If the Federal Trade Commission clears Acme Markets owner Albertsons’ $20 billion sale to Kroger on schedule next month, the private investors who control this collection of U.S. grocery and drug store chains will have realized profits nine times greater than what they have since invested. 2006.
That’s about triple what you and I and our pension plans (if any) would have gotten if we had put our money in the S&P 500 stock index over the same period. And that’s far more than rising wages for grocers, even with pandemic-era gains caused by labor shortages and competition to hire from Amazon and other grocery operators. warehouses and delivery.
These investors, led by private equity giant Cerberus Capital Management, brought together the 2,300 stores that now make up Albertsons in a series of complex transactions. Besides Acme, they include Safeway, Jewel-Osco, Vons, Shaw, and over a dozen other brands.
Cerberus doesn’t always hit the home runs: The 30-year-old company lost $2 billion in Chrysler’s 2009 bankruptcy. For the grocery bet, it spread its risk by partnering with four big investors real estate, including Lubert-Adler, the Philadelphia-based real estate partnership whose clients include Pennsylvania’s public pension plans.
After years of merging, consolidating and upgrading stores, these pros took Albertsons public last year but still control more than 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 is expected to turn its $300 million investment into $2.7 billion if everything goes according to schedule. (With the government still reviewing the sale, founders Ira Lubert and Dean Adler wouldn’t speak when I called last week.)
The deal also includes a big parting kiss: after Albertsons used its pandemic-era profits to pay off much of its old debt – reducing its debt-to-earnings ratio from nearly 5 to just 1 – The company agreed to pay private equity funds and other current investors an additional $4 billion – $6.85 per share – as a “special dividend” on Nov. 7.
That’s more than two years of profits for the company, meaning Albertsons will have to borrow at today’s rapidly rising rates, pushing the debt-to-equity ratio up to 2.5, still well below the level before the pandemic; or use proceeds 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 stokes critics, who disregard store improvements, new technology and other investments by private equity owners, and see investors like Cerberus and Lubert-Adler as scavengers squeezing companies’ employees targets and leave the companies they buy and sell weaker when they’re squeezed out of profits and payouts.
“This will significantly weaken the indebted grocery chain. Regulators must step in and stop this corporate plunder,” wrote Eileen Appelbaum, a Penn and Temple-trained economist, author of Private equity at workand co-director of the Center for Economic and Policy Research, a think tank in Washington, D.C.
“It’s a very big concern for the unions: what financial situation is this company going to be in when you take $4 billion out of these companies? We’ve had some discussions about this, our international union is hiring financial experts and law firms, and I think you’re going to see attempts to block or block this payment,” says Wendell Young IV, President of United Food and Commercial Workers Local 1776, based in Philadelphia, which represents workers at Acme and 100 other companies, mostly in Pennsylvania.
The union and other locals at both chains in 34 states fear the cost of reimbursing Cerberus, Lubert-Adler and other private investors “will come to the bargaining table to drive down wages and benefits.” , Young added. Merger-related debt is as common as mergers in grocery chains.
Young notes that his union had a series of “nasty fights with Acme” even before its former owner, Sam Skaggs’ American Stores, was bought out by Albertsons in 1999.
Union leaders talk tough; it’s part of the negotiations. With Kroger and Albertson’s long history as union businesses — now competing with Walmart’s non-union grocers in Wegmans — there’s reason to expect expanded Kroger and its unions s ‘hear, with a bigger and more efficient competitor, providing pensions and medical care, the plans that set the chains apart as unionized employers are more likely to proceed.
When Skaggs’ company hired Wall Street bankers and threatened to sell Acme stores, the syndicate hired its own investment bank and tried to buy them (as it did former A&P stores for form the former SuperFresh chain).
In the late 2000s, when Albertsons merged with the SuperValu group of stores and executives demanded cuts, the union waged a “walk and work” picket campaign to pressure the company to she continues to pay benefits without breaking her contract.
Young said similar tactics could pressure Kroger to commit to funding store salaries, benefits and needs before paying investors — and that the worker-friendly Biden administration, or even the state antitrust regulators, could help persuade employers to change their agreement so that it is more favorable to workers.
But it would be unusual for the FTC, Securities and Exchange Commission or any other federal agency to step in and block Albertsons from paying investors a large dividend, says Charles Elson, a corporate governance consultant based in Newark, Del.
That’s because Kroger, the buyer, agreed to accept the Albertsons even without the $4 billion, he added. “If Kroger thought taking the money would ruin the Albertsons, they wouldn’t buy it,” Elson added. “Kroger must deliver results for its own investors.”