By Jody Godoy and Aishwarya Venugopal
(Reuters) -Albertsons and Kroger (NYSE:) ended their $25 billion merger plan on Wednesday after courts blocked the deal, with the former suing its rival, claiming breaches of contract that led to the deal’s demise.
The formal termination ends a two-year effort by the chains to combine, which regulators said would lead to higher prices for shoppers. Albertsons (NYSE:) said it was suing because Kroger failed to take “all actions” to get the deal approved.
“Given the recent decisions by federal and state courts to block our proposed merger with Kroger, we have made the difficult decision to terminate the merger agreement,” said Albertsons CEO Vivek Sankaran.
Albertson is seeking billions of dollars in damages, along with $600 million in severance pay.
Kroger called the claims baseless in a statement and said it will defend against them in court.
“This is clearly an attempt to deflect responsibility following Kroger’s written notice of Albertsons’ multiple violations of the agreement, and to demand payment of the merger consideration, to which they are not entitled,” a Kroger spokesperson said.
Kroger said Wednesday that after reviewing its options, the supermarket chain has determined that “it is no longer in its best interests to pursue the merger.”
Albertsons operates about 2,300 stores and had hinted at the possibility of store closures and layoffs if the deal was blocked. However, the company sounded positive on Wednesday, praising recent investments in new technology.
Two different courts blocked the deal on Tuesday, siding with federal and state antitrust regulators, who moved to stop the deal by saying the merger would eliminate competition among traditional supermarket chains, creating higher prices and influence of union workers would decline.
A combination of Kroger and Albertsons would have had the second-largest share of the U.S. grocery industry at about 11%, based on industry 2023 market share information from GlobalData. Walmart (NYSE:) would have continued to hold the top spot with about 17% of the market.
“Walmart, Costco (NASDAQ:) and other supermarket giants are the clear winners in this scenario,” said Blake Droesch, analyst at eMarketer. “The merger would have created a formidable competitor to Walmart. But without the merger, Walmart remains in a class of its own.”
The deal became a symbol of rising grocery costs and faced fierce regulatory opposition. U.S. food prices have risen 25% over the past four years, and while food inflation shows signs of cooling in 2024, grocery bills remain a concern for shoppers.
The U.S. Federal Trade Commission, along with attorneys general from eight states and the District of Columbia, filed the lawsuit. Washington state filed its own lawsuit to block the deal. In both cases, judges ruled on Tuesday that the deal would unlawfully reduce competition. Colorado had also filed a lawsuit to block the deal.
Kroger defended the proposed combination, saying it would lower prices at Albertsons stores, where prices are 10-12% higher than their own. The merged company would finance price reductions through cost savings it expects from a larger operation, and a larger customer base to boost revenue for Kroger’s data consulting business.
The rulings against the deal are the result of Kroger’s unwillingness to listen to regulators’ feedback and sell assets that would have enabled approval of the deal, Albertsons said.
If the deal went through, Kroger would own about 5,000 stores in the United States. The companies had argued during the lawsuit that selling 579 of the stores, mainly in the western U.S. states where Kroger and Albertsons are located close to each other, would maintain competition.
U.S. District Judge Adrienne Nelson, who oversaw the FTC case, disagreed and questioned whether the stores’ proposed buyer, C&S Wholesale Grocers, could become a successful competitor.
Albertsons claims Kroger rejected stronger suitors for the sale.
Several analysts had predicted a quick termination of the deal and said Kroger would not appeal the decision to block the deal.
“We are disappointed by the Court’s decision, but not surprised given the FTC’s narrow view of competition and the pushback and lawsuits from multiple attorneys general,” Telsey Advisory Group analysts said after the deal was blocked.
Albertsons also said Wednesday it would increase its quarterly dividend to 15 cents per share, from the current 12 cents per share, and approved $2 billion in share repurchases, although that also includes previously approved share buybacks.
In addition, Kroger also said its board had approved a new stock repurchase program that would allow for the repurchase of up to $7.5 billion in common stock.
The new repurchase program replaces Kroger’s existing $1 billion authorization, which was approved in September 2022, the company said, adding that it plans to enter into an accelerated share repurchase agreement of approximately $5 billion of common stock.
Kroger shares rose 2% in extended trading following the buyback news. Shares of Albertsons, which have fallen about 20% this year, closed 1.5% lower at $18.23 on Wednesday.
