Washington’s top lawyer has asked a court to stop Albertsons from paying investors a $4 billion dividend due before the grocer’s proposed merger with rival Kroger.
The lawsuit, filed Tuesday by state Attorney General Bob Ferguson, is among the first targeting the proposed merger, which would combine the two largest grocers operating in Washington into one company.
But at least one legal expert is skeptical that the state has the power to block payment.
In the lawsuit, which was filed in King County Superior Court, Ferguson argues that a $4 billion dividend would undermine Albertsons’ ability to keep its stores open for the years it likely would take to complete. the merger of more than 20 billion dollars. The attorney general’s office also requested a temporary restraining order to block payment of the dividend, which Albertsons expects to complete on Monday, until the lawsuit is resolved.
“Dispensing $4 billion before regulators can do their job and review the proposed merger will weaken Albertsons’ ability to continue as a business and compete,” Ferguson said in a statement Tuesday.
Concerns about potential store closings are particularly acute in Seattle and across Washington, where Albertsons, owner of Safeway, and Kroger, owner of QFC and Fred Meyer, are two of the biggest players in local grocery markets.
To get its merger approved, Kroger and Albertsons must sell hundreds of competing locations with too much market overlap to a competitor. This process, known as divestment, could affect many stores in Washington.
In the greater Seattle area alone, Kroger and Albertsons each have around 80 locations, according to company data, and often appear to be each other’s biggest local competitors.
Some critics worry that a cash-strapped Albertsons may be unable to sustain its divested locations long enough to be purchased by a competitor.
In Tuesday’s statement, the attorney general warns that paying the dividend “could diminish Albertsons’ ability to track inventory orders, forcing customers to travel to other grocery stores” and “could also impact on employee hours.
The dividend and merger are opposed by United Food & Commercial Workers Local 3000, which represents nearly 26,000 workers at 265 Kroger and Albertsons locations in Washington.
The merger has also raised concerns among Seattle-area shoppers, who fear some divested stores may eventually close, as happened after the 2015 merger between Albertsons and Safeway.
Ferguson’s office said Kroger and Albertsons violated state antitrust laws and consumer protection law.
The company also claimed that the dividend was expected before the start of merger talks with Kroger, according to media reports. This appears to contradict previous statements from Albertsons and Kroger that the dividend was tied to the proposed merger.
The lawsuit, which was filed Tuesday afternoon in King County Superior Court, is the latest mess against a controversial merger that has drawn fire from regulators, unions and buyers.
Last week, Ferguson co-signed a letter from five other attorneys general threatening to sue Albertsons if the retailer did not defer the dividend payment.
According to the lawsuit, Albertsons expects to cover the $4 billion amount using $2.5 billion in cash and an additional $1.5 billion in loans.
Albertsons needs $10 billion to operate over the next year, according to the suit, which argues that a $4 billion payout “will cripple Albertsons’ ability to operate its stores and compete meaningfully.” Kroger during the period before the agreement is concluded and will leave it in a weakened state if the agreement subsequently collapses.
The lawsuit argues that a similar crisis followed the Albertsons-Safeway merger in 2015: the divested stores were sold to Haggen, a local retailer, but Haggen’s cash reserves were so depleted by a dividend payment to his own private equity firm owner Haggen was ultimately unable to operate the stores, many of which were eventually acquired by Albertsons. Nine of the divested sites are no longer supermarkets, according to the suit.
“The parallels … are unsettling,” the lawsuit continues. “Albertsons says it will be sufficiently capitalized to pay the special dividend, but there is every reason to suspect that – two years from now – Albertsons will be…arguing to federal and state antitrust authorities that it is better to allow Kroger to buy its remaining assets because it’s a failing business.
So far, Washington appears to be the only state to follow through on a threat of legal action to stop the dividend.
And the effectiveness of that threat is far from clear, says attorney Douglas Ross, an antitrust expert at the University of Washington School of Law.
Ross agrees that a dividend payment may ultimately be relevant as federal and state antitrust regulators review the proposed merger to determine whether it hurts competition in the local grocery store.
But Ross is skeptical that Washington has the power to stop the dividend now, before that review, simply on the grounds that the payment itself could ultimately make the merger anti-competitive.
” Is the [retailers] to decide how they want to conduct themselves in order to bring their merger to fruition,” Ross said. “And if they do something that, in retrospect, could be considered stupid, that’s their business. The state has no right to stop them from doing something stupid.