Kroger-Albertsons merger highlights a popular private equity strategy

The proposed deal has drawn significant headwinds at a time when corporate consolidation has become a major concern in Washington, D.C. During hearings on the merger a few weeks ago, the Senate antitrust subcommittee chaired the subcommittee, Democrat Amy Klobuchar of Minnesota, who said the merger would reduce competition and lead to higher prices. Sen. Mike Lee, R-Utah, complained that while both companies promised the deal would be good for everyone, they didn’t explain “why the merger was necessary.”

But another aspect of the deal may be more controversial.

Albertsons, which was acquired by Cerberus in 2006 for $350 million, plans to pay its investors $4 billion in dividends — and that’s starting now, more than a year before the merger closes. Although Albertsons became a public company in 2020, Cerberus remains its largest shareholder with a 30% stake. It also controls the Albertsons board. (Cerberus did not respond to an email requesting an interview.)

“The $4 billion special dividend is, in my view, a straight corporate hit,” Sarah Miller, founder of the American Economic Freedom Project, wrote in an email. Washington, D.C. Attorney General Karl Racine pointed to the dividend as 57 times the Albertsons’ previous dividends, calling it a “money grab.” He and others also point out that Albertsons doesn’t have $4 billion on hand; it will have to borrow $1.5 billion, adding to its debt load of nearly $7.5 billion.

Dividend recapitalizations — or so-called dividend restructurings — have become a fairly common tactic in private equity investing. Last year, companies borrowed about $80 billion — a record amount — to pay dividends to their private equity owners, according to Bloomberg. Critics say dividend reviews often leave companies with insufficient capital to weather business downturns. For private equity firms, “heads win, tails you lose,” said Andrew Parker, a policy analyst at Americans for Financial Reform.

Dividend restatements are generally not a concern because private companies are not required to make the same level of financial disclosure as public companies. Yet Albertsons’ recap is in the merger filing — and critics are quick to point to it as a classic example of how private equity firms can take care of themselves before the companies they own.

Source link