Cerberus Capital and other private equity firms could see a big payout from controversial Albertsons dividend

In October 2022, grocery giant Kroger announced plans to buy Albertsons for $24.6 billion.^[1] In addition to profiting from the sale, Albertsons announced an additional payout to investors for November 7th that is not contingent on federal approval. The $4 billion dividend would primarily go to a group of private equity and real estate firms including Cerberus Capital Management, Lubert-Adler Funds, HPS Investment Partners, and Oak Hill Advisors.^[2]

Cerberus Capital Management, the private equity firm that has controlled Albertsons since 2006, is set to receive over $5 billion if the FTC approves the merger.^[3] In addition to the profit on its shares, Cerberus will receive over $1 billion from the immediate Albertsons dividend.^[4]

Six state Attorneys General have criticized the $4 billion dividend payout because it would deprive Albertsons of the cash it needs to operate while regulators review the merger.^[5] The Attorneys General, including members of both political parties, have demanded that Albertsons delay the payout until after FTC reviews the merger.^[6] On November 1, 2022, Washington State Attorney General Bob Ferguson filed a lawsuit to block Albertsons from enriching Cerberus Capital and other shareholders with the $4 billion payout before the company’s proposed merger with The Kroger Co. can be reviewed by state and federal antitrust enforcers. “Paying out $4 billion before regulators can do their job and review the proposed merger will weaken Albertsons’ ability to continue business operations and compete,” Ferguson said.^[7]

On November 3, a judge in Washington State issued an order halting the dividend payout until at least Thursday, November 10, when the court will hear the Washington Attorney General’s request for an injunction blocking the dividend while regulators review the proposed Albertsons-Kroger merger.^[8]

The Attorneys General from Illinois, Washington DC, and California also filed suit last week seeking to halt the payout to Cerberus and other private equity firms.^[9]

The dividend goes far beyond Albertsons’ profits. The $4 billion is significantly greater than the $3.56 billion in combined profit (net income) that Albertsons has generated over the past decade.^[10]

The dividend could allow the Cerberus-led investor group to profit even if the FTC blocks the deal on antitrust grounds. The $4 billion dividend will also “devalue the company at a time when consumers are facing crushing inflation” said UFCW Local 770, which represents grocery workers at Albertsons stores.^[11]

Federal and state regulators could halt the proposed merger on antitrust grounds. Together, the two grocery giants would control around 13% of the U.S. grocery market, and may significantly alter competition.^[12] The Federal Trade Commission (FTC) has interrupted grocery mergers on similar grounds. When Albertsons and competitor Safeway merged in 2015, the FTC found that the merger was likely to harm competition and required the company to sell more than 168 stores.^[13]

The merger may also have serious impacts on workers and consumers. Senators Klobuchar, Blumenthal, and Booker wrote to Lina Khan, chair of the Federal Trade Commision, expressing concern regarding the merger and the effects it could have on food prices.^[14] Food prices skyrocketed by 11.2% from September 2021 to September 2022.^[15]

The FTC will review the merger in the coming year and weigh the effects it may have on competition in the industry. Before the FTC signs off on the deal, the Cerberus-led investor group could see a dividend payout of $4 billion unless the Washington AG and/or other Attorneys General are successful in stopping it.

The dividend would deplete much of Albertsons currently available cash.^[16] The dividend will be funded with $2.5 billion in cash and $1.5 billion in debt.^[17]

Credit rating agency Moody’s downgraded Albertsons based on the dividend, noting “The downgrade to SGL-2 reflects Albertsons lower cash balances and reduced revolver availability following the payment of the dividend.”^[18]

Cerberus and other private equity firms are utilizing a financial tactic called a dividend recapitalization, where a private equity firm uses debt leveraged onto a company that it owns to extract cash dividends. In a dividend recapitalization transaction, a company will take on new debt and then use the proceeds of the loan to provide a special dividend to its private equity owners. The tactic has been widely criticized by both supporters and skeptics of the private equity model for needlessly saddling companies with debt to extract cash without making substantive operating improvements. This puts those companies at risk for restructuring, bankruptcy, or cost cutting to make up the interest payments and pay off debt.

If the Kroger-Albertsons merger is halted by the FTC or other regulators, Albertsons would be left to compete with significantly fewer funds, leading to even potential store closures and layoffs.

