Wow. Judge Stops the Looting of Albertsons (For Now)
In a stunning move, a Washington state judge issued a temporary restraining order on the attempt of PE billionaires to loot the Albertsons supermarket chain as part of the Kroger merger.
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Today’s issue is about a shocking move in the Kroger-Albertsons deal. A state judge actually stopped the private equity barons trying to loot one of the largest supermarket chains in the country. It’s a temporary reprieve, but a fascinating legal moment. Plus, today’s weird monopoly is a roll-up of Ketamine Clinics.
No, Cheating Is Not Just How Things Work
One of the weird parts of the American economic order over the last few decades is how looting has become a normalized business habit, such that people have a hard time even imagining what the rule of law might look like. Well yesterday we got a reminder when a Washington state judge temporarily blocked the attempt of a few private equity barons to extract $4 billion from a large and important supermarket chain. The astonishment of the fanciest corporate lawyers in Seattle was apparently palpable.
Here’s what happened. Last month, supermarket giants Kroger and Albertsons cut a deal to merge into a 700,000 person goliath, which naturally attracted significant antitrust scrutiny. The supermarket industry has been consolidating for decades, with lots of bad consequences, including higher prices, food deserts, less local control, etc. But in this case, there was a twist.
Albertsons is a public company, but it is primarily owned by two private equity firms, Cerberus Capital and Apollo, and these funds have been trying to sell the company for awhile. But they know that the merger is going to take years to play out, and may be blocked, so as part of the merger deal they decided to grab all the cash that Albertsons has, and even put it into debt, in order to cash out with a special $4 billion payout.
Normally, such ‘dividend recapitalizations,’ which is a fancy term for looting a company you own by having the company borrow money and paying it out to you in a lump sum payment, goes on without a hitch. Such transactions, even though they are obviously destructive because they put pressure on firms to raise prices, reduce quality, and often go bankrupt, are not considered illegal. But in this case, it was part of an overall merger deal. I made the point that an asset transfer like this, which will drive Albertsons into a weakened state during a merger trial, is a possible violation of various competition laws, because it will reduce the firm’s ability to operate and compete. Over the next few years, as the merger investigation and trial happens, Kroger-Albertsons will claim to the judge that Albertsons is a ‘weakened competitor,’ and needs the merger to stay in business. Of course, it will be a weakened competitor because its owners deliberately weakened it with this cash grab. This is a creative reading of the law, but it’s not outlandish.
After I published that BIG issue, other analysts of private equity, such as Eileen Appelbaum and Andrew Park, fleshed out the problem in impressive detail. Senators Elizabeth Warren, Bernie Sanders, and Ron Wyden, as well as Congressional members Katie Porter, Chuy Garcia, and Jan Schakowksy, weighed in. So did Washington state Senators Patty Murray and Maria Cantwell, and multiple United Food and Commercial Workers local unions.
Like a lot of you, I do not have enormous faith in the political process, so I did not expect much. But something important happened. Seven state attorneys general sent a note to the Kroger and Albertsons CEOs asking them to cancel the special dividend. They said no. So Washington state Attorney General Bob Ferguson filed a complaint in state court asking for an emergency injunction to block the dividend. Three other state attorneys general followed in Federal court.
Ferguson’s complaint is very good. He notes that the last time a private equity owned supermarket chain engaged in a dividend recapitalization during a merger transaction - the Haggen chain in 2014 during the Albertsons-Safeway deal - it almost immediately went bankrupt and lessened competition. This saga still stings in Washington state, where Haggen was based. Ferguson also pointed out that the special dividend will hurt the company, and that Moody’s immediately downgraded the firm’s borrowing rating because of it.
Surprisingly, Albertsons plans to pay the $4 billion not from its surplus profits, but rather out of critical operating margins it needs to stay afloat over the next twelve months. Albertsons publicly disclosed that it will use $2.5 billion in cash on hand and will finance the remaining $1.5 billion through loans.
In other words, the company will go deeply into debt to finance this dividend, and it may not be a viable firm on its own.
Apparently, these arguments were persuasive enough for action. Last night, King County Superior Court Commissioner Henry Judson granted a temporary restraining order, writing, according to Bloomberg, that “there’s ‘a well-grounded fear of immediate invasion of’ Washington’s right to protect its consumers and prevent anti-competitive behavior.”
