Column-Kroger and Albertsons play blame game after failed merger in billion-dollar battle

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By Jenna Greene

March 28 (Reuters) - Breakups are rarely easy, but the acrimony over a busted blockbuster deal can rival finger-pointing by the bitterest of star-crossed lovers. Consider the blame game unfolding now between Kroger ( KR ) and Albertsons ( ACI ) in Delaware Chancery Court, where each grocery chain is attempting to fault the other for the failure of their $25 billion merger, which was blocked by judges in both federal and state courts in December. To hear Albertsons ( ACI ) tell it in its Chancery Court lawsuit seeking billions of dollars, Kroger ( KR ) had "a classic case of buyer's remorse" after negative reaction to the merger by investors, workers and politicians, as well as falling post-pandemic profits. As a result, Kroger ( KR ) allegedly failed to take "any and all actions" possible to win antitrust approval for the deal, as required by the merger agreement. In a countersuit made public on Tuesday, Kroger ( KR ) says Albertsons ( ACI ) "secretly coordinated" with C&S Wholesale Grocers, which was set to buy hundreds of grocery stores that the parties planned to divest, in a "surreptitious scheme" to pursue their own regulatory strategy.

Kroger ( KR ) is seeking unspecified damages from Albertsons ( ACI ) for willfully breaching the merger agreement. Also jumping in the fray, C&S on March 14 sued Kroger ( KR ) in Delaware Superior Court seeking payment of a $125 million termination fee it says it's entitled to under its agreement with Kroger ( KR ).

This isn't the first time companies in a merger gone wrong have sued each other in Delaware, though the cases tend to be highly fact-specific. To misquote Tolstoy, every failed merger fails in its own way. Still, a 2020 decision by Vice Chancellor Travis Laster holding that Cigna ( CI ) breached its obligation to try to close a $54 billion merger with Anthem - but that the merger would probably have been enjoined anyway, so Anthem wasn't entitled to recover damages - will likely come into play in allocating the burden of proof for the thwarted grocery union.

A Kroger ( KR ) spokesperson declined comment.

Albertsons ( ACI ) in a statement said it was "steadfastly committed to the success of the combination," but that Kroger ( KR ) "did not hold up its end of the bargain."

A C&S spokesperson said via email that the New Hampshire-based company "worked tirelessly in support of the merger and divestiture, including communicating with both Kroger ( KR ) and Albertsons ( ACI ) executives."

Announced in 2022, the proposed merger would have been the largest-ever supermarket combination.

Kroger ( KR ) - operating stores under regional names including Fry's, Harris Teeter and King Soopers - and Albertsons ( ACI ) - whose regional banners include Jewel-Osco, Safeway and Vons - together have about 5,000 supermarkets across 48 states.

Going into the deal, Kroger ( KR ) anticipated it would have to sell off stores in locations where the two chains competed head-to-head to appease the Federal Trade Commission and state regulators. Per the merger agreement, Kroger ( KR ) agreed to divest up to 650 properties and lined up C&S as the buyer.

Like many antitrust fights, market definition was key.

Kroger ( KR ) argued its grocery competitors nowadays go beyond traditional supermarkets to include retail behemoths like Walmart ( WMT ), Costco and Amazon. If Kroger ( KR ) could convince regulators to adopt such a broad view of the competitive landscape, perhaps divesting a few hundred stores might assuage their concerns that the merger would lead to higher prices for consumers.

At its first meeting with the FTC, Kroger ( KR ) proposed shedding just 238 stores, Albertsons ( ACI ) said. Kroger ( KR ) subsequently offered to divest 413 stores to C&S, later upping the total to 541, then 579 outlets.

Albertsons ( ACI ) argues this was the wrong approach, calling Kroger's ( KR ) position "indefensible." According to Albertsons ( ACI ), Kroger ( KR ) "squandered its credibility with regulators" by refusing to propose a viable divestment package, its lawyers from Williams & Connolly; Selendy Gay; Dechert; and Richards, Layton & Finger wrote in the Delaware complaint.

Albertsons ( ACI ) also says Kroger ( KR ) shut it out of the "disorganized protracted" process of selecting C&S as the purchaser, and that picking a wholesaler with a limited track record of running retail outlets "introduced new obstacles" for regulatory approval.

The FTC along with attorneys general from eight states and the District of Columbia sued to block the deal in 2024, while Colorado and Washington filed suits on their own.

Albertsons ( ACI ) says it's owed a $600 million contractual break-up fee since the merger failed to close by the outside date set in the agreement, plus additional damages.

Under the terms of the merger agreement, Kroger ( KR ) was in charge of antitrust regulatory strategy, while Albertsons ( ACI ) was obliged to cooperate and support the effort. Kroger ( KR ) faults Albertsons ( ACI ) for allegedly engaging in "secret communications" with C&S, urging it to tell regulators it needed more stores from Kroger ( KR ) to compete effectively post-merger, Kroger ( KR ) counsel from Weil Gotshal & Manges and Ross Aronstam & Moritz wrote.

Offering to divest more assets is of course one way to mitigate antitrust concerns, but here, Kroger ( KR ) said Albertsons' ( ACI ) rogue strategy backfired, making regulators believe C&S was "a weak buyer that would not be an effective competitor regardless of the number of stores it received."

Kroger ( KR ) also alleges Albertsons ( ACI ) manufactured a "faux litigation record" of "lawyer-crafted letters" so it would be ready to sue its would-be partner for billions of dollars if the merger failed to close. To bolster the allegations, Kroger ( KR ) notes that shortly after court decisions enjoining the merger were issued, Albertsons ( ACI ) moved to terminate the deal and sued Kroger ( KR ) in Delaware for damages.

"No doubt capable counsel represents Albertsons ( ACI ), but even they could not draft a 140-page complaint in a few hours," Kroger ( KR ) said.

Was having a complaint ready to go nefarious? Or just advance planning?

The Delaware court will decide this and other questions in weighing whether the union was ever meant to be, with a possible trial late next year or early 2027. (Reporting by Jenna Greene)