Kroger to merge with Albertsons?

[kr.abs.swy]

Almost every company has debt. That's just how it works. Pull up basically any company you can think of on Yahoo Finance. 90%+ will have debt.

Expected return on equity is MUCH higher than the cost of debt. If there was no debt, the companies would have to generate even higher income to meet the expectations of equity holders. You DO NOT want to see that. Absolute disaster.

Here's the real question that nobody is willing to ask - it's very easy to determine when you just pull public company balance sheets which are public documents - HOW MUCH IS THE AMERICAN CONSUMER PAYING EACH MONTH IN CORPORATE DEBT SERVICING COSTS? I'll bet we are all paying more in debt service costs shopping these public companies than we pay in taxes now. This is the REAL cause of our rampant inflation and it is only going to get worse as long as these mergers keep getting approved and funded. Scary as all hell.

I've seen that here locally when Price Chopper bought Tops. Prior to the merger, I did most of my shopping at Price Chopper; they were competitive and I like supporting the "home team". Now they are so much higher on pretty much everything that aside from cherry picking their ad every now and then, I pretty much shop at Hannaford exclusively now.

[storewanderer]

EBITDA is the money they have to pay principal, pay interest, pay taxes, for capex, and to deal with working capital changes. Round numbers, they have $4bn in EBITDA. Assuming $14bn of debt at a 5% interest rate, interest expense would be $700MM per year, leaving them ~$3.3bn to do everything else. If rates double to 10%, interest expense would be $1.4bn -- an amount still easily covered by EBITDA. Worst case, they'd have to put off some expansion or trim back remodels. And that interest is tax deductible. The debt stack is material and the debt service is definitely a factor, but it is far from crippling.

The other thing we don't know about the last 4 years of profits are how much of that profit came from real estate sales... obviously they had a basis in these properties so it isn't that they got $720 million in profit, we don't know what their basis in the properties was, so that is a bit of a wild card as to how much money these activities made them.

I think they are selling out for a reason. If it was in Cerberus best interest to keep this going, they would keep it going. Looking at the number you are calculating would be a strong case to keep it going (especially since they could make some changes to drive sales and increase profitability even more).

For instance: 2017: sale-leaseback $720 million / 71 properties
https://www.supermarketnews.com/news/al ... -leaseback

2019: sale-leaseback: distribution centers: $660 million
https://www.winsightgrocerybusiness.com ... -leaseback

Also this union document on page 4 details additional sale/leaseback transactions.
https://pestakeholder.org/wp-content/up ... 110619.pdf
2019 53 stores/1 distribution center $931 million
Then the 2019 distribution center I cite above from Winsight, the union seems to think it was $950 million

[pseudo3d]

Nice to see all the speculation but this merger isn't happening. The FTC will kill it.

What do you expect? Kroger and Albertsons will separate and continue as they are? After Kroger already got significant insight into the business of Albertsons as part of the due diligence process... seems like a merger split would leave an even weaker/more vulnerable Albertsons.

I think they will agree to divest 650 stores, multiple distribution centers, multiple banners, and a couple manufacturing plants to SpinCo and the merger will proceed. FTC and various politicians will go high five each other for making so many divests happen and then the real fun will start- the integration. If they want to play hardball and only divest 100 stores then yes this deal is toast. Assuming they don't just pull a 7-Eleven/Speedway and just proceed with their merger without FTC approval and self-divest; if they go that route they should probably just divest the 650 stores, it will help them after the fact when FTC turns around and tries to sue them. They can go back to the way it was done during the Albertsons/Lucky merger and if a given zip code had stores from both chains, all assets of one chain or the other in a given zip code were divested. If they really want more stores in a given area they can go in and build new stores after getting the FTC off their back.

Rite Aid and Albertsons had a definitive merger agreement for six months before it was killed. Albertsons got nothing when they walked away. Giving Albertsons' shareholders SpinCo is a rotten deal and I could easily imagine the deal could be killed over that.

