The controversial merger between grocery store giants Kroger (KR) and Albertsons (ACI) announced back in October called for Kroger to pay $34.10 a share for Albertsons, with the deal closing in 2024. That takeout price included a special dividend of $6.85 that Albertsons shareholders of record as of Oct. 24 were to receive back in November. The payment of that dividend was delayed due to a preliminary injunction, but the Washington State Supreme Court declined to intervene and the dividend payment now is moving forward.
Albertsons' current stock price of $21.20 implies 29% upside if the merger goes through (as the current price excludes the $6.85 special dividend) and suggests that the market doubts the merger will proceed. The politicos have been all over this deal as the combination would create the largest pure-play U.S. grocery company and would be second only to Walmart (WMT) in terms of grocery sales. (I only wish our local Acme store -- an Albertson's brand -- had Walmart-like prices.)
The grocery store business in the U.S. remains fragmented, but the biggest current players behind Walmart are Amazon (AMZN) and Costco (COST) followed by Kroger and Albertsons.
Another facet of the merger agreement to consider is that it calls for Alberstons to spin off a number of stores, estimated at between 100 and 375, which ACI shareholders would receive as part of the total consideration. If the deal goes through, it would mean cash plus shares of the spinoff worth a total of $27.25.
Of course, The Federal Trade Commission (FTC) will have its say on this merger, and Kroger has received requests for additional information from the agency. There's always the possibility the FTC will not approve the merger. I think back to the failed 1997 Office Depot/Staples merger and associated comical quote from Director of FTC Bureau of Competitions William J. Baer:
"The FTC's decision to ask a court to block the merger is about lower prices for consumers. If the merger is allowed to proceed, consumers will pay millions of dollars more for their copy paper, envelopes, pens and file folders."
In any event, knowing the risks that the merger could fail, I've recently taken a position in Albertsons. If the deal goes through, which I believe it will, I've got 30% upside, and if it does not, I've got shares in a major grocery chain trading at 7x 2024 and 2025 consensus earnings estimates and that yields 2.3%.
