By Aishwarya Venugopal, Diane Bartz and Abigail Summerville
(Reuters) - Kroger (NYSE:KR) Co snapped up Albertsons Cos Inc in a $25 billion deal on Friday, creating a U.S. grocery behemoth to better compete with leader Walmart (NYSE:WMT) Inc on prices while bracing for potential antitrust roadblocks.
The mega merger between the No. 1 and 2 standalone grocers in the United States will bring under one roof nearly 5,000 stores that include banners such as Albertsons' Safeway and Kroger-owned Ralphs and Fred Meyer.
The U.S. Federal Trade Commission (FTC) could, however, challenge the deal between the two major grocers as antitrust scrutiny intensifies under the Biden administration and decades-high inflation squeezes households, according to three antitrust experts.
"There is a significant risk of a challenge," said Andre Barlow of law firm Doyle Barlow and Mazard PLLC. "This is the type of deal that the FTC wants to discourage."
To help ease those concerns, the companies said they plan to divest some stores and that Albertsons is ready to spin off a standalone unit to its shareholders immediately before the deal's close, expected in early 2024. The new public company is estimated to comprise as many as 375 stores.
"We have a clear path to achieve regulatory approval with divestitures," company executives reassured investors on a conference call on Friday, adding that it was still too early to narrow down which markets the restructuring would occur in.
Barlow said the U.S. FTC would still have questions about who would run the stores, and whether they would have enough in the way of assets and purchasing power to compete effectively.
Still, some analysts were optimistic that the plan to divest stores would be enough.
Neil Saunders, managing director of GlobalData Retail, said "these (concerns) are mostly local issues where a merger produces a very high market share in certain areas. From a broader national perspective, a combined Kroger and Albertsons does not pose any major threat to the competitive dynamics of the market."
"Scale is necessary to deliver the prices and investments that consumers demand."
GRAPHIC: America's top ten grocery retailers - https://graphics.reuters.com/ALBERTSONS-KROGER/zdpxolblevx/chart.png
BATTLE FOR LOWEST PRICES
With a customer base of 85 million households and 66 distribution centers, Kroger and Albertsons would together have an edge over negotiations on product prices with suppliers, including consumer goods companies, at a time when prices of groceries and essentials are soaring in the country.
Kroger said it expects to reinvest about half a billion dollars of cost savings from deal synergies to reduce prices for customers. An incremental $1.3 billion will also be invested into Albertsons.
Market leader Walmart has been doubling down on its own grocery business and has traditionally used its scale to demand the lowest possible prices from food and beverage suppliers, leaving rivals at a disadvantage in price negotiations.
"The merger will accelerate our position as a more compelling alternative to larger and non-union competitors," Kroger Chief Executive Officer Rodney McMullen said.
Kroger will pay $34.10 for each Albertsons share, representing a premium of about 33% to the stock's closing price on Wednesday, a day before media reports emerged of a deal between the two.
Shares of Albertsons were down about 6% in morning trading, after closing up 11% on Thursday, while Kroger's stock was down about 3%. Earlier in the day, Ahold Delhaize shares also surged on news of a potential deal, with J.P. Morgan analysts saying that a deal would underpin the Dutch supermarket major's own M&A appeal.
Kroger CEO McMullen, who will serve as the head of the combined firm, said in an interview with Reuters that they had approached Albertsons a couple of months ago, after the smaller rival began a strategic review process earlier this year.
"One of the things that will be incredibly important to us is making sure that the (spun out) stores, when we sell them, is making it into a viable, strong business from a competitive standpoint." Goldman Sachs (NYSE:GS) and Credit Suisse were the financial advisors to Albertsons, while Citigroup (NYSE:C) and Wells Fargo (NYSE:WFC) advised Kroger. Citi and Wells also jointly arranged $17.4 billion of debt financing to support the deal.
Kroger will have to pay Albertsons $600 million if the deal is terminated.