I think they are selling out for a reason. If it was in Cerberus best interest to keep this going, they would keep it going. Looking at the number you are calculating would be a strong case to keep it going (especially since they could make some changes to drive sales and increase profitability even more).

Counter-argument: if the situation at Albertsons was unworkable, then there is no reason for Kroger to drop $25B for a bunch of failing stores and billions more in debt.

[CalItalian]

EBITDA is the money they have to pay principal, pay interest, pay taxes, for capex, and to deal with working capital changes. Round numbers, they have $4bn in EBITDA. Assuming $14bn of debt at a 5% interest rate, interest expense would be $700MM per year, leaving them ~$3.3bn to do everything else. If rates double to 10%, interest expense would be $1.4bn -- an amount still easily covered by EBITDA. Worst case, they'd have to put off some expansion or trim back remodels. And that interest is tax deductible. The debt stack is material and the debt service is definitely a factor, but it is far from crippling.

I absolutely do not understand all of the hate that is being tossed around here with regards to Albertsons' finances.

Before COVID, Albertsons profitability was rather dismal, lost money based on operations every year from 2016-2018 but got some tax benefits to ease those losses, 2019 they turned the corner and became profitable.

The real problem with Albertsons financials is here:
https://www.albertsonscompanies.com/inv ... fault.aspx

Go to page 28 on the debt and take a look at that, through page 29.
Then pages 84-88.
The real problem is all this debt coming due each year, with the current interest rate environment, the debt service costs go up significantly. This is the real problem.

5% interest in 2024? LOL. I'm on the side we're going into the abyss - fast. Financing is going to be very rough for this deal. That may kill it more than the regulatory issues.

[CalItalian]

Almost every company has debt. That's just how it works. Pull up basically any company you can think of on Yahoo Finance. 90%+ will have debt.

Expected return on equity is MUCH higher than the cost of debt. If there was no debt, the companies would have to generate even higher income to meet the expectations of equity holders. You DO NOT want to see that. Absolute disaster.

Here's the real question that nobody is willing to ask - it's very easy to determine when you just pull public company balance sheets which are public documents - HOW MUCH IS THE AMERICAN CONSUMER PAYING EACH MONTH IN CORPORATE DEBT SERVICING COSTS? I'll bet we are all paying more in debt service costs shopping these public companies than we pay in taxes now. This is the REAL cause of our rampant inflation and it is only going to get worse as long as these mergers keep getting approved and funded. Scary as all hell.

I've seen that here locally when Price Chopper bought Tops. Prior to the merger, I did most of my shopping at Price Chopper; they were competitive and I like supporting the "home team". Now they are so much higher on pretty much everything that aside from cherry picking their ad every now and then, I pretty much shop at Hannaford exclusively now.

Yes, every company has debt. Many have been riding the near 0% refinancing for more than a decade that should have been in Chapter 7, out of business years ago.

Those near 0% days are over - forever. Lot of big, well known name companies aren't going to survive when their refinancing to double digit interest rates come due.

[CalItalian]

Nice to see all the speculation but this merger isn't happening. The FTC will kill it.

What do you expect? Kroger and Albertsons will separate and continue as they are? After Kroger already got significant insight into the business of Albertsons as part of the due diligence process... seems like a merger split would leave an even weaker/more vulnerable Albertsons.

I think they will agree to divest 650 stores, multiple distribution centers, multiple banners, and a couple manufacturing plants to SpinCo and the merger will proceed. FTC and various politicians will go high five each other for making so many divests happen and then the real fun will start- the integration. If they want to play hardball and only divest 100 stores then yes this deal is toast. Assuming they don't just pull a 7-Eleven/Speedway and just proceed with their merger without FTC approval and self-divest; if they go that route they should probably just divest the 650 stores, it will help them after the fact when FTC turns around and tries to sue them. They can go back to the way it was done during the Albertsons/Lucky merger and if a given zip code had stores from both chains, all assets of one chain or the other in a given zip code were divested. If they really want more stores in a given area they can go in and build new stores after getting the FTC off their back.

