Why judges blocked the merger

On December 18, 2024By Littum

Alexander Coolidge
| Cincinnati asks

Hooks‘s $25 billion proposed takeover of the rival Albertsons ultimately failed because two judges — one federal and the other from Washington state — didn’t buy the competitive vision the merchants were trying to sell, antitrust experts said.

Hours after the judges issued rulings on Tuesday blocking one of the largest retail mergers ever, the deal died. On Wednesday, Albertsons announced that it had called off the merger and sued her former suitor for flubbing it. Kroger called the trial “baseless” and hours later announced a massive $7.5 billion share buyback.

Antitrust experts say a few core issues led the judges to say no, ultimately dooming the deal:

The judges disagreed with Kroger and Albertsons on competition

From the start, Cincinnati-based Kroger and Boise, Idaho-based Albertsons said the merger was necessary to remain efficient and competitive in a grocery industry increasingly dominated by non-traditional competitors such as Walmart, Costco, Amazon, Aldi, Trader Joe’s and Dollar General. Key to their argument in court: the regulators’ assessment of the market was too narrow because it focused on traditional convenience stores.

But the legal precedent relevant to the merger defines their competitors as other supermarkets as well as supercenter operators like Walmart — and neither judge was convinced to change that methodology. The narrow definition of who the competition was meant to merge two competitors in a market posed a greater risk to consumers with less choice and potentially higher prices.

“Traditional full-service grocery stores constituted the relevant market … This (excluding non-traditional competitors) gave the merging parties a large share of the market.” William Kovacic, director of the Competition Law Center at George Washington Universitysaid.

Douglas Ross, an antitrust law professor at the University of Washingtonagreed that the narrower definition of competitors led the judges to decide that there was a greater risk to maintaining competition in the market.

“They both agree that the market is supermarkets and not anything much wider,” Ross said. “Both agree that there are many geographic markets where the merger will result in high concentration.”

The judges didn’t realize that C&S Wholesale was ready for the big time

Also fatal were Kroger’s and Albertson’s proposals to preserve competition in markets where their stores overlapped, experts said. The merchants said they would sell from 579 stores for DKK 2.9 billion to New Hampshire-based C&S Wholesalersa supplier and retail operator in the grocery industry.

The problem? C&S Wholesale’s limited current retail footprint of fewer than 24 stores didn’t exactly scream big-box retail competitor, and neither did the company’s spotty history of buying and selling or simply closing grocery stores. A lawyer for regulators even declared that C&S was a “liquidator” not an operator.

The evidence and arguments gave both judges pause, experts said.

“It was found that the buyer was seriously deficient. This blew the solution apart,” Kovacic said.

The judges stuck to traditional – and solid – arguments

While regulators, particularly in the federal case, made a point of saying the merger could hurt workers’ bargaining power, experts said the judges didn’t really address those concerns in their rulings. This was despite the FTC pushing a theory that the merger would create a “monopsony” for unionized grocery workers – an argument that some experts believed had no legal precedent to support it and would not hold up.

A monopsony is a situation where one company controls a market because they are a disproportionately large buyer of something and can force prices down – this is the opposite of a monopoly where one company has a stranglehold on something for sale and sets prices high. In the Kroger case, regulators worried that the supermarket company would become too powerful as the largest employer of unionized grocery workers and could ultimately depress wages.

But the fact that the judges’ orders were based on traditional local market conditions made them less likely to be overturned on appeal, experts said.

“The fact that the orders are based on traditional antitrust principles makes them more difficult to appeal,” Christine Bartholomew, law professor at the University at Buffalosaid. “They didn’t trust the labor issue. That’s the safest, most apolitical interpretation of antitrust.”

This story was updated to add a video.