In going ex-dividend with a special $6.85 per share distribution on October 21st, Albertsons Companies, Inc. (ACI) determinedly advanced its pending merger with The Kroger Co. (KR). In the real estate investment trust (“REIT”) world, this was most significant to Kimco Realty Corporation (KIM), as KIM is a major holder of ACI shares (even after selling 29% of it ACI holding on 10/14) and will be the recipient of the big cash payout, but Albertsons is a major anchor tenant to a number of shopping center REITs.
Kimco has the highest number of leases and Alexander & Baldwin, Inc. (ALEX) has the highest % of revenue coming from ACI, but considering Leased Area (%) and % of Rental Revenue in combination, it seems Retail Opportunity Investments Corp. (NASDAQ:ROIC) has the largest exposure to Albertsons. When you consider that Kroger is also a major ROIC tenant, the merger will significantly concentrate the REIT’s revenue sources.
KR and ACI are each strong credits independently; in combination, they will be even stronger. Credit quality is not the issue here, however. The issue here is antitrust and, maybe more specifically, the geography of antitrust.
It’s not the size, it’s the location
The combined KR/ACI are estimated to have a 13% market share of U.S. grocery sales, far below that of uber-grocer Walmart’s (WMT) 22% share. Their combined KR/ACI $200 billion annual sales are just a fraction of aspiring grocer Amazon.com’s (AMZN) nearly $500 billion annual sales tally. The size of the merged company isn’t what will prompt an extensive antitrust review, it is who else is or isn’t doing grocery business in Kroger’s submarkets.
A recent Wall Street Journal article described that Albertsons and Kroger compete head-to-head for grocery dominance in many locations throughout California and Washington state.
The Kroger Company
The concern is that the combination removes any real sense of competition, putting certain communities at risk of being held hostage to a potential grocer monopoly.
Examining ROIC’s property map, it is clear that they have not just high lease exposure to KR and ACI, but that it is very geographically concentrated.
This map shows the locations of ROIC’s 92 properties, 20 of which have Albertsons as the anchor tenant, 11 of which are anchored by Kroger. The map does not show the California or Seattle Albertsons and Kroger stores ROIC does not own.
If the antitrust review determines that the merger introduces anticompetitive environments at local levels, the merger may be blocked, or store divestitures mandated. When the deal was announced, the companies said they are prepared to establish a 100 to 375-store subsidiary that would be spun off to Albertsons’ shareholders and that they have agreed to determine which stores to potentially divest. In anticipation of potential antitrust rulings, the companies have agreed to sell up to 650 stores.
The merger should proceed
In paying this month’s $6.85/share special distribution, Kroger and Albertsons jumped into the merger with both feet; it would be nearly impossible for ACI to get that $3.66B back. In agreeing to sell up to 650 stores, the companies have signaled that they will go to great lengths to appease the antitrust enforcers.
ROIC will be fine
Because ROIC’s portfolio is so geographically concentrated in locations where Kroger or Albertsons is already the dominant grocer, it is easy to imagine that some of their properties host stores that will be slated for sale. KR and ACI guarantee the in-place leases, so ROIC faces no near-term cash flow interruption; the stores will simply be operated by a new grocer. ROIC will be fine.
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