It’s a temporary injunction, and there will be another hearing on November 10th to either lift the injunction or make it permanent.
I’m stunned that the idea of challenging a special dividend under antitrust law made it from a random newsletter into a court order in three weeks. But perhaps I shouldn’t be. Antitrust Division Attorney General Jonathan Kanter laid the basis for the use of the law to address these kinds of unfair practices back in June, when he challenged the Booz Allen-EverWatch merger. Though the Antitrust Division lost, they were using creative legal tactics to go after the merger agreement itself. When trying to expand the use of the law, plaintiffs usually do lose at first, and then refine legal arguments over time to make them workable.
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Competition laws at a state and Federal level are quite flexible, they are intended to stop restraints of trade, mergers that consolidate industries, interlocking directorates, exclusive dealing arrangements, and unfair methods of competition more broadly. And yet, there has been little work to use these laws creatively over the last forty years, while there’s been immense energy put into finding exploitative business models. This legal dynamic explains how we’ve become normalized to cheating.
Indeed, private equity as a model started in the early 1980s, exactly as Ronald Reagan stopped enforcing most antitrust laws. Basic private equity techniques, like the practice of buying chunks of competing companies and sticking your own directors on each board to exert control, are illegal. But until a few weeks ago, when Jonathan Kanter forced a significant number of private equity-related board resignations, American business operated as if the black letter law of the Clayton Act against interlocking directorates didn’t exist.
But now the creativity is back. It’s not just challenging this dividend, or the board of director rules. A side payment to Spirit shareholders of $400 million by Jetblue as part of their merger agreement is now being challenged under the Clayton Act. There are also a lot of monopolization suits filed in court which are going to be heard over the next few years, and case law will develop. We’re in the early stages of redefining corporate law.
I don’t know what will happen in the hearing next week with the special dividend, but the temporary restraining order itself is an interesting step. How Cerberus and Apollo are taking advantage of the Kroger-Albertsons merger to grab cash, is clearly unethical and wrong. What we’re starting to see is that it may also be illegal. In fact, one could argue that a dividend recapitalization that saddles a firm with too much debate, even without a merger, is in and of itself a restraint of trade, since such transactions tend to lower wages, increase prices, and reduce quality. It’s an aggressive reading, but the antitrust doctrine is flexible because business practices themselves change, and the law must be able to keep up.
And we’re starting to see that it just might be able to do that.
Today’s weird monopoly, or aspiring monopoly in this case, is Irwin Naturals, a ‘nutraceutical’ company that is seeking to dominate both the cannabis and psychedelic sectors. One of its key strategies is take advantage of the mental health crisis, which hits about a quarter of Americans, and push various substances as a solution. Cannabis is one, but ketamine, an anesthetic with some hallucinogenic effects, is being marketed aggressively these days as a means of treating depression.
Irwin is pretty explicit about it. The firm is seeking to buy up as many ketamine clinics as possible to become the Coca Cola of psychedelics, in what the CEO calls a “lifetime opportunity” for a “rollup of psychedelic mental health clinics featuring psychedelic treatment with ketamine.” Recently they bought Ketamine Media, an advertising firm for the industry.
But here’s the broader monopolization strategy, from a firm marketing document.
The ultimate controllers of the industry are the clinic brands at the end-user interface, where the patients exist. Pharmaceutical brand owners must go through clinic brands – the companies that employ medical doctors. Irwin Naturals is poised to be the world’s first and largest household brand of psychedelic mental health clinics acting as the gateway between big pharmaceutical companies and patients.
Basically, Irwin is trying a middleman play. The psychedelics and cannabis space are new industries, and thus prone to monopolization, as Luke Goldstein showed in a profile of a different attempted monopoly in that area. They are also prone to influence peddling. Here’s another part of that strategy document: “At an early stage, the company plans to engage with pharma companies, such as J&J, as well as major payors, such as Anthem and the Veterans Administration.”
Maybe it’s just me, but I think that mind-bending chemicals, market power, and lobbying should not mix.
What I’m Reading
Global bankers ‘very pro-China’, says UBS chair, Financial Times
Big Tech’s National Security Red Herring, The Heritage Foundation
Thanks for reading!
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