The Kroger-Albertsons Merger Spotlights a Popular Private Equity Tactic

At a time when corporate consolidation has become a major concern in Washington, D.C., the proposed deal has already drawn a great deal of pushback. At a hearing on the merger held by the Senate antitrust subcommittee a few weeks ago, Amy Klobuchar, a Minnesota Democrat who leads the subcommittee, suggested that the merger would lessen competition and lead to price hikes. And Senator Mike Lee, Republican of Utah, complained that for all of their promises that the deal would be good for everyone, the two companies hadn’t explained “why the merger is necessary in the first place.”

But there is another aspect to this deal that may be even more contentious.

Albertsons, which Cerberus bought for $350 million in 2006, is planning to pay a $4 billion dividend to its investors — and to do it 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 percent stake. It also controls the Albertsons board. (Cerberus did not respond to an email requesting an interview.)

“In my opinion, the $4 billion special dividend is straightforward corporate raiding,” Sarah Miller, the founder of the American Economic Liberties Project, wrote in an email. Karl Racine, the attorney general of Washington, D.C., noting that the dividend was 57 times as much as any previous Albertsons’s dividend, called it “a cash grab.” He and others also pointed out that Albertsons did not have $4 billion in hand; it would have to borrow $1.5 billion, adding to its nearly $7.5 billion debt load.

Dividend recapitalizations — or dividend recaps, as they are called — have become a fairly common trick in the private equity playbook. Last year, according to a Bloomberg report, companies borrowed around $80 billion — a record — to pay out dividends to their private equity owners. Critics say that dividend recaps too often leave companies without enough capital to withstand a business downturn. For private equity firms, said Andrew Park, a policy analyst at Americans for Financial Reform, “it’s heads I win, tails you lose.”

Dividend recaps are usually under the radar, as private companies are not required to make the same level of financial disclosure as public companies. The Albertsons recap, however, was right there in the merger documents — and critics quickly pointed to it as a classic example of how private equity firms take care of themselves ahead of the companies they own.

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