Kroger-Albertsons Competition Fix Rejected by Skeptical FTC

The US Federal Trade Commission’s lawsuit to block a tie-up between supermarket giants Kroger Co. and Albertsons Cos. underscores antitrust enforcers’ reluctance to believe companies that propose easy fixes to concerns about competition.

Merging companies in the past offered to sell off some assets, or divest, in order to assuage regulators’ concerns about monopoly power or other harms from their deal. But some of those selloffs went off the rails. For example, Albertsons in a 2015 deal with Safeway agreed to divest grocery stores that then went bankrupt.

Given the flawed track record, the FTC and the Justice Department’s Antitrust Division under the Biden administration have preferred challenging deals rather than accepting pre-complaint settlements in the form of divestitures.

“We don’t want to resolve mergers like a craps game in Las Vegas,” said David Balto, a former trial attorney in the DOJ’s Antitrust Division and former FTC policy director. “The potential risk of a failed divestiture should not fall on the pocketbooks of consumers.” Balto now runs his own antitrust firm.

The FTC, eight states, and Washington, D.C. sued on Monday to block Kroger’s $24.6 billion acquisition of Albertsons, arguing the merger would lead to lower wages for workers and higher prices for groceries. The complaint, filed in federal court in Portland, Ore., comes after Colorado and Washington state sued in state courts to block the deal.

Kroger and Albertsons, in an attempt to assuage the FTC’s concerns about the deal, last year unveiled a plan to divest at least 413 stories to Piggly Wiggly chain owner C&S Wholesale Grocers Inc. A Kroger spokesperson said the grocery giants “took considerable steps to position C&S to continue to successfully operate divested stores,” adding that no stores will close as a result of the merger.

In its complaint, the FTC said C&S lacks the resources and capabilities to replicate the competition between Kroger and Albertsons, and that the divestiture fails to solve anticompetitive concerns. C&S today operates only 23 stores and one retail pharmacy, the FTC said.

“Kroger and Albertsons’s inadequate divestiture proposal is a hodgepodge of unconnected stores, banners, brands, and other assets that Kroger’s antitrust lawyers have cobbled together and falls far short of mitigating the lost competition between Kroger and Albertsons,” the FTC said.

See also: Big Law Firms Guide Kroger, Albertsons Through Store Selloffs

Recent Precedent

Companies seeking to merge have long been required to show they can offset any risk of harm from the deal, said Christine Bartholomew, a professor at the University at Buffalo School of Law who teaches antitrust. But FTC Chair Lina Khan has shown she’s willing to challenge such proposed offsets, “giving the words on paper some real meaning,” Bartholomew added.

“She is taking a more aggressive stance—but the basis that she is taking is actually grounded in law,” Bartholomew said.

The agency under Khan can point to recent failed divestitures as evidence for heightened skepticism. For example, in a bid to merge with supermarket operator Safeway, Albertsons agreed in 2015 to divest 168 supermarket outlets—the majority to much-smaller regional grocery chain Haggen Holdings LLC—in order to settle FTC allegations that the proposed $9.2 billion deal may have been anticompetitive.

But later that year, Haggen declared bankruptcy after laying off hundreds of workers. Albertsons ultimately repurchased many of the stores it had divested. Khan criticized this divestiture and its outcomes in a 2017 Harvard Law and Policy Review article.

The failed Haggen divestiture colors how regulators are looking at any merger involving Albertsons, Bartholomew said.

Attorneys and professors also pointed to Hertz Global Holdings Inc.‘s acquisition of competitor Dollar Thrifty in 2012 as another example of a divestiture failure. To greenlight the deal, the FTC required Hertz to sell its Advantage Rent A Car business; but within months, Advantage filed for bankruptcy.

“There’s been an increased wariness about these fixes because what we’ve seen from the economic literature, and also from everyday experience, is that they don’t always work and consumers are the ones that end up paying the price,” said Maurice Stucke, an antitrust professor at the University of Tennessee College of Law who advised the FTC on policy matters last year and previously served in the DOJ’s Antitrust Division.

Litigating the Fix

Companies seeking to merge now recognize they have to include a buyer in any divestiture proposal in order to have a chance of convincing regulators that the divestiture adequately resolves antitrust concerns, said Eleanor Tyler, a Bloomberg Law legal analyst.

But the FTC’s lawsuit to block the Kroger and Albertsons deal shows the agencies are even skeptical of divestitures that include a proposed buyer. Companies must demonstrate how the divested assets will be used in the buyer’s hands—and Kroger and Albertsons failed to convince the FTC that C&S would be an adequate competitor in the grocery landscape, Tyler said.

The agencies’ preference for challenging deals rather than accepting pre-complaint remedies results in more fixes being hashed out in court, Tyler added. Litigating the fix means courts, rather than antitrust regulators, have the final say on whether a proposed remedy resolves antitrust concerns.

While companies tend to have the upper hand when bringing a proposed merger remedy to court, Tyler said the FTC is “coming in with more ammo than they usually do” in the Kroger lawsuit.

“You get a second bite at the apple with the court, and the court is not as skeptical” about divestitures, Tyler said. “But it’s hard to sell them on a buyer that just doesn’t have any track record in the industry.”