Not going to be done by zipcode. Pay closer attention to how Lina Kahn FTC Chairwoman operates, her past comments (including on the Haggen disaster). This will be an unconventional review.

"Khan criticized that outcome in a 2017 law review article she co-wrote, calling it (Haggen) a “spectacular” failure that a casual observer could have anticipated."

Clearly they aren't going the 7-11/Speedway route. Unions & SpinCo should be your first clues.

There are NO politicians backing this - on either side.

[CalItalian]

I anticipate Kroger already has gone through the entire Albertsons store portfolio in regions with overlap and has prepared what they want to divest, various what/if/than scenarios to play with FTC, and how this will go. The various state AGs suing may get in the way and cause Kroger some fun, but at the same time, anything divested, means a lower purchase price for Kroger. And if the stores are "overlapping" that probably also means they are marginal performing/poorly performing anyway because there are few situations with Albertsons/Kroger competing where the Albertsons operation is a higher volume store than the Kroger operation. The way the releases read, it sounds like everything going to SpinCo is going to be Albertsons assets. The divested stores will never even show up as assets on Kroger's books. At the time of the merger there will be two things that will happen, the divest stores will detach from Albertsons to separate public company SpinCo, then what is left of Albertsons will be merged into Kroger.

This is a very creative transaction with this SpinCo. This alleviates a number of scenarios. First, you no longer have the FTC breathing down your neck to sell the stores within x days from the merger or face fines. You no longer have a scenario saying the buyer has to operate for x years and the seller cannot open a new store nearby for x years. Further it reduces the cash outlay for Kroger to buy Albertsons.

Also I find it entirely possible the stores sold to SpinCo just stay part of the main chains but under different ownership, for an extended time period. As in the customer who goes to a Safeway run by "SpinCo" does not even know they are in a Safeway with a different owner. Sort of like those Rite Aids that were owned by Walgreens but still operated as Rite Aid for as much as 3 years, on Rite Aid systems, Rite Aid private label, Rite Aid ads, etc.

Are we sure there are just Albertson's assets going to SpinCo?

Food4Less actually wouldn't have much of an issue finding a buyer and I believe that it is probably less valuable to Kroger than Jewel if they had to choose one over the other. I'd imagine Bodega Latina the owner of Smart & Final might find it attractive.

In the year leading up to the Albertsons/Safeway merger both chains closed a handful of stores in the Phoenix area. I'd be interested to see if Kroger and Albertsons/Safeway have some "quiet" closures that they claim are due to operational performance but are more likely related to securing regulatory approval.

Also what will become of Harris Teeter and United? Both are conventional operators that haven't been fully integrated into Kroger or Albertsons even though both have been owned by Kroger or Albertsons for a while.

It's just going to be Albertsons assets that are going to be part of SpinCo. The details are in how the deal is structured, how they are trying to get regulatory approval. It's a relatively new strategy being used to get past courts blocking deals the FTC sues over.

We really need to throw out much of what has occured in past grocery mergers to understand how this is going to go. Expect the FTC to enlist other government agencies as part of this review who will (in my view, opinion) all sue to block the deal.

[buckguy]

You guys love to drag Haggen into any discussion, but the structure seems different here and the scale is larger plus the debt issues are much more in the foreground. In some ways, it's a bit like Walgreen/Rite Aid and the divestures there certainly haven't helped Rite Aid, nor does Walgreen seem any stronger for what they've gotten.

