The divestiture plan—which envisions spinning off as many as 375 stores under a new Albertsons subsidiary called SpinCo—puts a potential solution to competition concerns on the table before regulators have a chance to propose a remedy.
“We believe we have a clear path to achieve regulatory approval with divestitures,” Kroger Chief Financial Officer Gary Millerchip said.
Companies have rarely proposed a divestiture at such an early stage, but are increasingly considering it earlier in the merger process than they did before, said Jennifer Rie, a Bloomberg Intelligence analyst.
But that “fix it first” approach may give the companies an advantage if the Federal Trade Commission, which is seen as the agency likely to review the deal, decides to challenge it in court, Rie said.
Still, passing the FTC’s muster could be a challenging task. Agency Chair Lina Khan has already developed a reputation as an aggresssive opponent of market-consolidating mergers, and has voiced concerns in the past about grocery store competition.
“This strategy puts the agencies in a difficult position, because if they don’t agree with what they’re divesting or the divestiture buyer, they’ll go to court and may lose,” Rie said. “The FTC is on notice that if they decide to go to court and block it, there will be a fix on the table that a judge is going to look at,” Rie added.
A federal judge nixed the Justice Department’s opposition to
“Were there to be a lawsuit, a judge would evaluate not the combination of the two firms, but the combination and the creation of the spin-off firm,” Wayne State University Law School professor Stephen Calkins said.
“It’s a trend that’s distinctly troubling to enforcers because it reduces their influence over what remedy packages look like and hurts their ability to bring successful merger challenges,” Calkins, a former FTC general counsel, added.
FTC Scrutiny
The FTC’s prospective merger review is likely to be a major test of chair Lina Khan’s tough stance when it comes to such deals. The commission declined to comment.
In 2015, the FTC required Albertsons and Safeway Inc. to divest 168 stores as part of a settlement allowing those companies to merge. Albertsons bought 33 stores back less than a year after the deal closed when Haggen Holdings LLC—which had bought most of the available Albertsons stores—filed for bankruptcy.
Khan criticized that outcome in a 2017 law review article she co-wrote, calling it a “spectacular” failure that a casual observer could have anticipated.
Upending the deal might not require a judge’s ruling against the merger itself. The merger agreement only allows for the divestment of up to 650 stores altogether. If the FTC can convince a court that more divestitures are necessary, the deal could collapse.
Still, an FTC challenge won’t be easy, Calkins said.
“Parties have the immense advantage of having all the information about which stores have bad managers or surly employees, are often out of stock, et cetera,” Calkins said. “They could spin off the dogs and keep the winners, and it’s hard for government to prevent that.”
The commission is already engaged in several labor-intensive merger challenges, potentially hindering its ability to respond, Calkins said. Its deal review, and any litigation, would require detailed research into dozens of regional markets, commuting patterns, and local competition.
The FTC must factor the divestiture proposal in its deal analysis, now that the companies themselves have built it into their own proposal, said Steven Cernak, a Bona Law partner.
The companies’ divestiture proposal makes the tie-up “a tougher deal for the FTC to challenge,” Cernak said.
—- With assistance from Brendan Case
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