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Kroger (KR) moves higher while Albertsons (ACI) encounters modest selling pressure today after court rulings temporarily blocked the previously announced $25.0 bln merger between the two grocery chains, leading Albertsons to terminate the deal. Kroger had expressed confidence in the deal closing during past quarterly conference calls since announcing the merger in late 2022. The takeover was met with skepticism as it would have had to overcome significant regulatory barriers, particularly since the two companies are among the few remaining pure national grocery chains. Earlier this year, the FTC sued to block the merger, alleging that the deal was anticompetitive, with the merger possibly leading to higher prices and lower-quality products.

Today, a judge for the District of Oregon and a judge for the Washington State court temporarily blocked the deal, agreeing with the FTC regarding concerns over anti-competitiveness. As a result of these rulings, Albertsons decided to terminate its merger agreement with Kroger. Albertsons instead authorized a $2.0 bln repurchase plan and increased its quarterly dividend by 25%, giving it an annual yield of 3.2%. Albertsons also outlined its FY24 (Feb) financial outlook, projecting identical sales growth of +1.8-2.2% and adjusted EPS of $2.20-2.30.

As both companies now go their separate ways, what is next?

• Albertsons filed a lawsuit against Kroger for breaching the terms of the merger agreement. Albertsons alleges that Kroger repeatedly refused to divest certain assets necessary for antitrust approval, ignored regulator feedback, and rejected divestiture buyers. Albertsons is suing for billions of dollars in damages. It is unclear how this lawsuit will shake out at this early stage. However, Kroger's unadjusted earnings could take a hit sometime down the road if ordered to pay billions in damages.
• Kroger recently reported its Q3 (Oct) results, highlighting several sustained tailwinds. Mainstream households continue to drive positive comp growth, while healthy private label demand supported decent margin gains. Meanwhile, during the conference call, CEO Rodney McMullen noted that business would continue even if the merger with Albertsons were to fail. Mr. McMullen added that mergers remain an opportunistic way to grow the business, leaving the door open to other possible deals.
• Due to the former pending merger with Kroger, Albertsons has not held a conference call for some time. However, in its recent Q2 (Aug) report, the company performed similarly to Kroger, registering a +2.5% bump in comps and minor gains from ongoing productivity initiatives. However, labor wages remain a headwind, which could erode future margins.

Albertsons cutting ties with Kroger following state and federal hurdles surrounding the massive $25.0 bln merger could produce near-term challenges for both firms, primarily due to the intense competitiveness within the grocery industry. Mass merchants like Walmart (WMT) and Costco (COST) benefit from consumers consolidating their shopping trips and hunting for the best value amid the inflationary environment. WMT repeatedly notes each quarter that it is gaining additional market share in the U.S. in grocery. While comp growth may remain healthy for Albertsons and Kroger, a heightened competitive landscape could eat into their margins, producing bottom-line volatility.