Kroger may emerge as the stronger party, but they will likely find themselves with some problem children---Shaw/Star has been shrinking for years and faces strong regional operators plus Wegman, as well as Ahold in the Boston area and anywhere they'd want to expand South or West, along with Market Basket to the North. If Kroger keeps Acme, they have another problem with strong local competition in order to succeed. This is the kind of scenario that has always been trouble for them---they need weak, disorganized competitors. The Bay area is someplace where they've never done well and I'd wonder how they'd do there if that falls in their realm. Neither their chains in Southern California nor Albertson's seem to be strong or growing. It's a shame that the long-term marketplace capital that Ralphs and Vons/Pavillions have built up over time has been squandered so easily.

Albertson's return to profitability seems to have coincided with their pricing reaching the stratosphere. The mention of real estate sales doesn't seem consistent with the mention of increased manufacturing (on this thread or another), although I seem to recall that they had cut back on their food processing operations. Regardless, if their profits are based on overcharging or selling off, these are not sustainable and new management will need to reverse course.

The idea of Loblaw buying SpinCo is intriguing, but they have had to repeatedly reimagine themselves to survive in Canada. I'm guessing that their private label operations (a reason to buy stores) were shrunk after the loss of US accounts. They are willing to make significant changes to survive--this was evident even decades ago when they tried to hold on to their Buffalo-based operations by way of buying a wholesaler, but it's a different matter to do that in places where they've never operated.

[ClownLoach]

Almost every company has debt. That's just how it works. Pull up basically any company you can think of on Yahoo Finance. 90%+ will have debt.

Expected return on equity is MUCH higher than the cost of debt. If there was no debt, the companies would have to generate even higher income to meet the expectations of equity holders. You DO NOT want to see that. Absolute disaster.

Here's the real question that nobody is willing to ask - it's very easy to determine when you just pull public company balance sheets which are public documents - HOW MUCH IS THE AMERICAN CONSUMER PAYING EACH MONTH IN CORPORATE DEBT SERVICING COSTS? I'll bet we are all paying more in debt service costs shopping these public companies than we pay in taxes now. This is the REAL cause of our rampant inflation and it is only going to get worse as long as these mergers keep getting approved and funded. Scary as all hell.

I've seen that here locally when Price Chopper bought Tops. Prior to the merger, I did most of my shopping at Price Chopper; they were competitive and I like supporting the "home team". Now they are so much higher on pretty much everything that aside from cherry picking their ad every now and then, I pretty much shop at Hannaford exclusively now.

I'm not saying debt is unnecessary, however there are many situations that are erupting especially in retail where substantial additional amounts of debt are taken out, used in questionable manner instead of being working capital, and leave the company hobbled. It is well known and documented how such debts took down Toys R Us, Sports Authority, Linens N Things, and many regional retailers. Usually, but not always, private equity firms are involved in either partial or total ownership. In Albertsons case most of that debt was probably taken against their P&L but the cash went to Cerberus instead of the company. The costs of this financing are passed along directly to the customer, or are removed from the employee payroll. I'm in the middle of one of these exact situations right now where a company was doing fine and profitable as a public company with a good amount of debt, but was taken private and instantly the debt doubled. Prices have had to substantially increase, store maintenance and upgrades are slashed except for new stores (because new stores become new assets - while not every dollar you spend fixing old stores increases the value of said old store - so the old stores now rot), and a project is underway removing all staffed checkout lanes except for one per store and replacing everything else with self checkout. And this slashing of expenses and raising of prices is still now enough because of the heap of additional debt. Reasonable debt is fine. Unreasonable debt kills companies. Wall Street has been quick to force companies into taking out billions of dollars in loans for soon-to-be-obsolete system upgrades or distribution centers to drive e-commerce whether it's really needed or not, and many companies have been significantly harmed by this. Then Wall Street changes their practices and suddenly they have to spend more money (now that you've built e-commerce distribution centers that isn't actually the best way to go, so now you need to close those and do ship from store and borrow more money to change your programs). Meanwhile the Wall Street bankers make more money on the interest for the debt service and someone has to pay for that....

