On February 26, 2024, the Federal Trade Commission (FTC) filed a lawsuit to block The Kroger Company’s proposed acquisition of Albertsons Companies, Inc. for $24.6 billion. The challenge marks the first attempt to block a merger by either the FTC or the Department of Justice’s Antitrust Division (DOJ) since their joint publication of the 2023 Merger Guidelines, a revamping of the Horizontal Merger Guidelines issued in 2010 and Vertical Merger Guidelines issued in 2020. The FTC alleges that the Kroger/Albertsons merger would eliminate head-to-head competition between the companies, resulting in higher prices for food and grocery products at supermarkets and harm to thousands of union grocery workers in the United States. To allay the FTC’s concerns, the companies previously announced a proposed divestiture of 413 stores and associated assets to C&S Wholesale Grocers, LLC, but the FTC rejected the divestiture as insufficient to resolve the competitive issues. The Offices of the Attorneys General of Arizona, California, the District of Columbia, Illinois, Maryland, Nevada, New Mexico, Oregon, and Wyoming have joined the lawsuit, which comes amid the backdrop of two separate and ongoing state lawsuits to block the merger, in Colorado and Washington, where Kroger and Albertsons have filed motions to dismiss.
The FTC’s challenge provides some key insight into its enforcement strategy under the new 2023 Merger Guidelines. Unsurprisingly, the lawsuit demonstrates that the FTC is following through with asserting presumptive illegality of transactions in which market concentration measures exceed the newly lowered Merger Guidelines thresholds. Additionally, although the agencies under the Biden Administration have been transparent about their willingness to investigate and challenge transactions they believe harm workers, this is the first challenge that does not allege that workers need to be highly specialized in a particular field but instead puts the focus on union membership. Finally, the FTC’s rejection of the divestiture package does not suggest a significant divergence from recent prior practice, at least in this instance, with the agencies casting a critical eye on sufficiency of remedy offers.
Lower Market Concentration Thresholds Are Firmly in Play
Guideline 1 of the 2023 Merger Guidelines identifies market concentration thresholds above which the FTC and DOJ will presume a transaction is unlawful. There are two, alternative thresholds: (1) a Herfindahl-Hirschman Index (HHI) measure (which sums the squares of each market participant’s market share) greater than 1,800 for the post-merger market and a post-merger HHI increase greater than 100, and (2) a combined market share of 30% and a post-merger HHI increase greater than 100. The 2010 Horizontal Merger Guidelines’ presumption was stated only in the context of HHIs (rather than market shares) and maintained a higher threshold of 2,500 with an increase of 200.
The complaint alleges that the transaction exceeds at least one of the new thresholds in local markets surrounding more than 1500 Kroger and Albertsons supermarkets in 17 states and exceeds the new market share threshold in local areas covered by collective bargaining agreements (CBAs) in 4 states. Given that the 2023 Merger Guidelines state the antitrust agencies’ current enforcement policy, it should not come as a surprise that the FTC relies on the new thresholds to allege that the Kroger/Albertsons transaction is presumptively unlawful. We expect this practice to continue.
The FTC Is Keenly Attuned to How Mergers Impact Workers
A key theory of harm under which the FTC challenges the transaction is the reduction of competition in a labor market. The complaint notes that Kroger and Albertsons are two of the largest employers of union grocery labor in the United States. The FTC defines the relevant labor markets as “union grocery labor” in local areas defined by coverage of their respective CBAs. As support for its theory of harm, the FTC explains that in areas of overlap between Kroger and Albertsons, unions negotiate separately but simultaneously with the companies and frequently can obtain favorable deals with the employers by leveraging them against each other. For example, the FTC asserts that union members can threaten to strike or coordinate a strike against Kroger and encourage customers to shop and fill their prescriptions at Albertsons or vice versa, with the diversion of sales pressuring Kroger to offer better employment terms to the members to end the strike. The lawsuit in Colorado also pointed to competitive concerns in the grocery labor market, alleging that the no-poach agreements during a 2022 strike by Kroger employees, and the non-solicitation agreements of pharmacy customers, are per se unlawful under state law.
The FTC’s approach to the labor theory of harm is a novel one in modern merger enforcement under Section 7 of the Clayton Act. One likely issue to resolve is whether the markets are appropriately defined for antitrust purposes. For example, in an area where workers may not need to have highly specialized training or experience, there is a question whether businesses operating in different industries compete for the same workers—that is, could a clothing retailer or a restaurant hire a worker from a grocery store? The complaint attempts to define the labor market by arguing that union grocery workers have incentives to keep their pension and healthcare benefits by staying within the union. Regardless of any potential judicial outcome, these allegations demonstrate that the FTC remains focused on labor markets, including in merger control.
Traditional Considerations for Divestitures Remain Highly Relevant
The FTC alleges that the proposed divestiture to C&S Wholesale Grocers, LLC, is insufficient to mitigate the harm to competition expected from the transaction. The FTC expresses concerns with C&S as the divestiture buyer and with the divestiture package. It alleges that C&S is a grocery wholesaler and has limited experience with retail supermarkets. Interestingly C&S was an approved divestiture buyer involved in the 2021 transaction between Tops and Price Chopper. However, the scenarios may be distinguished. In Tops/Price Chopper, C&S acquired 12 stores in that divestiture package. Here, C&S would be acquiring 413 stores from Kroger/Albertsons, increasing C&S’s retail footprint 18-fold. The FTC also alleges that C&S’s publicly stated business strategy as recently as 2021 was to not grow its grocery retailing operations or operate its retail grocery stores in the long term, indicating the FTC is skeptical of C&S’s ability and incentive to maintain the competitive status quo.
Additionally, the FTC alleges that the divestiture package is a “hodgepodge” of 413 out of over 5,000 stores, rather than a standalone business capable of operating as a viable competitor, due to a lack of scale and necessary assets (e.g., banners, distribution centers, IT). Moreover, a lengthy transition period raises FTC concerns regarding ongoing entanglement between Kroger/Albertsons and C&S following the closure of the transaction.
These concerns are highly salient to the FTC (whether they have merit or not in this case), particularly when it comes to supermarkets. Sufficient incentives and capabilities on a divestiture buyer’s part, the ability to operate as a standalone business, and a clean transition that timely eliminates ongoing entanglements are issues that the FTC and DOJ have historically tried to resolve when considering divestiture packages. The issues are also relevant to the FTC in the context of supermarket mergers considering a recent history of divestitures in the space that did not succeed.
Key Takeaways
This challenge presents the first glimpse of the FTC’s application of the 2023 Merger Guidelines and underpins several recommendations for companies considering mergers:
- Merging parties should be prepared to overcome presumptions present in transactions that meet the 2023 Merger Guidelines’ lower market concentration and market share thresholds.
- Merging parties should consider whether there are any potential labor-focused competitive concerns in a given transaction, especially in circumstances where there are stakeholders that may complain, such as unions.
- The importance of the identity of the divestiture buyer and the scope of the divestiture package continues, especially in the context of US agencies that are skeptical of remedies. The FTC will test critically whether the divestiture package comprises a standalone business that will allow the divestiture buyer to continue operating the business as a viable competitor.
If you have any questions, feel free to reach out to our Merger Antitrust Team, including Jamillia Ferris, Mary Lehner, Bruce McCulloch, Jenn Mellott, Meghan Rissmiller, Jan Rybnicek, Justin Stewart-Teitelbaum, and Christine Wilson.