The Albertsons dividend is a clear example of the destabilizing effects private equity can have on retail. After years of stripping cash from Albertsons^[19], the Cerberus-led private equity investor group will continue to profit – a cost that will be carried by workers and consumers.

^[1]https://ir.kroger.com/CorporateProfile/press-releases/press-release/2022/Kroger-and-Albertsons-Companies-Announce-Definitive-Merger-Agreement/default.aspx

^[2]https://boisedev.com/news/2022/10/26/massive-improper-giveaway-attorneys-general-ask-albertsons-to-halt-dividend-payment/ https://www.sec.gov/Archives/edgar/data/1646972/000114036122023648/ny20003207x1_def14a.htm#a_030

^[3]https://www.privateequitywire.co.uk/2022/10/18/317961/cerberus-capital-set-big-payday-krogers-246bn-deal-albertsons

Based on 151.8 million Albertsons shares owned, $34.10 per share offer price. https://www.sec.gov/Archives/edgar/data/1646972/000114036122023648/ny20003207x1_def14a.htmhttps://ir.kroger.com/CorporateProfile/press-releases/press-release/2022/Kroger-and-Albertsons-Companies-Announce-Definitive-Merger-Agreement/default.aspx

^[4] Based on 151.8 million Albertsons shares owned, $6.85 per share dividend. https://www.sec.gov/Archives/edgar/data/1646972/000114036122023648/ny20003207x1_def14a.htmhttps://www.yahoo.com/now/albertsons-companies-announces-special-dividend-111800746.html

^[5] https://www.newsobserver.com/news/business/article267946547.html

^[6]https://www.latimes.com/business/story/2022-10-26/albertsons-kroger-merger-dividend-bonta-attorneys-general

^[7]https://www.atg.wa.gov/news/news-releases/ag-ferguson-files-lawsuit-block-albertsons-paying-4-billion-shareholders-merger

^[8] https://www.atg.wa.gov/news/news-releases/ag-ferguson-statement-king-county-superior-court-order-temporarily-blocking

^[9] https://illinoisattorneygeneral.gov/pressroom/2022_11/20221102.html

^[10] Based on $3,564.5 million in combined net income between 2012 and https://www.sec.gov/ix?doc=/Archives/edgar/data/1646972/000164697222000073/aci-20220910.htm  https://www.sec.gov/ix?doc=/Archives/edgar/data/1646972/000164697222000031/aci-20220226.htmhttps://www.sec.gov/ix?doc=/Archives/edgar/data/1646972/000164697222000031/aci-20220226.htmhttps://www.sec.gov/ix?doc=/Archives/edgar/data/0001646972/000164697221000026/aci-20210227.htmhttps://www.sec.gov/ix?doc=/Archives/edgar/data/0001646972/000164697219000036/acify1810-k.htmhttps://www.sec.gov/Archives/edgar/data/1646972/000164697218000017/acify1710-k.htm

^[11] https://ufcw770.org/essential-grocery-store-workers-say-stop-albertsons-dividend-payment/

^[12] https://www.newsobserver.com/news/business/article267946547.html

^[13] https://www.fastcompany.com/90797301/kroger-albertsons-deal-antitrust-grocery-merger

^[14]https://www.klobuchar.senate.gov/public/_cache/files/2/b/2b61dbcf-3bb9-49d2-a8e9-3622b1c1f9a9/7A05803C37BA9F78A1B037066B860D13.quill—letter-l7137—letter-to-ftc-chair-khan-re-albertsons-kroger-merger-002-.pdf

^[15]https://www.theguardian.com/environment/2022/oct/27/kroger-albertsons-merger-groceries-prices-food-deserts

^[16]https://www.theguardian.com/environment/2022/oct/27/kroger-albertsons-merger-groceries-prices-food-deserts

^[17]https://www.atg.wa.gov/news/news-releases/ag-ferguson-files-lawsuit-block-albertsons-paying-4-billion-shareholders-merger https://www.moodys.com/research/Moodys-places-Albertsons-ratings-on-review-for-upgrade-on-proposed–PR_470252

^[18] https://www.moodys.com/research/Moodys-places-Albertsons-ratings-on-review-for-upgrade-on-proposed–PR_470252

^[19] SEC Form 10-K (2019), pg. 23 https://www.sec.gov/ix?doc=/Archives/edgar/data/1646972/000164697219000036/acify1810-k.htm