Is the Kroger-Albertsons Merger Really Doomed? They explained the odds of the deal and what it means for consumers

A week-long legal battle is going on right now in Oregon that could determine the future of your grocery shopping — with one side arguing that the largest proposed supermarket merger in U.S. history will drive up prices, and the other side saying it will be for the benefit of consumers.

Fast Company’s Most Read

Next month marks two years since Kroger announced it would acquire Albertsons in a $24.6 billion merger. But that deal has been in the way since February, when the Federal Trade Commission sued to block the merger on the grounds that it was anti-competitive. Kroger and Albertsons are the two largest grocery store chains in the US, respectively.

Now, the deal’s fate is in the hands of a federal court in Portland, and it will likely be determined by one woman: U.S. District Court Judge Adrienne Nelson. She could decide whether to grant a preliminary injunction or a decision immediately after the hearing.

During court proceedings last week, the CEOs of Kroger and Albertsons testified that the merger would result in lower prices for consumers. But the FTC’s position is that the deal would “eliminate fierce competition” between rivals — leading to higher prices for shoppers.

Most consumers likely won’t see any significant changes when they shop if the deal ultimately prevails, though those who live in areas with few grocery store options could be more materially affected, says Arun Sundaram, senior research analyst at capital at CFRA Research, Fast company. He adds that Kroger and Albertsons want to merge to better compete with a growing number of retailers that also sell groceries, including Walmart, Amazon, Costco, Target and various dollar stores.

However, the optics of the proposed merger are problematic, given the increase in food prices in recent years. “It’s a very tough time to try to merge in the food space – it’s a tough time to sell carcass,” says Sundaram.

Stock market skepticism

Another group that hasn’t been sold yet? Stock market investors. Kroger agreed to buy Albertsons for $34.10 per share, which included a special dividend of $6.85. But Albertsons shares are now trading at a “significant discount” to the terms of the deal, hitting a three-year low of $17.94 earlier this week.

“That means investors are telling us the deal might not close,” says Sundaram.

CFRA Research, meanwhile, puts the probability of a successful merger at 20%. “The judge is more likely to rule that this is an anti-competitive merger and block the deal,” says Sundaram.

The story continues

Trying to predict the outcome of the trial means taking into account everything that was said during the testimony — in addition to what has so far been left unsaid, namely, which way Nelson is likely to lean. She was nominated to the federal district court in 2022 by President Joe Biden, and the process has political overtones, especially with the November election in mind.

The FTC case

When the FTC filed suit to block the merger, it was joined by attorneys general from eight states, and the commissioners in Washington, DC are appointed by the sitting president, which is why the Biden administration gets credit (or blame) for delaying it Kroger. – I agree with Albertson.

The FTC’s challenge to the acquisition hinges primarily on the overlap between the two companies, both of which currently operate stores in more than 30 states. The commission pointed out that the merger would harm consumers by eliminating competition on prices and quality, while harming the largely unionized workforce of both companies, who would lose the power to negotiate better terms of employment.

In an effort to sweeten the deal for antitrust approval, Kroger and Albertsons proposed selling hundreds of stores and several brands to C&S Wholesale Grocers. But once again, the FTC is skeptical, noting that the divestment proposal is a “middle ground” of stores that were “cobbled together.”

The case of grocers

But there could still be hope that a deal could be reached, which underlines CFRA’s 20% likelihood. “There is a chance that the government will take a more forward-looking view of the merger,” notes Sundaram.

Grocers claim that they have been losing market share for some time and this puts them at a competitive disadvantage. Walmart actually sells more groceries than any other company in the US, accounting for more than 20% of the market share, according to various estimates. A merged Kroger-Albertsons still wouldn’t overcome Walmart’s dominance in the industry.

Considering the current state of the competitive landscape with these other types of stores in mind, Sundaram says that could bolster the case for grocers. The companies, which are unionized, say they face a competitive disadvantage against Walmart and Amazon, two market-share gobbling giants that are largely non-union.

Ultimately, a successful merger will likely depend on the existence of more assurances that C&S Wholesale Grocers can successfully operate the divested stores.

Can Albertson survive?

Whatever ultimately happens, the court case has revealed some information that could anger consumers and dismay investors.

Executives were quoted as noting that the proposed merger “virtually creates a monopoly” and admitted under oath that they had raised prices above past inflationary levels.

While Kroger will emerge largely unscathed, it may not be the same for Albertsons. Sundaram says that in opening statements, the company’s lawyer made “a strange point” that Albertsons’ survival may very well depend on the merger.

According to Sundaram, this information took investors by surprise. Albertsons shares have fallen more than 11% since the lawsuit began.

“I thought Albertsons was doing well,” says Sundaram. “That raised some new questions if the deal doesn’t go through.”

This post originally appeared on fastcompany.com
Subscribe to receive the Fast Company newsletter: http://fastcompany.com/newsletters