Albertsons owns Safeway, Vons and Pavilions. The 2 corporations management 38 different retail market manufacturers nationwide.

The merger ought to be a first-rate goal for antitrust officers on the Federal Commerce Fee and Division of Justice.

Earlier than 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 took place. Approach 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.

In a letter responding to the request, an Albertsons lawyer, Ted Hassi of the agency Debevoise & Plimpton, stated “the particular dividend… is a part of Albertsons’ long-term technique for progress,” which was “decided properly earlier than Albertsons’ discussions with Kroger started.”

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

In keeping with the merger settlement, furthermore, the particular dividend was voted on by the Albertsons board on the similar assembly at which they authorised the merger deal itself.

Hassi, the Albertsons lawyer, informed the states that the dividend can be paid whether or not or not the merger really takes place. That factors to the principle concern 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’ capacity to operate as an impartial firm, the plaintiffs assert. They’ve a degree.

In keeping with the corporate’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 corporate should borrow to lift funds for the particular dividend, and that borrowing received’t come low cost — the corporate’s present excellent debt is rated as junk grade by each Moody’s Investor Providers and Customary & Poor’s.

Neither is the scale 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 corporate paid out solely $207.4 million in shareholder dividends in fiscal 2021, the corporate says, and spent nothing on share buybacks, the opposite method that companies reward shareholders.

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

The orphaned Albertsons would have much less cash 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 laborious to keep away from the impression that the $4-billion payout is a cynical cash 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 technique for progress,” as Hassi did in his letter to the attorneys basic, appears like some form of a joke.

It’s not particularly straightforward for an organization 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 “supplies near-term liquidity to all of its shareholders.”

In an annual report Hassi quoted, Albertsons stated that its capital allocation technique aimed to steadiness “investing for the long run, strengthening our steadiness sheet and returns to shareholders.” Payouts to shareholders had 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 corporations.

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