Let's not pretend that debt is not important to this discussion, it is critically important. Companies that are operating in little to no debt environments (basically companies that just finance their inventory builds) are doing much, much better and are breaking away from the rest of the retail pack. And it seems that there are some sterling examples of companies that are avoiding the e-commerce money suck and are much more successful and agile as a result. In SoCal the obvious one previously mentioned is Stater Bros. who pretty much is private, has been quoted in articles before as not being heavily in debt, operates mainly as a traditional non e-commerce retailer (they let Instacart in the door which just brings them free sales), and is absolutely kicking butt over their Albertsons and Kroger competition. There are other anecdotal examples I can think of right now where a private low debt retailer is by far more competitive.

[Bagels]

I anticipate Kroger already has gone through the entire Albertsons store portfolio in regions with overlap and has prepared what they want to divest, various what/if/than scenarios to play with FTC, and how this will go. The various state AGs suing may get in the way and cause Kroger some fun, but at the same time, anything divested, means a lower purchase price for Kroger. And if the stores are "overlapping" that probably also means they are marginal performing/poorly performing anyway because there are few situations with Albertsons/Kroger competing where the Albertsons operation is a higher volume store than the Kroger operation. The way the releases read, it sounds like everything going to SpinCo is going to be Albertsons assets. The divested stores will never even show up as assets on Kroger's books. At the time of the merger there will be two things that will happen, the divest stores will detach from Albertsons to separate public company SpinCo, then what is left of Albertsons will be merged into Kroger.

This is a very creative transaction with this SpinCo. This alleviates a number of scenarios. First, you no longer have the FTC breathing down your neck to sell the stores within x days from the merger or face fines. You no longer have a scenario saying the buyer has to operate for x years and the seller cannot open a new store nearby for x years. Further it reduces the cash outlay for Kroger to buy Albertsons.

Also I find it entirely possible the stores sold to SpinCo just stay part of the main chains but under different ownership, for an extended time period. As in the customer who goes to a Safeway run by "SpinCo" does not even know they are in a Safeway with a different owner. Sort of like those Rite Aids that were owned by Walgreens but still operated as Rite Aid for as much as 3 years, on Rite Aid systems, Rite Aid private label, Rite Aid ads, etc.

Are we sure there are just Albertson's assets going to SpinCo?

Food4Less actually wouldn't have much of an issue finding a buyer and I believe that it is probably less valuable to Kroger than Jewel if they had to choose one over the other. I'd imagine Bodega Latina the owner of Smart & Final might find it attractive.

In the year leading up to the Albertsons/Safeway merger both chains closed a handful of stores in the Phoenix area. I'd be interested to see if Kroger and Albertsons/Safeway have some "quiet" closures that they claim are due to operational performance but are more likely related to securing regulatory approval.

Also what will become of Harris Teeter and United? Both are conventional operators that haven't been fully integrated into Kroger or Albertsons even though both have been owned by Kroger or Albertsons for a while.

It's just going to be Albertsons assets that are going to be part of SpinCo. The details are in how the deal is structured, how they are trying to get regulatory approval. It's a relatively new strategy being used to get past courts blocking deals the FTC sues over.

We really need to throw out much of what has occured in past grocery mergers to understand how this is going to go. Expect the FTC to enlist other government agencies as part of this review who will (in my view, opinion) all sue to block the deal.

There’s nothing to suggest SpinCo will comprise of Albertsons assets only; the press release indicates that Kroger and Albertsons will jointly make the decision in which assets are put into into, SpinCo will be spun off to Albertsons shareholders as part of the deal and the final price may be adjusted based upon the value of SpinCo.

Some initial reports wrongly indicated SpinCo would be spun off before the merger was complete, hence the assumption it would be all Albertsons assets - but that’s incorrect.

I agree that the bulk of SpinCo assets — everything from stores, to brands, to manufacturing facilities (specifically dairies), to distribution centers, etc. - will largely be Albertsons. But there are clearly situations in which Kroger would swap its store for Albertsons - like the Pavilions in WeHo for the Beverly Ralphs up the street.