If the Federal Trade Commission clears grocery giant Albertsons' $20 billion sale to Kroger on schedule next month, the private-equity investors who control this collection of U.S. grocery and drug store chains will have squeezed out profits nine times larger than what they invested since 2006.
That's about triple what you and I and our retirement plans (if any) would have gotten if we put our money in the S&P 500 stock index over the same period. And it's a lot more than grocery workers' wages have risen, even with pandemic-era gains caused by labor shortages and hiring competition from Amazon and other warehouse and delivery operators.
These investors, headed by private-equity giant Cerberus Capital Management, collected the 2,300 stores that now make up Albertsons in a series of complex deals. They include Acme, Safeway, Jewel-Osco, Vons, Shaw, and more than a dozen other brands.
Cerberus doesn't always hit home runs: The 30-year-old firm lost $2 billion in Chrysler's 2009 bankruptcy. For the grocery bet, it spread its risk by teaming up with four big real estate investors, among them Lubert-Adler, the Philadelphia-based property partnership whose clients include Pennsylvania's public pension plans.
Investors control 50% of shares
After years of merging, consolidating, and upgrading the stores, these pros took Albertsons public in a stock offering last year but still control over 50% of the shares and will be the biggest beneficiaries of the Kroger deal.
For example, Lubert-Adler owns about 10.9% of Albertsons and stands to turn its $300 million investment into $2.7 billion if everything goes through on schedule. (With the government still scrutinizing the sale, founders Ira Lubert and Dean Adler wouldn't talk when I called last week.)
The deal incldes a big kiss goodbye, too: After Albertsons used its pandemic-era profits to pay down a lot of old debt — cutting its debt-to-earnings ratio from nearly 5 to just 1 — the company has agreed to pay the private-equity funds and other current investors an extra $4 billion — $6.85 per share — as a "special dividend" on Nov. 7.
That's more than two years' profits for the company, implying Albertsons will have to borrow at today's fast-rising rates, boosting the debt ratio to as much as 2.5, still far less than the pre-pandemic level; or use profits from asset sales, which the government is expected to require as a condition of the deal in Midwestern and Western states where Kroger and Albertsons stores compete.
The payout stirs up critics, who discount store improvements, new technology and other investments by private-equity owners, and see investors like Cerberus and Lubert-Adler as scavengers that squeeze target companies' employees and leave the firms they buy and sell weaker when they're done wringing out profits and payouts.
"This will greatly weaken the debt-ridden grocery chain. Regulators need to step in and stop this pillaging of the company," wrote Eileen Appelbaum, the Penn- and Temple-trained economist, author of Private Equity at Work, and cohead of the Center for Economic and Policy Research, a think tank in Washington, D.C.
Unions are worried
"It's a really big concern to the unions: What financial condition is this company going to be in when you pull $4 billion out of these companies? We've had a few huddles about it, our international union is hiring financial experts and law firms, and I do believe you're going to see some attempt to try to stall or block that payment," says Wendell Young IV, president of Philadelphia-based United Food and Commercial Workers Local 1776, which represents workers at Acme and 100 other companies, mostly in Pennsylvania.
The union and other locals at both chains in 34 states are concerned that the cost of paying off Cerberus, Lubert-Adler and the other private investors will "show up at the bargaining table in a push for lower wages and benefits," Young added. Merger-related debt is as common as, well, mergers in the chain grocery business.
Young notes his union has had a string of "nasty fights with Acme" even before its former owner, Sam Skaggs' American Stores, was bought by Albertsons in 1999.
Union leaders talk tough; it's part of negotiations. With Kroger's and Albertson's long history as union companies — competing now with nonunion grocers from Walmart to Wegmans — there's reason to expect the enlarged Kroger and its unions will come to terms, with a larger, more efficient competitor, ensuring the pension and medical plans that distinguish the chains as union employers are more likely to continue.
When Skaggs' company hired Wall Street bankers and threatened to sell Acme stores, the union hired its own investment bank and tried to buy them (as it did former A&P stores to form the former SuperFresh chain).
At the end of the 2000s, when Albertsons merged with the SuperValu store group and managers demanded cuts, the union waged a "walk and work" picketing campaign to pressure the company to continue benefit payments without breaking its contract.
Young said that similar tactics could pressure Kroger to commit to funding pay, benefits and store needs before paying off investors — and that the labor-friendly Biden administration, or even state antitrust regulators, could help persuade the employers to modify their deal so it's more worker-friendly.
But it would be unusual for the FTC, the Securities and Exchange Commission, or any other federal agency to step in and block Albertsons from paying investors a fat dividend, says Charles Elson, a corporate-governance consultant based in Newark, Delaware.
That's because Kroger, the buyer, has agreed to accept Albertsons, even without the $4 billion, he added. "If Kroger thought taking the money out would ruin Albertsons, they wouldn't buy it," Elson added. "Kroger has to produce results for their own investors."
