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Bloomberg reports that a Washington State judge has ordered that Albertsons delay a $4 billion special dividend payment, scheduled for next week, while the move undergoes regulatory review.  The delay was requested by the Washington State Attorney General's office.

The story says that "the ruling Thursday upends Albertsons’ plan to reward shareholders including Cerberus Capital Management. Several states argued the payments would weaken the company’s ability to compete if its takeover by Kroger is blocked. 

"While Albertsons has said the dividend was planned before the companies started talking about a potential $24.6 billion merger, they disclosed the payout 'as part of the transaction' when they announced their agreement Oct. 14.

"California, Illinois and the District of Columbia filed a separate request for a temporary restraining order against the two grocers in federal court in Washington, DC, on Wednesday … Jonathan Mark, senior assistant attorney general for Washington, asked Judson to 'simply preserve status quo,' arguing that doling out the dividend could result in Albertsons experiencing liquidity issues and difficulties investing in its employees and restocking shelves to meet consumer needs."

The delay will be in place until November 10.

Albertsons responded with the following statement:

Albertsons Cos. intends to seek to overturn the restraint as quickly as possible because the temporary order was based on the incorrect assertion that payment of the Special Dividend would impair its ability to compete while its proposed merger (the “Merger”) with The Kroger Co. (“Kroger”) is under antitrust review. A hearing on the State of Washington’s request for a preliminary injunction is scheduled for November 10, 2022.

Albertsons Cos. continues to maintain that the lawsuit brought by the State of Washington, and the similar lawsuit brought by the Attorneys General of California, Illinois, and the District of Columbia are meritless and provide no legal basis for canceling or postponing a dividend that has been duly and unanimously approved by Albertsons Cos.’ fully informed Board of Directors. Albertsons Cos. is a thriving business which has delivered over $75 billion in revenues in the rolling four quarters ended September 10, 2022, following strong performance of $71.9 billion in revenues in fiscal 2021. Albertsons Cos. is well-capitalized, with limited debt and significant free cash flow and is in a strong position financially. The size of the dividend reflects the Company’s strength, rather than the illogical and damaging accusation that it is an attempt to weaken the Company.

"The Company’s plan to return capital to stockholders is part of its long-stated capital-return strategy and does not change the fact that Albertsons Cos. is in the strongest financial position it has ever been. The Company remains fully committed to investing in the associates, stores, and digital capabilities that have made its recent growth and strong performance possible. Albertsons Cos. is confident that it will continue to make strategic progress following the payment of the Special Dividend, given its strong cash flows and low debt profile. After payment of the Special Dividend, Albertsons Cos. will have approximately $3.0 billion of liquidity, including approximately $500 million in cash and approximately $2.5 billion available under its already existing asset-based lending facility, and expects to continue to generate strong revenues and positive free cash flow, furthering increasing liquidity."

KC's View:

I'm not a lawyer, so I have no idea if the various Attorneys General are overstepping on this.  I do know that the optics aren't great for Albertsons, and that is just the beginning of the legal, legislative and regulatory challenges that Kroger and Albertsons are going to face over this deal.

Their argument is going to be that this deal is going to be great for shoppers, but they'll be fighting the perception that it actually is best for shareholders, and that larger will not necessarily equal low prices.

A perfect example is a column in the Los Angeles Times today by business writer Michael Hiltzik, who asks who the shareholders are who will most benefit from the dividend payment:

"Six of them are corporate insiders, defined as holders of more than 5% of Albertsons shares each.

"The big dog among them is the private equity firm Cerberus Capital Management, which owns nearly 30% of the shares and holds two seats on the company’s board of directors. The other five are investment and real estate funds that hold a total of an additional three board seats.

"The six investors control about 75% of Albertsons shares. Combined with the three current and former Albertsons executives on the board, they hold a majority of seats. In other words, they voted themselves a multibillion-dollar handout."

At the moment, I think it is a coin flip which argument will succeed … though if I were Albertsons and Kroger, I would not be comforted by the successful efforts - so far - to derail the Penguin Random House/Simon & Schuster merger.