(Bloomberg) -- Albertsons Cos. said it filed a lawsuit against Kroger Co. after terminating the companies’ proposed $24.6 billion deal, claiming it failed to exercise “best efforts” to secure regulatory approval.
Albertsons said in a statement that it’s seeking billions of dollars in damages from Kroger to make Albertsons and its shareholders whole. In addition to a $600 million termination fee, the grocery chain wants compensation for the “multiple years and hundreds of millions of dollars it devoted to obtaining approval for the merger.”
Shares of Albertsons fell 1.5% in New York on Wednesday, bringing the stock’s year-to-date decline to 21%. Kroger shares, which have risen 34% this year, outpacing the gain of the S&P 500 Index, rose 1%.
Albertsons said that Kroger “willfully” breached the merger agreement by refusing to divest assets needed for antitrust approval, ignoring feedback from regulators and rejecting stronger buyers for the stores it planned on divesting, among other reasons.
In a statement, Kroger said that Albertsons’ claims are baseless. It added that Albertsons isn’t entitled to the merger break fee and that Albertsons wants to “deflect responsibility following Kroger’s written notification of Albertsons’ multiple breaches of the agreement.” Kroger’s board is evaluating the next steps for the company.
Later on Wednesday, Kroger said it terminated the merger agreement with Albertsons and will now pursue a range of growth opportunities, including investing in stores.
Kroger said it will resume share repurchases after a hiatus. The board approved a new $7.5 billion share buyback, and the company will share a more detailed strategic update on investor day next year.
Kroger and Albertsons had agreed to the tie-up in October 2022, saying it would help them compete better against Amazon.com Inc., Walmart Inc. and other non-unionized rivals. It would have united Kroger, the nation’s biggest grocery company, with Albertsons, the second biggest, to create a company with more than 4,000 stores across 48 states and Washington, DC.
The Federal Trade Commission sued to block the deal in February, arguing that it violates US antitrust law and that a divestiture of hundreds of stores to C&S Wholesale Grocers Inc. wouldn’t be enough to replace the lost competition.
A federal judge on Tuesday blocked the deal, siding with the FTC and arguing it would lessen competition and raise prices for US shoppers. A Washington judge in Seattle on Tuesday blocked the deal in that state. Following the rulings, Albertsons said Wednesday it was exercising its right to terminate the deal.
“Albertsons wants to get out of the deal” with money, Peter Cohan, an associate professor of practice in management at Babson College, said in an interview. He added that the new legal fight appears to be primarily about the breakup fee.
There have been many rulings against big mega-deals in recent years, he said, adding that it would be difficult to make the case that Kroger is responsible for the proposed acquisition falling apart. Still, the legal process could go on for years and will ultimately depend on whether the parties believe it’s worthwhile to let it drag on.
Next Moves
Chief Executive Officer Vivek Sankaran said Albertsons is disappointed in the outcome of the deal, but is focused on starting a new chapter. He added the company is financially strong and has strengthened its core business and generated new sources of revenue in recent years. In the statement, key shareholder Cerberus Capital Management LP said it has no intention of selling any of its shares in Albertsons and will continue supporting the company.
The company expects comparable sales to grow 1.8% to 2.2% in fiscal 2024, while adjusted earnings are seen in a range of $2.20 to $2.30 per share in the period. It will provide further details on future plans in its next earnings report no later than January.
Albertsons and C&S declined to comment further.
It’s not the first time a bad corporate breakup has led to litigation. The failed merger between health insurers Anthem and Cigna sparked a bitter lawsuit after the Justice Department successfully sued to block the deal in 2017. Cigna sought the $1.85 billion breakup fee plus damages while Anthem asked for $21 billion and accused its erstwhile partner of intentionally killing the deal. After four years of litigation, the courts ruled that neither side was entitled to damages and each company “must deal independently with the consequences of their costly and ill-fated attempt to merge.”
‘Came Out Swinging’
“Albertsons came out swinging here,” Evercore ISI analyst Mike Montani said in an interview. The company is aggressively laying out how it plans to meet investor expectations and reassure shareholders that it’s in it for the long haul, he added.
Montani expects a number of actions from the company going forward, including meetings with existing and prospective shareholders ahead of Albertsons’ next earnings report in January. Longer term, he said the grocer could pursue store divestitures or exits in underperforming markets and sharpen its focus on the West Coast, where locations are doing better. Albertsons could also explore sale leasebacks, Montani said.
Kroger could pursue smaller deals and accelerate buybacks and other shareholder returns, he added. Deal prospects lessened during court proceedings, he said, given heightened focus on defining the grocery sector and examining C&S as a legitimate buyer.
The case is Albertsons v. Kroger, 2024-1276, Delaware Court of Chancery.
--With assistance from Leah Nylen and Steve Stroth.
(Updates with share moves, Kroger’s comments from third paragraph.)
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